Profit from Poverty?

From child labour to tropical deforestation, practices in the global South, or the 'developing' world, have been central to Western debate and practice of corporate citizenship during the past decade. However, a company's relationship with the broader issue of international development per se, has not been a key focus of mainstream corporate citizenship - until now. 2004 witnessed more corporate activity being framed within the context of promoting international development. This is increasingly being discussed as the ways that business can support the Millennium Development Goals (MDGs).

The UN Development Programme (UNDP) and International Business Leaders Forum (IBLF) suggested in 2003 that that there are three broad reasons why it makes sound business sense to contribute towards the achievement of the MDGs: first, investing in a sound environment in which to do business; second, managing the direct costs and risks of doing business; third, harnessing new business opportunities.122 This latter focus, on business opportunities in the global South, received growing attention as the year progressed.

In December, the World Resources Institute held a conference in San Francisco, titled "Eradicating Poverty Through Profit: Making Business Work for the Poor"123 Over 800 people from the private, voluntary and government sectors attended, to hear the latest on the opportunities for corporations to source from or sell to disadvantaged people in ways that improve their quality of life while generating profit. The opening plenary saw C.K. Prahalad of the University of Michigan, present this proposition, which is developed in The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits.124

He said that there is an undeveloped and untapped market waiting at the bottom of the world economic pyramid - a market of four billion people who live on less than $2 a day. Prahalad cites case studies of rural electrification in Nicaragua, small scale construction in Mexico, and salt iodization in India, to show how companies can make money from selling to people who have low incomes, while improving their quality of life. He points to transnational companies such as Unilever, Philips, Hewlett Packard, Dupont and Johnson & Johnson that have developed new business models and strategies aimed at low income markets. To achieve this requires rethinking basic approaches, such as the approach to pricing. Traditional pricing sums the costs of a production and distribution system and then adds on a profit margin, whereby selling to low income markets requires determining what people are able to pay, deducting a profit margin, and then working out how to delivery the product within that budget. Prahalad emphasized to the Economist that these markets "need to be built not simply entered".125

He suggests that the biggest barrier to success has been the mentality of managers. These markets have been "invisible to most large companies" Prahalad argued in Fortune magazine "because few executives can conceive of a market among people that are poor. Businesspeople think that the poor cannot afford their products and services, and also assume, naively, that the poor have no use for advanced and emerging technology. In fact, selling to the poor is a uniquely powerful way to achieve breakthroughs in products and management practices: The bottom of the economic pyramid is a sandbox for innovation. But you have to understand the rules of the game, which can be startlingly different from what you are used to."126 In his book he writes "if we stop thinking of the poor as victims or as a burden and start recognizing them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity will open up."127

Central to the argument is that companies are not the only ones that can profit from this new approach to business. The cover of his book contends that if we "create the capacity to consume" we are "delivering dignity, empowerment, and choice not just products" and thereby promoting "an inclusive new capitalism". Some of the case studies in the areas of information technology and banking appear to support this view. The experience of microfinance, in particular, is worth some attention. The problem it addresses is the poor's lack of access to even the smallest loans to support their entrepreneurship. Mohammed Yunus founded the world's largest microcredit program 30 years ago with the establishment of the Grameen Bank in Bangladesh, which has so far distributed more than $3 billion in loans to the poor since the first $27 loan was granted. A key target beneficiary of this has been women, organized into small groups that share the loan and the commitment to repay it. "These services not only alleviate poverty and enhance growth, but they also consolidate networks of trust and create opportunities for women," said Beatriz Armendariz de Aghion, a visiting Harvard professor and microfinance expert.128

Microfinance institutions have achieved average repayment rates greater than 95 percent, which is higher than rates for many more financially powerful debtors. Commercial banks are beginning to profitably enter the sector,129 and governments are beginning to back it. In November, Princess Basma bint Talal of Jordan hosted a conference on the topic, and endorsed its role in promoting development in an article in the Jordan Times."130 In India, the Finance Minister P Chidambaram said at a conference of microcredit recipients that the government wanted more done, as "only 10 per cent of bank credit goes to small borrowers, who account for 72 per cent of the bank accounts."131

