The diversity credit solution

An effective way to ensure inclusive growth is to make inclusion part of the market model

Written by Neeraj Kumar Singh | Published:June 17, 2013 5:38 am

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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