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The Nature of Corporate Social Responsibility (CSR) in Ethiopian Business Context

An Essay on Corporate Social Responsibility

BY

Tewelde Mezgobo (PhD candidate)

International School of Management March 2012

The Nature of Corporate Social Responsibility (CSR) in Ethiopian Business Context Tewelde Mezgobo (PhD candidate) International School of Management - Paris March 2012

Introduction CSR in developed countries like that in the U.S. and U.K., models of corporate social responsibility (CSR) are relatively well defined. As the phenomenon of CSR establishes itself more globally, the question arises as to the nature of CSR in other countries. In line with this Robertson (2009), raises the following question: Is a universal model of CSR applicable across countries or is CSR specific to country context? In this regard, hence, the objective of this paper is to assess the specific context of Ethiopian business environment; i.e., identify the structural, systemic and other reasons that preclude the intention or practice of CSR in Ethiopia. First, the specific context of Ethiopian business environment (the economic, political and social) is presented then literatures on the universal models of CSR applicable across countries has been explored; after that a discussion relating Ethiopian context with the universal models of CSR specifically Carrolls CSR model has been employed, in fact, by relating it with empirical findings on the issue at hand; and finally inferences and implications for future studies has been made.

Country Context Described by Bahru (1991) Ethiopia is an ancient country located in northeast Africa, or, as it is generally known, the Horn of Africa, so called because of the horn-shaped tip of the continent that marks of the red sea from the Indian Ocean. It is bounded by Sudan in the west and north, Kenya in the south, Somalia in the south-east, and Djibouti in the east and Eritrea in the north. To the outside world, it has been known by the name of Abyssinia. Before the coming in to power of the EPRDF government in 1991, private ownership of business was very minimal as the government was with socialist ideology that does not permit private ownership of firms. Although the new government (the government of EPRDF that come to power in 1991) was socialist in its past history and background it is slowly moving to privatization.

Ethiopia is a predominantly agrarian economy, and its major products are coffee, meat, and animal hides. Approximately, 85% of the population lives in rural areas and majority of the rural population support its livelihood from agriculture. A significant component of its economy consists of foreign aid. Ethiopia the second populous country in Africa has a total population of about 82 million. Although it is known for its oldest civilizations. According to the World Bank (2012), currently the country is one of the least developed nations in In Africa with annual per capita income of 380 US dollars which is much lower as compared to other Sub-Saharan Africa average of 1165 US FY 2010 (GNI, Atlas Method). (The World Bank Group, 2012) According to the same source . Ethiopia has been one of the fastest growing economies in Africa. Nevertheless, its robust growth performance and considerable development gains from 2003 to 2007 came under threat during 2008 and 2010 with the emergence of twin macroeconomic challenges of high inflation and a difficult balance of payments situation. The problem was exacerbated by the high fuel and food prices in the global market. Though Ethiopia made progress in tackling the twin macroeconomic challenges of 2008-2010, the recent surge of inflation depicts the countrys vulnerable macroeconomic condition. The annual end-of-period inflation, which stood at 16.5 percent in February 2011, increased to 35.9 percent in July 2011. Food inflation almost quadrupled going from 12.8 percent to 46.5 percent during the same period. Non-food inflation also remains stubbornly high at 21.8 percent, possibly due to the upward revision of fuel prices, coupled with a series of depreciations of the local currency over the past year, which in turn has lead to an increase in the cost of production as well as transportation. (The World Bank Group, 2012) In an effort to control inflation and the rising cost of living, the government has been taking various measures including imposing tight cash controls on government expenditure, temporarily introducing price caps ( which has been lifted except on few consumables) on selected goods and increasing the salary of civil servants by 35-39 percent.(Ibid) While Ethiopias economy is expected to continue to grow at a healthy p ace, its macro situation will remain under stress in the foreseeable future. The economy is likely to slow down in the coming years, though the growth rate will remain respectable from a global perspective.

When we look at the political context of the country as mentioned earlier for much of the 20th century, Ethiopia was ruled by highly centralized and undemocratic governments. The current ruling party (the Ethiopian Peoples Revolutionary Democratic Front (EPRDF)) has governed Ethiopia since 1991. Since taking power, the EPRDF has led an ambitious reform effort to initiate a transition to a more democratic system of governance and decentralize authority. This

