Featuring
As value chains stretch across the globe, the impact of firms' investments on the poor are under increasing scrutiny. A great deal of hype surrounds new ideas about how to make money by selling to the "base of the pyramid". However, Prof. Aneel Karnani of the Ross School of Business at the University of Michigan critiques the idea that selling to the poor is an effective method of poverty alleviation.
Globalization has brought many people into the global economy. Low cost labor pools along with enabling communication technology and falling transport costs has caused the business community to stretch value chains across the globe, and trade in intermediate goods has grown dramatically over the past few decades. But, globalization has distributed its benefits unequally. While there are 600 million people with incomes exceeding $20,000 annually, over 4 billion people earn less than $3,000 annually. The base is largely rural, under served and, in many cases, not part of any organized economic sector.
For generations, the role of poverty alleviation has been a focus of solely governments and the nonprofit development community - $260 billion in aid has been spent on poverty alleviation over the past 60 years. Recently, however, there has been a surge of interest in the Base of the Pyramid (BoP) among the business community. Inspired by high profile cases of companies which have earned profits by creatively selling to the base of the pyramid, a growing chorus has called for business to help the poor by viewing them not as victims, but as consumers.
To supporters, BoP initiatives offer a new market based approach to alleviating poverty. One of the central tenets of the BoP approach is its focus on generating profits while lifting people out of poverty. Introduced in 2002 by C.K. Prahalad of the Univeristy of Michigan and Stuart L. Hart of Cornell University, the BoP perspective has gained a great deal of attention with its promise of unleashing new private sector investment that simultaneously generates returns while lifting millions out of poverty. Since its inception, the focus of BoP has been on how business can serve the poor by selling to the base of the pyramid. Prahalad's book, The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, became a best seller outlining a vision based on the BOP market "as a major engine of growth and global trade."
Still, recent critiques question the notion that the poor can be lifted out of poverty by treating them as consumers. Among the critics is Aneel Karnani. As Associate Professor and Chair of Strategy at the University of Michigan's Ross Business School, Dr. Karnani is interested in global competition, particularly in the context of emerging economies.
He wants to determine how local companies can compete against large multinational firms, and how multinational firms can succeed in these unfamiliar markets. Along these lines, Karnani also researches the role of the private sector in poverty reduction. Woodward Fellows recently sat down with Dr. Karnani to discuss his views on the role of the private sector in emerging economies. Their conversation examined ways multinational corporations can spur development and reduce poverty in emerging economies.
Limitations of Selling to BoP
While the bottom billion of the poor are located in failed states, the next three billion people are better off because they are living in regions were resources are available. Although Karnani agrees that determining how to best use these resources is complicated, he is certain that selling to BoP is not the solution: "[Selling to the poor to improve their condition] is very seductive because it tells business that you can get rich and help the poor all at the same time, that you can be a saint and rich simultaneously. But you cannot make the poor better off by trying to sell more to the poor... The poor don't benefit from this strategy and actually there is a potential to exploit them because the company is trying to sell them stuff that they don't need or is bad for them." Karnani also points out that firms should not sell to BoP because there is no profitability. In fact, most multinational firms have already dismissed BoP and started targeting the emerging middle classes.
Limitations of Microfinance
In addition to BoP, microfinance is another strategy aimed at reducing poverty. Karnani agrees that from a poverty perspective, microfinance is better than BoP because it buys from the poor instead of selling to them. But while microfinance has non-economic benefits, especially for women, Karnani argues that the supposed economic benefits have not been proved. Simply stated, the arguments supporting microfinance are basically a matter of emotion and not sound economic strategy. "Microfinance doesn't work because the idea of microfinance is that all these poor people will become entrepreneurs. Most rich people don't become entrepreneurs," Karnani said. "To be an entrepreneur, you've got to have some idea of business, some creativity, some vision or some persistence, some drive, and so on... Even most of the rich people in a rich country don't become entrepreneurs. They get a job
with a company or do something else, but they earn a salary rather than becoming self-employed entrepreneurs. So this idea that we can give a couple of hundred dollars to every poor person and make them into entrepreneurs is a romanticized view of the poor."
