Eradicating Poverty through Enterprise

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Eradicating Poverty through Enterprise

• ANEEL KARNANI
• The University of Michigan
• November 2007

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Poverty Eradication

• Increasing role for the private sector
• Development through Enterprise
• World Economic Forum
• World Bank Private Sector Development
• United Nations Inclusive Markets
• Bottom of the Pyramid (BOP) strategies
• World Resources Institute
• World Business Council for Sustainable
  Development
• Business as an Agent of World benefit

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Poverty Eradication

• Private Sector
• Poor as Consumers
• Poor as Producers
• Public Sector
• Civil Society

• Color Coding
• BOP emphasis
• My emphasis

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Bottom of Pyramid Proposition

• Low-income markets present a prodigious
  opportunity for the worlds wealthiest companies
  to seek their fortunes and bring prosperity to
  the aspiring poor.

C.K. Prahalad and Stuart L. Hart, The Fortune at
the Bottom of the Pyramid, Strategy Business,
January 2002
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Role of Private Sector

• Poor as Consumers
• Facilitate purchase
• Marginal impact
• Market is very small
• Potential for exploitation
• Lower price without lowering quality
• Lower price and lower quality

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Exploiting the Poor

• The poor often make choices that are not in their
  own self interest.
• The poor are vulnerable lack of education (often
  illiterate), ill informed, victims of social and
  cultural deprivations
• Amartya Sen A persons utility preferences are
  malleable and shaped by his background and
  experience, especially so if he has been
  disadvantaged. We need to look beyond the
  expressed preferences and focus on peoples
  capabilities to choose the lives they have reason
  to value.

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Alcohol and Poverty

• The poorer people spend a greater fraction of
  their income on alcohol than the less poor.
• Alcohol abuse exacerbates poverty impact on work
  performance, health, accidents, domestic violence
  and child neglect.

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Fair Lovely
A poor woman using Fair Lovely has a choice
and feels empowered because of an affordable
consumer product formulated for her needs.
Hammond and Prahalad (2004)
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Fair Lovely package
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Fair Lovely Advertisement

• A young, dark-skinned girls father laments he
  has no son to provide for him, as his daughters
  salary was not high enough the suggestion being
  that she could not get a better job or get
  married because of her dark skin.
• The girl then uses the cream, becomes fairer, and
  gets a better-paid job as an air hostess and
  makes her father happy.

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Empowerment or Entrenching Disempowerment?
A poor woman using Fair Lovely has a choice
and feels empowered because of an affordable
consumer product formulated for her needs.
Hammond and Prahalad (2004)

• Fair Lovely cannot be supported because the
  advertising is demeaning to women and womens
  movement
• Ravi Shankar Prasad, Minister of Information and
  Broadcasting

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Market Failure

• Need for legal, regulatory, and social mechanisms
  for protecting consumers.
• Particularly difficult in the context of the poor
  in developing countries.

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Role of Private Sector

• Poor as Consumers
• Facilitate purchase
• Marginal impact
• Market is very small
• Potential for exploitation
• Lower price without lowering quality
• Good idea, but too rare in practice
• Lower price and lower quality
• Appropriate price-quality trade-off
• Transparency

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Role of Private Sector

• Poor as Producers
• Microentrepreneurs
• Positive social impact
• Minimal economic impact
• Poor are not entrepreneurs low value added
  enterprises
• Increase productivity
• Goods/services to increase productivity
• Increase market access and efficiency
• Cooperatives
• Employment

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Romanticizing the Poor Harms the Poor

• We should recognize the poor as resilient and
  creative entrepreneurs and value-conscious
  consumers.

C.K. Prahalad, The Fortune at the Bottom of the
Pyramid, 2005.
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Increasing Employment

• Create jobs
• Labor intensive, low-skill sectors
• SMEs are the primary engine of job creation
• Pro-business (especially pro-SMEs) policies and
  environment
• Increase employability
• Education
• Vocational training
• Reduce friction in labor markets
• Motivation
• Labor mobility
• Information enabling transition

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Job Creation and Productivity
Employment/Population Late 1980s Employment/Population Late 1990s
China 51.0 58.7
India 29.5 35.8
Africa 33.4 30.1
Working Poor/Employment Late 1980s Working Poor/Employment Late 1990s
China 79.6 35.2
India 75.0 62.0
Africa 63.4 65.4
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Role of Public Sector

• The BOP approach relies on the invisible hand of
  free markets to eradicate poverty. We should
  instead require the state to extend a very
  visible hand to the poor to help them climb out
  of poverty.
• Public Sector
• Public Services and Infrastructure
• Regulation
• Equity

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Role of the Public Sector

• The poor have suffered because of a massive
  failure of the state to fulfill its traditional
  functions of providing
• Literacy and basic education
• Basic health care and public health
• Safe drinking water
• Sanitation
• Basic infrastructure (transportation,
  electricity)
• Public safety and security

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BOP Dangerous Delusion

• Failure of the state can not be remedied by
  increasing the role of the private sector. We
  need to enhance the agency and the voice of
  the poor.
• Discussing the residents of the slums of Dharavi
  (in Mumbai), Prahalad and Hammond say that
  getting access to running water is not a
  realistic option. The poor accept that
  reality and they spend their money on things
  they can get now, such as televisions.
• Even if the poor accept this reality, we should
  not.

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Dislodging sludge to keep water flowing in a
sewer canal in the Janata Colony section of New
Delhi.
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Poverty EradicationRole of Private Sector

• Help generate employment by creating (or
  facilitating) low skill jobs.
• Focus on the poor as producers, and help increase
  their productivity and income potential.
• Sell products/services appropriately targeted at
  the poor at prices they can afford, even (and
  usually) at the expense of quality.
• Respect the vulnerabilities of the poor, even in
  the absence of other protective mechanisms