has involved devolving powers and mandates first to regional states, and then to woredas, or district authorities, and kebeles, or village authorities. (World Bank Group: 2012). Although the formal Ethiopian state structure has been transformed from a highly centralized system to a federal and increasingly decentralized one, a number of challenges remain. The national elections in 2005 and 2010, and the largely uncontested local elections in April 2008, illustrated the fragility of the democratic transition, the dominance of the EPRDF, and the weakened state of the opposition. The May 2010 parliamentary elections resulted in a 99.6 percent victory for the ruling EPRDF and its allies, reducing the opposition from 174 to only two seats in the 547 member lower house. (Ibid) In January 2009, the Ethiopian Parliament passed legislation to regulate civil society organizations (CSOs). While many CSOs had long argued for a new and coherent framework, the new law is quite restrictive in demarcating areas of operations for different types of CSOs (for example by excluding those receiving more than 10 percent of funding from external sources from many areas of activity). The government and the Development Assistance Group (DAG), comprising bilateral and multilateral donors, have agreed that the implementation of the CSO law will be reviewed regularly through their joint High-Level Forum structure. (Ibid) Looking at the development challenges of the nation The main challenge for Ethiopia is to continue and accelerate the progress made in recent years toward the Millennium Development Goals (MDGs) and to address the causes of poverty among its population. The government is already devoting a very high share of its budget to pro-poor programs and investments. Large scale donor support will continue to provide a vital contribution in the near-term to finance the levels of spending needed to meet these challenges. However, even if donor support is increased, using aid effectively will require Ethiopia to improve governance, empower local authorities, and become more accountable to its citizens. (World Bank Group: 2012) The same report has shown the progress in key human development indicators: primary school enrollments have quadrupled, child mortality has been cut in half, and the number of people with access to clean water has more than doubled. More recently, poverty reduction has accelerated. The poverty headcount, which stood at 46 percent in 1999 and 2000, fell to 39 percent in 2004/5, and there is optimism that the current household survey will demonstrate substantial further progress. In order for having further progress the government of Ethiopia has launched five-year plan (2010/11-2014/15), called the Growth and Transformation Plan (GTP), which is geared towards fostering broad-based development in a sustainable manner to achieve the MDGs. Over the next five years, the GTP envisions a major leap in terms of not only economic structure and income levels but also the level of social indicators. Key goals include: 1. Maintain at least an average real GDP growth rate of 11% and meet the Millennium Development goals,

2.

Expand and ensure the qualities of education and health services thereby achieving the MDGs in the social sectors, 3. Establish favorable conditions for sustainable state building through the creation of stable democratic and developmental state 4. Ensure growth sustainability by realizing all the above objectives within stable macroeconomic framework Having saying this about the political and economic context of the country, the sociocultural context of Ethiopia, based on the national cultural dimensions of Hofstede, can be summarized as follows: Power Distance According to Hofstede Ethiopia scores high on this dimension (score of 70) which means that people accept a hierarchical order in which everybody has a place and which needs no further justification.. These definitely have an impact on the type of management style that we are going to apply. Like most Sub-Saharan African countries subordinates in Ethiopian context are not expected to challenge their superiors and all authority vested at is the hand of the mangers. (Agyie, 2009) Individualism Ethiopian society is typically known for its extended family tradition. This is similar to most African nations in which people think in terms of we rather than I (Agyie, 2009). Collectivism as a dominant national cultural characteristic of the society is also supported by Hofstedes country comparison in which Ethiopia, with a score of 20 is considered a collectivistic society. According to him this is manifest in a close long-term commitment to the member 'group', be that a family, extended family, or extended relationships. He also believes that Loyalty in a collectivist culture is paramount, and over-rides most other societal rules and regulations.

Performance Orientation As the Ethiopian society is collectivist that gives value more for relationships, family ties and blood relationships Individuals are most of the times rewarded not on their results but rather according to their relationships. Uncertainty avoidance Emanating from its religious and historical reasons, Ethiopian people are very conservative to their beliefs and behaviors. This is also supported by Hofstedes study in which Ethiopia scores 55 on this dimension and thus has a high preference for avoiding uncertainty. Countries

exhibiting high uncertainty avoidance maintain rigid codes of belief and behavior and are intolerant of unorthodox behavior and ideas.

