“Market solutions to poverty are very much in vogue. These solutions, which include services and products targeting consumers at the “bottom of the pyramid,” portray poor people as creative entrepreneurs and discerning consumers. Yet this rosy view of poverty-stricken people is not only wrong, but also harmful. It allows corporations, governments, and nonprofits to deny [...]
“Market solutions to poverty are very much in vogue. These solutions, which include services and products targeting consumers at the “bottom of the pyramid,” portray poor people as creative entrepreneurs and discerning consumers. Yet this rosy view of poverty-stricken people is not only wrong, but also harmful. It allows corporations, governments, and nonprofits to deny this vulnerable population the protections it needs. Romanticizing the poor also hobbles realistic interventions for alleviating poverty.”
This article proposes an interesting view/argument on the way the BOP (”bottom-of-the-pyramid”) “fortune” is viewed. Here are some interesting quotes from the article, since you have to be a subscriber (or your college/university/school has to be) to read it –
Proponents of these market solutions assume that poor people are fully capable and willing participants in free market economies…On its Web site Nextbillion.net, WRI emphasizes the “potential of the world’s poorest citizens as entrepreneurs, employees, and discerning consumers.” The United Nations’ Web site declares that microentrepreneurs are using small loans “to grow thriving businesses … leading to strong and flourishing local economies.”
Beneath these beliefs in the market readiness of poor people lies a more basic assumption: people in dire straits are well-informed and rational economic actors...And so romanticized views of BOP people as value-conscious consumers and resilient entrepreneurs are not only false, but also harmful. These views lead states to build too few legal, regulatory, and social mechanisms to protect the poor, as well as to rely too heavily on market solutions to poverty……Many advocates of market-based solutions to poverty view poor people as rational consumers who, if given more options, would make better choices—that is, choices that would increase their economic welfare. They see no problem with encouraging the poor to spend their already meager incomes on low-priority products and services. They further argue that the poor have the right to determine how to spend their limited income and are in fact the best judges of what is in their best interests…
…In addition, poor people more often encounter stressors—including hunger, pollution, crowding, and violence—that lead them to act in ways that may alleviate suffering in the short term, but hinder economic prosperity in the long term…
…The consequences of bad choices are bad for everyone, but even worse for the poor, who lack the resources—financial, psychological, social, and political—to compensate for their errors. Consider the story of Hasan, a rickshaw puller in Bangladesh who spends 20 cents per day on tobacco. When public health experts Debra Efroymson and Saifuddin Ahmed asked Hasan whether his three children ever eat eggs, he exclaimed: “Eggs? Where will the money come from to buy them?” But if Hasan didn’t buy tobacco, each of his children could eat an egg a day, and be healthier as a result…
…For example, the typical poor household in Udaipur could spend up to 30 percent more on food if it did not spend money on alcohol, tobacco, and festivals…
…Another reason that poor people suffer disproportionately for their bad choices is that corporations, governments, and nonprofits offer them fewer services and protections than they offer richer people. The annual report of virtually every large company claims its mission is to serve some larger social purpose besides making profits. Yet in a recent article about corporate social responsibility (CSR), The Economist concludes that for most large public companies, “CSR is little more than a cosmetic treatment.” Even nonprofits and foundations skew their offerings to better-off people, finds Stanford University political scientist Rob Reich (see “A Failure of Philanthropy” in the winter 2005 issue of the Stanford Social Innovation Review). In addition, many corporations exploit poor people’s vulnerabilities, such as their lack of education and their desire for cheap relief from chronic distress…
…Corporations not only work around existing protections to sell poor people things that they do not need, but also work with governments to rewrite laws in their own favor. For example, SABMiller has enjoyed great success in Africa with Eagle, a cheap beer made from locally grown sorghum rather than imported malt, reports The Economist. In Uganda, Zambia, and Zimbabwe, SABMiller can price the beer lower than mainstream clear beers because governments reduced the taxes the corporation has to pay. Meanwhile, these countries pass up valuable alcohol taxes that other countries would likely use to support public education and rehabilitation programs…
…Governments have a responsibility to guard their most vulnerable citizens from unsavory practices. Yet governments in all countries have problems regulating markets. This is all the more true in developing countries with corrupt governments that are in cahoots with firms. And even when governments in poor countries have good intentions, they often lack the resources and competence to design and administer appropriate regulations…
…Despite the many disadvantages that indigent people face in the marketplace, nonprofits, governments, and businesses are flocking to market-based poverty alleviation programs. For instance, microcredit, the newest silver bullet for reducing poverty, has attracted many billions of dollars in funding. Microcreditors make small loans to poor individuals or groups of borrowers—called microentrepreneurs—whom mainstream financial institutions have traditionally snubbed. Many people have made grand claims about the impact of microcredit, including Muhammad Yunus, founder of Grameen Bank and winner of the 2006 Nobel Peace Prize, who said, “We will make Bangladesh free from poverty by 2030.”
