With less than a month before Rio+20, the UN Conference on Sustainable Development, the world is focused on Brazil and other countries in Latin America, a region that is frequently called out for its significant contribution to the post-crisis expansion of the world economy. As we learn from a discussion with BSR Advisory Services Manager Ryan Flaherty, one of our Latin America and food and agriculture experts, the region is poised to demonstrate the role of agriculture in long-term sustainable development--with significant opportunities for business to engage.
There has been a lot of discussion about emerging economies in Latin America and the disposable income of the growing middle class. What's driving the growth?
There is a lot of diversity within Latin America, so any discussion about regional trends should be understood in this context--we are making generalizations. With that caveat, we see several broad trends converging to create the "perfect storm" for growth. First, over the past 30 years, there has been a fair amount of openness to foreign direct investment (FDI), which has connected the region to global trade and to new ideas and technologies. Second, this region has an extraordinary wealth of natural resources and an abundance of unskilled labor. Third, the region is slowly warming up to the idea of transparency, which creates an enabling environment for participation in the global economy. The combination of these factors has contributed to a very consistent GDP growth that has attracted the attention of investors. From 2010 to 2011, the region saw a 30 percent increase in FDI, with Asia now representing about 20 percent of the region's trade. However, it is important to note that the benefits of this growth have not been evenly distributed: The environment has carried a lot of the burden, and the emerging middle class still lacks basic services and infrastructure for education, health care, water, and energy. Ongoing struggles with corruption only exacerbate this inequality.
Why is agriculture becoming an increasingly significant player?
Latin America, which is one of the world's richest regions in natural resources, has a large agricultural base of some 15 million farms. Many countries in the region see the global challenge of supporting 9 billion people by 2050 as an opportunity for growth via the agricultural sector. And the sector is evolving to meet that demand. Some areas have maintained an extensive network of smallholder farms, many of whom have organized into cooperatives or other structures that enable production at scale. In contrast, other areas have moved toward large-scale production. In both cases, grower-producers are improving their performance through better practices and/or improved technology that make them more competitive globally. Since agriculture still represents only about 10 percent of the region's GDP, the challenge will be how to capture more value as production grows.
When I think of agriculture, I see the web that connects food, water, fiber, and energy. And when I think of Latin America, I see high rates of biodiversity and declining ecosystem services. What are companies operating in the region doing, or what can they do, to manage land responsibly given how connected it is to other sectors?
The region's biodiversity and mineral resources present a great opportunity for many industries--including oil and gas, extractives, agriculture, health care, and tourism. There is often a natural tension that arises from balancing competing needs for natural resources among different industries, sectors, and local communities. The idealist in me would like to say that the trend is toward understanding mutual dependencies on natural resources and collaborating to find the best use of those resources in a way that benefits citizens in the short and long term. Unfortunately, the reality--as in most parts of the world--is more of a "take it while you can get it" mentality, which has had devastating impacts on ecosystems and the services they provide. So business, which has a vested interest in the long-term viability of these resources, has an opportunity to collaborate on sustainable resource management. One interesting example is a project initiated by AmBev (a subsidiary of Anheuser-Busch InBev) in Brazil. The company has brought together several water utilities and retailers to create the Cyan Bank, which provides consumers with incentives to reduce their water consumption. When consumers reduce their water use over time, they collect points that are redeemable for discounts at participating retailers.
Speaking of consumers, in the last few years, mainstream media has covered community activism in the region. Much of this has been aimed at the mining sector, but do you foresee any implications for agriculture companies, given the environmental footprint of the sector?
Latin America has a long history of communities speaking up against social injustice, even in the face of sometimes violent oppression. As the lines blur between social and environmental issues—between biodiversity and livelihoods, issues like land conversion and indigenous rights—communities are organizing around a broader range of issues that affect their well-being. Agriculture companies have a lot to learn from the experience of the mining sector. Both industries interact with local communities as they convert land and extract material from the natural environment. Often, these communities are concerned about land rights and the potential for negative impacts on biodiversity, soil health, and water quality. Leading mining companies conduct thorough assessments to understand the potential environmental, social, and human rights impacts of their operations and build community-development programs based on the results. When done correctly, companies can secure a social license to operate by showing they are dedicated to doing business in a way that respects land ownership, sustains local ecosystems, provides decent working conditions, and delivers economic benefit to the community. The challenge for multinational agriculture companies in Latin America is that, even if they are recognized globally as sustainability leaders, they won't necessarily be welcomed with open arms. Some in the region are frustrated when multinational companies make ambitious sustainability commitments and are very vocal in the global debate, but they are less active at the local level where change needs to happen. Companies should ensure that their local teams are translating global priorities into local context.
You mentioned corruption earlier. Corruption regularly appears among the top two or three problems cited in opinion polls in most Latin American countries. How significant is this, and what's the impact on companies operating in the region?
Widespread corruption and weak institutions have plagued the region for years, with some countries making more improvements than others. However, the challenge for companies goes far beyond just trying to conduct business ethically in a corrupt system--which itself is a significant challenge. Corruption and weak institutions have also exacerbated the unsustainable exploitation of natural resources and diverted the benefits to those with power, many times at the expense of the general population. As a result, you see a growing middle class that still lacks access to health, education, waste and sanitation services, clean water, and reliable energy. This represents a challenge for companies that are investing in emerging economies and dependent upon local infrastructure, strong institutions, healthy workers, and vibrant communities to be competitive. Companies must address these institutional shortcomings by making communities a central point of their sustainability strategies, but they should also be playing an active role in pushing for more responsible policy, transparent governance, and effective judicial systems.
One of the challenges for the region will be how to maintain recent growth while addressing the issue of social inclusion. Have you seen any businesses do this well?
This situation represents both a challenge and an opportunity. The challenge is a vocal and active population that is hearing about economic growth but is not seeing much improvement in their day-to-day lives. The opportunity is a growing customer base that values companies that strategically invest in the well-being of the communities in which they operate. In the agricultural space, leading companies are partnering with growers to implement more sustainable practices that ensure long-term productivity of the land, while improving product quality and reliability. They are also connecting farmers with financial institutions to provide financing for technology and equipment that improves farmers' ability to bring products to market. Another interesting opportunity that I haven't seen global companies explore is making fresh produce available in local markets. The requirements for produce exports are very high and in many cases heavily focused on non-quality aspects such as size, shape, and appearance. Instead of throwing that produce away, companies could sell it in the local market.
Bottom line: What's your advice for companies expanding in Latin America?
By focusing on creating sustainable local benefits, companies expanding in Latin America can help solidify their social license to operate by ensuring that local communities benefit from ongoing business operations. There are a lot of exciting things happening in the region right now, and I see significant business opportunity, but companies should take the time to understand the social, environmental, and economic tensions and build their growth strategies around long-term community well-being versus short-term profit maximization.