Literature review and conceptual framework According to Freidman (1970) in Hiel The conceptualization of CSR is based on two key questions: for what are corporations responsible? And to whom are they responsible? These questions have engendered much philosophical and legal debate. Addressing such questions will definitely lead to debates of philosophical and legal issues. Hence it will be very difficult to come up with a universally accepted definition of CSR. For the purpose of this paper CSR is the formal and informal ways in which business makes a contribution to improving the governance, social, ethical, labor and environmental conditions of the developing countries in which they operate, while remaining sensitive to prevailing religious, historical and cultural contexts (Visser et al., 2007). As developing countries present a distinctive set of CSR agenda challenges which are collectively quite different to those faced in the developed world the purpose of this paper is to describe the nature of CSR in Ethiopian context. The same author has also asserted that While many believe CSR is a Western invention (and this may be largely true in its modern conception), there is ample evidence that CSR in developing countries draws strongly on deep-rooted indigenous cultural traditions of philanthropy, business ethics, and community embeddedness. There is a powerful argument that CSR in developing countries is most directly shaped by the socio-economic environment in which firms operate and the development priorities this creates. (Ibid) Similarly, Schmidheiny (2006) questions the appropriateness of imported CSR approaches, citing examples from Latin America, where the most pressing issues like poverty and tax avoidance are typically not included in the CSR conceptions, tools, and methodologies originating in developed countries. By contrast, locally developed CSR approaches are more likely to respond to the many social and environmental problems in the region, such as deforestation, unemployment, income inequality, and crime (De Oliveira, 2006). CSR is often seen as a way to plug the governance gaps left by weak, corrupt, or underresourced governments that fail to adequately provide various social services (housing, roads, electricity, health care, education, etc.).

According Halmel (2009), contextual factors and institutional environments influence corporate responsibility norms and practices. The contextual factors in developing countries in general and Ethiopia in particular are worth considerations to see the interface between these factors and CSR. Hence in this paper using Carrolss CSR pyramid as a framework for descriptive analysis the nature of corporate social responsibility in Ethiopia will be illustrated. Visser (2005) asserted that Carrolls CSR Pyramid is probably the most well -known model of CSR, with its four levels indicating the relative importance of economic, legal, ethical and philanthropic responsibilities respectively. According to him the Economic Components of CSR involves: 1. It is important to perform in a manner consistent with maximizing earnings per share 2. It is important to be committed to being as profitable as possible. 3. It is important to maintain a strong competitive position. 4. It is important to maintain a high level of operating efficiency. 5. It is important that a successful firm be defined as one that is consistently profitable. The Legal components are: 1. It is important to perform in a manner consistent with expectations of government and law. 2. 3. 4. 5. It is important to comply with various federal, state, and local regulations. It is important to be a law-abiding corporate citizen. It is important that a successful firm be defined as one that fulfills its legal obligations. It is important to provide goods and services that at least meet minimal legal requirements.

The ethical and Philanthropic components are also summarized as follows: Ethical Components 1. It is important to perform in a manner consistent with expectations of societal mores and Ethical norms. 2. It is important to recognize and respect new or evolving ethical moral norms adopted by society. 3. It is important to prevent ethical norms from being compromised in order to achieve corporate goals. 4. It is important that good corporate citizenship be defined as doing what is expected morally or ethically.

5.

It is important to recognize that corporate integrity and ethical behavior go beyond mere compliance with laws and regulations.

The Philanthropic components are: 1. It is important to perform in a manner consistent with the philanthropic and charitable expectations of society. 2. It is important to assist the fine and performing arts. 3. It is important that managers and employees participate in voluntary and charitable activities within their local communities. 4. It is important to provide assistance to private and public educational institutions. 5. It is important to assist voluntarily those projects that enhance a communitys "quality of life." The Carrolls model of CSR is built on the priorities of the components from the perspective of firms operating in the west developed countries. Empirical studies to test the model have resulted that the context under which the model is applied results in variations in priorities of the components. Accordingly, as per the objective of the study the model will be discussed below by relating it with the context of Ethiopia.

Economic Responsibility Coming to Ethiopian context economically it is one of the least developed countries in Africa. Shortage of foreign direct investment, Unemployment, and wide spread poverty in addition to the huge amount of external debt can be some of the major reasons for the countrys emphasis in the economic component of the CSR. To support this by empirical research the finding of Robertson (2009) based on his interview of the following people is important to be noted: Government priorities are more fundamental: health care, education, and employment creation. Ethiopias priorities are in capacity building, not in refinement of corporate governance. We want to grow the private sector, but the issue is human capital. We lose many of our universityeducated young people through emigration. We need technicians to give help to the farmers in order to expand their productivity and income. The country has recently moved from two to twelve universities, but we have difficulty staffing the faculties of these universities (Dessalegn, 2006 in Robertson). Ethiopia has taken steps to liberalize its foreign investment policy, but official and unofficial obstacles to FDI are still in place. Ethiopias average tariff rate is high, and the banking system is subject to strong political pressure. The transfer of funds to and from Ethiopia is extremely cumbersome. Also, the relatively high level of corruption in Ethiopia reported by TIs Corruption Perceptions Index make it less attractive to FDI. Finally, the nature of small

