In this article Martin Kupp, Faculty Member at ESMT, argues that there is only one way to fight global poverty and it requires the macro involvement of established corporations.
by Martin Kupp, Faculty Member, ESMT European School of Management and Technology
We have experienced the notion of consumerism to fight global poverty and we have seen the idea of microloans, now met with disillusionment. But neither the mini-consuming nor the micro-producing have changed much at the bottom level of the income pyramid so far. As Martin Kupp of ESMT argues, there is only one way to reach the next level and that requires the macro involvement of established corporations.
The Fortune at the Bottom of the Pyramid by the late economist C.K. Prahalad was published in 2004. In the United States it was named Business Book of the Year. But even in Europe it triggered a paradigm shift by questioning the purely humanitarian approach toward the fight against global poverty. Prahalad challenged the received wisdom of the day insisting that third-world slum dwellers and agricultural workers should be seen as consumers, rather than recipients of aid from industrialized countries. According to him, multinational companies, primarily in industrialized countries, were to develop and sell special products and services for these social groups. And only when those at the bottom of the income pyramid – that is, the estimated three to four billion people who have to survive on less than two dollars a day – are taken seriously as customers would companies develop suitable services and products for them. Although the individual wealth of this group of customers was small, the size of the segment would make it attractive. If addressed correctly, Prahalad saw his approach not only as a means to fight poverty but also to make a profit.
Even when the entire notion was based on a relatively naive formula for happiness, the book received an enthusiastic reception. It was followed by a series of publications, studies, and examples of successful companies that, after tailoring new products to meet the specific requirements of the poorest segments of these societies, went on to make a profit. They also made new, affordable products accessible to this target group.
Six years after the book’s publication, euphoria has given way to disillusion. The number of critics continues to grow. Many of Prahalad’s examples have turned out rather differently than he predicted. For example, Hindustan Unilever Limited (HUL), the Indian branch of Unilever, has yet to publish any figures showing whether its bottom-of-the-pyramid (BOP) segment activities are actually profitable. Furthermore, state funding for the HUL project that offers small quantities of high-quality soap at affordable prices has been cut. Although Prahalad explicitly postulated a link between commerce and the fight against poverty, it is notable that many of the companies he highlighted as examples are actually charitable institutions. These include the Jaipur Foot Project, which manufactures and sells simple, functional artificial limbs for the world’s poorest citizens, and the Aravind Eye Care System, which provides affordable eye operations for the same target group.
If we broaden Prahalad’s approach, the lowest earners in developing countries should perhaps be viewed as active producers rather than just passive consumers. This is a theory often favored by authors such as Aneel Karnani from the University of Michigan and Arvind Virmani from the International Monetary Fund to counter Prahalad’s arguments. The underlying logic here is that a lasting victory in the fight against poverty can only be won by increasing the real income of the poor. This can be done, by either offering them better products at low prices or by helping them to earn more. Two possibilities are currently being discussed for the latter option: microloans and microfranchising.
The concept of microloans became more widely known in 2006 when the Nobel Peace Prize was awarded to Muhammad Yunus, the founder of the Grameen Bank in Bangladesh. It is based on the idea of awarding small loans to company founders in developing countries. Almost 10,000 microcredit institutes now exist worldwide, most of them charitable institutions. Although studies have emphasized the role of microloans in combating poverty, figures on the concept’s financial viability remain thin.
One project that proved to be too short-sighted, was the “Village Phone Ladies” scheme launched by GrameenPhone and GrameenTelecom. It provided various women in Bangladeshi villages with cellular phones, essentially turning them into living telephone booths. They earned their money by renting their cell phones to the other villagers. When the project first got off the ground, the women earned between US$ 750 and US$ 1,200 a year. As cell phones became more widespread, however, their earnings fell sharply.
Microfranchising is another way of raising the income of low earners. Essentially, the concept focuses on building local resources for the benefit of a company’s own franchise organization. For example, cellular phone operator Celtel Nigeria contracted with selected associated distributors for its Rural Acquisition Initiative (RAI) in 2007. They sold prepaid SIM cards and top-up cards, operated cellular phone network masts, and had a 2.5 percent share in Celtel Nigeria sales. This was a complete shift from the earlier practice of leaving the cell phone infrastructure, including operation and maintenance, exclusively in the hands of the operating companies. As it turned out, a six-week trial during June and July 2007 showed that customer phone usage increased by over 60 percent during this period. What’s more, each subcontractor had hired an average of five more people to sell SIM cards locally. The associated distributor was able to earn up to US $13,000 a year by achieving a 10 percent increase in call minutes on a cellular phone mast that had previously recorded only average use. This project can, therefore, rightly be seen as a successful economic development model.
Microloans and microfranchising share the goal of defining the world’s poorest people in developing countries as producers. The problem with both approaches is that many of these small companies lack the economies of scale to be competitive. The statistics on microloans show that they are used predominantly for the cultivation of foodstuffs, livestock breeding, and clothing and furniture production. From an economic perspective, it would make more sense to consolidate these into a single furniture factory. Rather than supporting 50 small-scale furniture manufacturers, the cost savings realized by the division of labor could then be used to buy machinery and to share fixed costs.
At the end of the day, shortcuts in the fight against poverty lead nowhere. In the long run, Prahalad’s concepts involving consumerism – and the well-meaning but otherwise poorly thought-out microloans – can at best be seen as moral gestures. Ultimately, there is only one sensible way to solve poverty at the bottom of the income pyramid: corporate investment in local infrastructure and workforce training, ideally in cooperation with NGOs familiar with the area. Companies can then incorporate these actions into their existing sustainability projects and treat them as a tax-deductible portion of their CSR activities. This would be just as effective as protecting rare species and artifacts. At the same time, it would represent a more modern, intelligent approach toward third-world development than a donation campaign in the spirit of social piety.
Courtesy of ESMT
Categories: Leadership in Economics