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Eradicating Poverty through Enterprise
ANEEL KARNANIThe University of Michigan
November 2007
Eradicating Poverty
Aneel Karnani 2
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 world’s 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 person’s 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 people’s 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 girl’s father laments he has no son to provide for him, as his daughter’s 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?
“Fair & Lovely cannot be supported because the advertising is demeaning to women and women’s movement”
Ravi Shankar Prasad, Minister of Information and Broadcasting
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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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 Eradication:Role 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