The development potential arising from new corporate strategies to serve low income markets makes this an area of interest for the corporate responsibility community. Both the Sustainable Livelihoods Project of the World Business Council on Sustainable Development (WBCSD) and the UN's 'Growing Sustainable Business (GSB) for Poverty Reduction' initiative have focused on this for some time.132 But the growing importance of this corporate social opportunity, not just corporate social responsibility, was reflected by Prahalad being given the plenary speech at the second academic conference of the Global Compact's Learning Forum in Philadelphia.

Meanwhile a flurry of articles during 2004 reflected an excitement amongst sections of the mainstream business press that tackling poverty might be the next big thing. The Wall Street Journal reported that the bank Citigroup is courting a new clientele - not the "ultra-rich" anymore, but the "unbanked".133 Newsweek International reported that "consumer-goods makers are realizing they have only one direction to go for growth: down market."134 Prahalad's publishers were keen to stoke this excitement, arguing that "the ramifications of this book are just beginning. Globally, this is a movement in the making that will affect everyone and the life of the planet. After all, what company or individual entrepreneur wouldn't want to make money, create successful products and services that no one else has thought of, and save lives and our earth at the same time?"

True, it would be difficult to think of anyone who wouldn't want to take part in such a win-win world. The publishers are right to suggest that this theory has legs. One reason is that it is an argument that resonates with the priorities of powerful institutions in society - be they business, government or intergovernmental groups; it holds out hope for current patterns of economic globalization, by suggesting that big business is key to solving the problems of poverty, not a reason for them. As more effort goes into the compilation of case studies, so this theory may grow from a proposition to a statement of fact about how development works. However, case studies do not prove a theory. It is important to critically examine some of the claims being made.

First, we should question whether the evidence of profitable business with low income markets is really evidence of engaging those in poverty. There is a great diversity of incomes in the 4 billion that are often referred to. Some of the most profitable examples are from the high technology sectors, with reports of booming cell phone sales across Africa135 and laptop sales across Asia.136 Yet what does this say about poverty eradication? Cell phones and IT may have multiplier effects on an economy, by facilitating more electronic payments and access to financial instruments for some people, but it is not clear how this benefits the malnourished and those without clean water? The argument that wealth will 'trickle down' does not correspond with the experience of many countries, where economic development has led to wealth gushing up to the rich few. Issues of power in supply chains and patterns of ownership are crucial in determining where incomes accrue.

Second, we can question the type of 'development' that is being promoted. One often quoted example of a successful bottom of the pyramid product is the work of Unilever's subsidiary in India, Hindustan Lever, in selling shampoo. The company had been focusing on the richer consumers and not looking at how to sell to poorer consumers, who were not able to afford a whole bottle of shampoo. They started producing and marketing single serving shampoo sachets, which were cheap enough for people, particularly young women, to afford. These examples are presented not only as a way of making money, but as a form of empowerment for these women. "When the poor are converted into consumers, they get more than access to products and services. They acquire the dignity of attention and choices from the private sector that were previously reserved for the middle-class and rich" says Prahalad.137

However, is this shampoo story really one of empowerment and dignity? Commenting on the uptake of brand-name shampoos sold in single serving sachets in Thailand, Nicola Bullard, of the NGO Focus on the Global South in Bangkok, pointed towards the marketing machine that creates the demand. "Thai TV advertising is an endless parade of beautiful young women with long glossy hair swirling without a care - obviously commercial and chemical shampoos are not only better than traditional or local products, but they also make you more beautiful, richer and more modern. Who can blame the village girls for buying the brightly packaged foaming chemicals when they are subjected to such relentless hair-swirling!"138 Claims about empowering people by providing means for them to consume certain products can not be taken on face value.