Reducing Poverty through Job Creation
So what can be done to reduce poverty? Karnani claims it is best to focus available resources on creating jobs. For instance, China has created many factories based on low capital, labor intensive products - labor becomes more efficient and productive with time. How much a person earns depends on productivity, and productivity increases with scale economies. Consequently, the workers start earning more and poor people start moving out of poverty. When asked why microfinance and job creation could not be used simultaneously, Karnani responded, "Resources are limited, and you want to get the bang for your buck. Creating jobs will have bigger impact than microfinance."
Role of Government, Civil Society and the Private Sector
Ultimately, Karnani argues that three types of players need to be involved in job creation: government, civil society, and the private sector. For Karnani, government needs to provide the infrastructure to do business and the basic necessities that will allow its citizens to work. "You cannot put up a factory in Sudan to make something," Karnani said. "There is no electricity. There are no roads. There is a civil war going on. These people are suffering from famine and diseases... There, it is hard to see how the private sector is really going to do very much."
The role of civil society, then, is to be a catalyst for change in government, to force the government to become more responsible. While some wealthy NGO's, such as the Gates Foundation, are able to address specific problems such as malaria, most do not have the resources to be substantially effective; only governments can effectively address issues such as war or infrastructure. What these
NGO's can do, says Karnani, is force the governments to
become more responsible. Civil society can also create
jobs by abandoning its microfinance. For example, instead
of giving $200 to 500 women to buy a sewing machine,
Karnani recommends that an organization give the total
amount of money ($100,000) to one person to create a
large garment factory and that employs 500 people. This
factory can achieve scale economies, find a competitive
advantage, specialize and become much more efficient at
creating value rather than one woman sewing clothes alone
in her house."
Because they cannot effectively address the needs of the
bottom billion, Karnani claims that for the private sector,
BoP needs to apply to the next billion. Multinational
companies should focus on creating jobs in this segment,
even if the working conditions are initially less then ideal.
Although often condemned in the developed world, Karnani
argues that sweatshops are essential to poverty reduction
because they provide jobs that otherwise would not exist
- they are a positive step in the development process.
Karnani does not advocate the use of child or prison labor,
but he does believe the individuals from wealthy nations need to contextualize working conditions: "We are not
talking about exploiting labor; we just think that these
people working in these factories want to work there
because that is better than the alternative," he said. "We
have to contextualize because we can sit in the United
States and say the conditions are terrible, but that's
because we have the luxury of being in a much richer place. I think what is happening is that there are a lot of
people who are saying sweatshops are a bad idea, but
they don't realize that when they say that they are hindering
the job creation in these poor countries."
Furthermore, instead of exporting products, multinational
firms should also consider making products for the local
population. Most Chinese factories, for instance, are not
producing products for export; most Chinese factories are producing products for Chinese consumption. Large
multinational companies, then, could set up factories that
produce products for the local economies or be suppliers
for their various products. The main idea is that the private
sector - whether it is large companies, small, medium or
some combination - emphasizes job creation for BOP
rather than selling to BOP. If they do so, companies will
help poor individuals earn income, even if the job entail a
low wage and poor working conditions. Over time, Karnani
argues, the working conditions will improve because there
is more competition and the productivity rises. Then, the
workers will say you know I should be paid more for what
I do. Said Karnani, "All of this has got to start somewhere."
Bibliography
Karnani, Aneel. 2006. "Fortune at the Bottom of the Pyramid: A Mirage." Ross School of Business Working Paper 1035.
Prahalad, C.K. 2004. The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits. Upper Saddle River, NJ: Wharton
School Publishing.
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Launched by Woodward Partners in 2007, Woodward Fellows is a non profit research foundation based in the United States. Woodward Fellows probes strategic management issues in Asia Pacific to better understand the challenges firms face in the region, explore the application of research to these challenges, and contribute to the research field through partnership with leading institutions. In doing so, Fellows seeks to build bridges between scholarship and practice.
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