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Harish Kotian
Quoting:
The diversity credit solution
Neeraj Kumar Singh, Kannan Gopinathan : Mon Jun 17 2013, 05:38 hrs
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An effective way to ensure inclusive growth is to make
inclusion part of the market model
Promoting social equity and inclusion has always been among the foremost
priorities of governments. Social equity ensures that every individual has a
fair chance towards a dignified life. Inclusion also facilitates long-term
sustainability of economic growth. Recognising this, governments worldwide are
taking initiatives to ensure an economic growth both inclusive and sustainable.
But these have mostly been in the form of redistributive justice and
affirmative interventions. Their effectiveness in a market economy is debatable
and it becomes important to make inclusion a part of the market model itself.
The triad of economy, environment and equity are linked to each other and to
the quality of life. But we have been inclined to assess the value of an
activity on the basis of its economic utility alone, not its impact on
environmental and social equity. This distortion has often been at the root of
divergence between the social, economic and environmental goals of society.
The Earth Summit in 1992 discussed reflecting environmental cost on economic
activities, and thus integrating economy and environment. A market solution in
the form of flexibility mechanisms evolved. Carbon credits trading and
incentivising reduction in carbon footprints were two such mechanisms. Although
as a society we have accepted that effects of economic activities on
inter-generational equity (environmental degradation) should be factored in, we
are yet to accept the need to factor in the effects of such activities on
intra-generational equity (social exclusion and inequality). It is imperative
that we acknowledge this need and devise a system of incentives and
disincentives to promote inclusion.
Here, we propose an inclusive growth model that attempts to promote inclusion
by incentivising diversity at workplace. Diversity at workplace is sought to be
achieved through different flexibility mechanisms. Thus, while a sustainable
growth is attempted by linking economy and environment, an inclusive growth is
attempted by linking economy and equity through market mechanisms.
The proposed model consists of two specific flexibility mechanisms. The first
one incentivises diversity footprints, the second facilitates diversity credit
trading. For both, the first step would be to measure companies' diversity.
What constitutes diversity is a political decision and may include various
sections of society: women, the disabled and other under-represented sections.
Their relative representation is then translated into the company's diversity
footprint. Under the first mechanism, government can link various incentives,
including tax, to this diversity rating. This will encourage companies to
consciously promote a diversified workforce.
In case of the second mechanism, the measured diversity footprint is converted
into market tradeable units called "diversity credits". The price of these
credits will be left to market forces - demand and supply. Further, with every
company made legally liable to hold a minimum share of diversity credits, the
ones with surplus credits will sell and the ones in deficit will buy.
Government can also be part of this diversity market, thus exerting an indirect
influence on pricing, and also earning some additional revenue.
Let us minimally define diversity as representation of differently abled
workforce. The company's diversity credits will be determined by the number and
profile of disabled employed. Thus, a differently abled employee on the shop
floor translates into "x" credits and in management into "y" credits. Three
scenarios may arise: One, company meets the credit obligation (Company A); two,
company falls short (Company B); three, company earns more than the stipulated
credit (Company C). Company A, having complied, is unaffected by the dynamics
of the diversity credit market. However, company B is dependent on the market
to meet its obligation. Now, B may have fallen short due to: one, it has not
put sufficient effort in ensuring a diversified workforce; two, shortage of
skilled and employable differently abled labour in the sector; three,
unsuitability of the sector vis-à-vis the differently abled. In case one, B can
easily rectify it without taking any hit on productivity by putting in the
additional effort. In case two, B has two options: it can contribute to
skilling the differently abled, earn credits in return and ensure a diversified
and efficient workforce. Or, it can buy the necessary credits from the market.
One factor deciding B's choice will be the market price of credits and its
long-term trend. If the price is expected to remain high, B may assist in
skill-development of the differently abled and then suitably employ them. In
case three, due to the minimal definition of diversity, B will have to buy
credits from the market. Company C is employing a diverse workforce and thus
has surplus credits. C can now sell these and earn revenue, or it can offset
them against future use. In this way, companies investing in a diversified
workforce are rewarded.
The model gives companies flexibility for compliance, and the price of
compliance and violation are discovered through market mechanisms. Companies
unable to meet credit obligations are in effect paying a tax, but a tax as
determined by the diversity market. As rational players, they will want to
minimise it. One way to do so would be to invest in training and
skill-development of a diverse set of the population. This might also help
reduce the skill set-job requirement mismatch today. The opportunity to earn
revenue through sale of diversity credits might encourage conversion of some
unorganised-sector companies to organised, and boost investment in
diversity-friendly sectors.
The impending publication of a socio-economic and caste census, renewed demands
for private-sector reservation, calls for increased Corporate Social
Responsibility spending, and questions about the effectiveness and efficiency
of government interventions make it imperative that we look for more effective
ways of ensuring inclusion. This model could be one such alternative. The
pricing of credits, impact on competitiveness and regulation of this market
call for a much deeper analysis. The purpose of this article is to provoke a
debate on integrating equity, economy and environment through market mechanisms.
The writers are IAS trainees, 2012. Views are personal
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