Below, William posed the question
“Is the market-based approach the solution to poverty?” His is a crucial question. I’d like to respond by reflecting on a
similar question: “How is the market-based approach a (potential) solution to
poverty.”
We would think that a 5 trillion
dollar market would attract business investment from around as strongly as a
medium rare T-bone steak would my hungry-swimmer brother from the next
room. But BOP markets are as
structurally different from established markets as a T-bone is from ground
beef. The analogy is better served if we
compare a medium rare, perfectly seasoned T-bone to the same weight of ground
beef – scattered across a soccer pitch.
The steak is ready to eat - established markets are optimized for conventional
business investment. Even if you think
it’s worth the time to scour the soccer pitch to find the ground beef, it’s no
T-bone. The rural nature and
disconnectedness increase the costs of finding and developing business
opportunities in the BOP markets.
But I’m
not asking why businesses aren’t investing in BOP markets, we are asking how
market-based approaches can provide effective solutions to reducing
poverty.
An
anecdote: on a humanitarian trip to Haiti, our group was discouraged from personally
donating any clothing, money or food to individual Haitians in village where we
worked. In fact, we were dissuaded from
bringing large donations with us and we were not permitted to share our food
even with the Haitians who were working side by side with us. We strongly felt the moral ambivalence as our
Haitian hosts waited while the Americans broke for lunch.
The rationale was three-fold. First, large donations of clothing had
historically contributed to driving Haitian clothing manufacturers,
distributors and retailers out of business.
They couldn’t compete with zero-price donations. Second -- and this was drilled into us by the
local Haitian leader – the village economy and the regional environment
couldn’t improve in the long run without a single-minded focus on the long
run. We were there to build a school and
a bread oven – two economic “innovations” that would bear fruit in the long
run. The bread oven would add
substantial economic value to the village’s economy; the school would increase
human capital. The local Haitian leader
firmly stated that, yes, he wanted the villagers to help, but for the hope of a
long-term reward, not a short-term (I should add that the village was not in any
state of food crisis.) He argued that to
some extent Haitians had optimized their behavior around prying donations from
bleeding-heart westerners (an ultimately unsustainable and thus
counterproductive strategy) instead of value-adding economic activity. He pointed out that the people who had the
strength and time to leave their homes and hang out with the Americans weren’t
the ones who needed the most help. The
local agricultural practices were also counter-productive in the long
term. The main cash crop was charcoal,
produced from clear-cutting trees. This
practice, though enough for a barely above subsistence standard of living, is
completely unsustainable. Large parts of
Haiti suffer from deforestation.
His argument essentially was that
donations distorted the incentives that best facilitated real, long-term
economic growth for his village. Cheap
imports of food and clothes hurt those Haitian producers and distributors just
like cheap imports decimated the auto and steel industries in the US – except of
course that there was is social safety net in Haiti. Yes, we donated money for building materials,
but they were bought in Haiti, growing the local economy. Americans carried a lot of symbolic
weight. If we showed a commitment to
long-term goals, he believed that Haitians would buy into the long-term
perspective, leading to a deeper transformation than could be achieved by pure
charity.
The key to market-based development
isn’t just dumping an innovation onto a population; it is identifying those
innovations that can begin to construct an integrated network of producers and
consumers within a region. Integrating
people into markets allows one-time investments (donations, even!) to
reverberate through the networks of consumers, vendors and distributors. This isn’t to say that we shouldn’t focus on
education or healthcare. But without a
functioning economy that can receive the human capital, an investment in
education doesn’t reverberate beyond the building and the students. A market-based mindset is critical to
optimizing a local economy. Optimization
enables growth.
Lastly, business investment must
take the charitable approach. That is,
the businesses must target their investments and innovations in products,
services and infrastructure that build up the local economy. This week’s articles list several examples of
indigenous firms that, because they can’t compete on a branding level in
established markets, are able to dominate market share and build up local
economies in the BOP markets. Ironically,
McKinsey argues that these firms, selling low-cost refrigerators in India, for
example, have the capability to outcompete “traditional” firms and products in
established markets. The “4 billion”
article asks us to imagine not the challenges but the potential of
re-optimizing business planning around the poorest instead of the richest. Focusing on making a great meal with ground
beef instead of steak.
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