Prahalad seems to use positive language about the autonomy and potential of the poor, while at the same time re-affirming their identity as the poor that by definition need to change, with outside help, and to change to become more like that outside 'developed' world. The 'developed' are shown to be able to learn from the poor, but only in terms of technical matters, while 'development' and 'progress' are assumed to be about more 'stuff' being bought and sold. There is an implicit recognition in his work that development is more than consumption, but other issues such as self-esteem are then dealt with in terms of consumption choices. There is a problem with expressing on the one hand a recognition and support for the autonomy and potential of the poor, while on the other, assuming their basic aspirations, and not considering how those aspirations are shaped by commercial forces.

The third area of debate concerns the environment. The shampoo sachet example automatically raises questions about the increased amount of packaging and transportation, and the comparative environmental impact in comparison to using locally produced cleaning materials, such as soaps, herbs, lemon and vinegar. It may seem a small issue in comparison to acute environmental problems and global challenges such as climate change, but some analyses of sustainable development suggest that all socio-economic relations are important and local production and consumption is crucial. The BoP thesis assumes a different perspective on sustainable development, where environmental problems can be solved through technical and financial advancement. Stuart Hart, professor at the Johnson School of Management at Cornell University, who was the first academic to conceptualize the BoP, argues that environmental concern is effete to the poor, and "sustainability requires massive reductions in poverty and that means bringing billions of people into the market economy." Contrary to this, the rural poor are depending on their immediate environment for survival in ways that richer urban dwellers do not, and express their own environmentalism which is integrated into normal practice.139

A fourth area where we need more deliberation is on the issue of ownership. Should a more inclusive capitalism mean that there are more capitalists, more owners of production? A problem often identified with foreign companies is that they can dislocate indigenous business and so the profits arising out of local economies are repatriated as profits outside of the community. Mr Japheth Katto, the Capital Markets Authority chief executive officer in Uganda, has said that "corporate social responsibility should be looking at shareholding to have any relevant meaning for Africa".140 It is unclear whether growth of BoP market business models from TNCs will promote or undermine local capital ownership. In the meantime, any facilitation of TNC trading with BoP markets by development agencies might even compound current problems with North-South supply chains, tax avoidance, and anti-competitive practices that are fairly typical of TNCs.

As work on the BoP grows, these questions will become more important. Some will challenge the fundamental basis of this concept, by pointing out that generating a profit from poverty has been the raison d'etre of the corporation since their original invention to exploit Europe's colonies. Thus BoP work could be seen as just the latest expression of post-colonial imperialism administered by corporations. That position could find support from the way that business researchers and consultants are currently approaching the BoP issue, with the aim of advising and benefiting the TNCs. For example, one management school study of Unilever's Indian subsidiary looked at how the company learned from their local Indian competitor company, Nirma, about how to sell to poorer markets. This was not so much about 'building markets' but about large foreign-owned companies competing with local companies. In addition, one of the key social development benefits of the local company's operation, employment arising from the use of smaller community-level labour-intensive factories, was not copied by Unilever.141

There is certainly potential, but more research is required on the BoP concept. Questions such as how large corporations might bring their financial, technical and management resources to help local entrepreneurs improve and scale their businesses, and avoid exploitative local middlemen, are important to address. The potential for large corporations to adapt technology to provide clean fuels, safer and more nutritious foods, medicines, and communications to people living in poverty could also be looked at. But the potential negative implications must also be explored, by drawing upon a range of intellectual disciplines, such as sociology and anthropology. There is some movement. Within the management discipline, IESE in Barcelona is developing a BoP Learning Laboratory. Coordinator Miguel Angel Rodriguez told the JCC that as "BOP markets are a multidimensional reality, so diverse vantage points are necessary in order for companies to understand this reality and be able to build the right business models and deliver products and services that satisfy people real needs in a sustainable way." Interdisciplinarity will be key, but also an approach which is not merely instrumentalist, not merely focusing on what is in this for certain types of business.

With BoP ideas, traditional assumptions of corporations as the enemies, unconscious engines, or ungrateful beneficiaries of development are now being challenged, as corporations are now argued to hold potential as conscious agents of development. This makes the interfacing of management studies and international development studies an important activity to help inform policy and practice in a way that delivers for the majority of the world who live in the global South.