individually owned farms may not be conducive to FDI. It seems to me that one of the reasons that Ethiopia has not attracted multinational firms is that compared to other African countries, the traditional farming system in Ethiopia is less penetrable by foreign influence and thus does not allow easy expansion of multinationals (Kelbessa, 2006 in Robertson). However, the greatest obstacle to FDI was expressed by Ethiopias Minister of Capacity Building, Mr. Fikru Dessalegn. The World Bank wants us to expand the private sector and to attract further foreign investment. Our biggest challenge in accepting foreign investment is to have the human capacity to absorb it. What are needed are management development, education, and skills (Dessalegn, 2006 in Robertson). Similarly, Dr. Andreas Ashete, President of Addis Ababa University, stated, A university priority is to establish a Ph.D. program in the business school in order to build capacity to train the countrys future entrepreneurs and managers (Ashete, 2006in Robertson). A comparable sentiment was expressed by a World Bank employee who was pessimistic about the ability of large amounts of foreign aid to effect change. It doesnt matter how many billions of dollars of aid are poured into Ethiopia. Nothing will change until people stop fighting about how to use the aid and work together to develop the capacity to put it to use (World Bank Employee, 2006 in Robertson). Philanthropic Responsibility Emanating from the socio-cultural context of the nation which is generally characterized by the existence of extended family tradition the philanthropic responsibility aspect is widely practiced in the countrys business practices. In this connection, the finding and examples of Robertson (2005) are clear indications. According to him The role of NGOs is critical in Ethiopia. The weakness of the economy means that a host of NGOs is present. The history of these organizations correlates directly with the occurrence of droughts and famines over the last three decades; early NGOs, which were mostly international, focused on providing relief. More recently, the domestic NGO sector has developed and, together with international NGOs, has come to play a prominent role in working with both the government and the private sector to improve the countrys economic and social resources. He further noted that As Ethiopia struggles to gain economic momentum; it relies on foreign aid and NGO investment. NGOs in Ethiopia are beginning to address issues of democracy and governance, and thus, to have a voice in government initiatives. If this trend continues, then NGOs also can be expected to voice expectations about the role of business in addressing social issues. As corporations move into Ethiopia, they are beginning to partner with NGOs. For example, TOTAL [the French oil company] Ethiopia has been actively working with a local NGO to help improve the environment. The company funded the rehabilitation of the Churchill Road area with the aim of developing an environmentally sound and sustainable program to

address the problem of litter. The company also planted flowers, bushes and trees, and installed four mobile toilets (Yamomoto, 2006 in Robertson). Beyond that he added the Another example involves Cisco and Information and Communication Technology Assisted Development (ICTAD). The objective of this program is to assist communities to improve their livelihood through the use of appropriate ICT that facilitated increased access to markets, development information and public services (Hailu, 2007 in Robertson). The contribution of the society in general and business organizations in particular for the construction of the largest hydroelectric dam (the Renaissance Dam) is also worth consideration. Legal and Ethical Responsibility The legal responsibility aspect of the Ethiopian business nature has significant flaws. The reason among others is there is poorly developed legal infrastructures, inefficient bureaucracy, and deteriorating ethical standards of business organizations. In Ethiopian culture emanating from the societies religious belief and fear of God stealing was socially unacceptable. However, today the perception of the society is changing and if someone makes money illegally, example, through corruption the tem is even changed and people say that he/she make business. In line with these is the issue of corporate governance which one aspect of CSR that could enhance legal responsibility of business organizations In Ethiopia, corporate governance is a topic that is recognized by the academics interviewed to be important, but it does not seem to be a priority given Ethiopias serious problems, and few steps have been taken to assure that adequate corporate governance measures are in place. (Ibid) Conclusions and Implications of the Study In this paper the context of Ethiopia and its interface with corporate social Responsibility has been illustrated using Carrolls model. Although many models CSR developed in the West Prescribe universal applications of the components and priorities , the contextual factors in developing countries in general and Ethiopia in particular may not allow the direct adoption of such models. In Ethiopian context the practice like many other African countries is on the economic aspect of the CSR and such emphasis may be at the expense of other dimensions. In such a situation how we can reconcile the different components is the major challenges that need to be addressed. As per the discussion of CSR in Ethiopia it is clear that the legal and ethical responsibilities are the least in terms of practice as it is the case in most of African countries context. This is also true in the Ethiopian case

Consequently if the desired economic development, and respect for rule of law is to exist concerted efforts in in improving the legal infrastructure, good governance and high ethical standards should be in place. In line with this a true government reform, rather than initiatives merely for political and electoral advantage, have to be implemented and they have to be systematic and supported by leadership commitment. As the informal sector grows and more privatization takes hold, attention to corporate governance issues is expected to increase. At present, the scale of business is too small to warrant attention to corporate governance. (Robertson, 2009) .

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