As I argued in an earlier article in this magazine, however, microcredit does not significantly alleviate poverty (see “Microfinance Misses Its Mark” in the summer 2007 issue of the Stanford Social Innovation Review). The problem with microfinance is that it romanticizes poor people as creative entrepreneurs. Most microcredit clients are not entrepreneurs by choice; they would gladly take a job at reasonable wages if one were available. This should not be too surprising. Most people do not have the skills, vision, creativity, and persistence to be an entrepreneur. Even in developed countries with high levels of education and access to financial services, about 90 percent of the labor force is employees, not entrepreneurs. Meanwhile, as borrowers struggle to repay loans that are unlikely to lift them out of poverty, some microfinance institutions earn handsome returns—such as the 100 percent compounded annual rate of return that investors in Banco Compartamos received (see “Microloan Sharks” in the summer 2008 issue of the Stanford Social Innovation Review)…
...Another BOP strategy for alleviating poverty is to create, package, and market products to poor people. Not only will these BOP businesses bring the world’s most isolated, impoverished people into the fold of the marketplace, the thinking goes, they may also make multinational companies a fortune. Prahalad argues that the poor, defined as people living on less than $2 per day, represent a market size of $13 trillion. Other economists make even grander assertions; Hammond once asserted that the BOP harbored $15 trillion in commerce.
Yet these estimates of market size are gross exaggerations. Using calculations from World Bank data available in 2006, I estimated elsewhere that the BOP market was $300 billion in 2002. And then once again, using data from a 2007 report coauthored by Hammond and called The Next Four Billion, I estimated a global BOP market size of only $360 billion, which is quite close to my earlier estimate…
…[Y]et corporations, governments, and NGOs romanticize the poor. As a result, they continue to rely too heavily on market solutions to poverty.
This is not to deny that free markets can help reduce poverty. In fact, the private sector must play a critical role. Rather than viewing the poor primarily as consumers, people interested in economic development should approach the poor as producers. The best way to alleviate poverty is to raise the real income of the poor by creating opportunities for steady employment at reasonable wages. Firms can do this by creating more employment opportunities in labor-intensive industries and investing in upgrading the skills and productivity of poor people, thus increasing their income potential.
For their part, governments need to help create and grow private enterprises in labor-intensive sectors of the economy through appropriate policies (such as deregulation), infrastructure (such as transportation), and institutions (such as capital markets). They must also protect poor consumers through legal and regulatory mechanisms. NGOs and social activists can help by exerting pressure on governments and companies.
Poverty cannot be defined only in economic terms; it is also about a much broader set of needs. But many market approaches to reducing poverty focus solely on economic ends, viewing social, cultural, and political benefits as by-products. In contrast, I think that social, cultural, and political benefits are desirable in and of themselves. We should emphasize the role of governments and public policies in cultivating and safeguarding these other noneconomic ends. By emphatically focusing on the private sector, market-based poverty alleviation programs distract people from correcting the frequent failures of governments to fulfill their traditional and accepted functions of ensuring safety, providing education, protecting health, and building infrastructure. No alternative to government has proven able to serve these functions.
The entire article can be read HERE.
If you would like to read the whole article but cannot view it on the website, please EMAIL me (cacutie[at]gmail.com) and I will send you the pdf file.
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