How can markets contribute to poverty solutions?

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.