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Romanticizing the Poor

Market solutions to poverty are very much in vogue. These solutions, which include services and products targeting consumers at the “bottom of the pyramid,” portray poor people as creative entrepreneurs and discerning consumers. Yet this rosy view of poverty-stricken people is not only wrong, but also harmful. It allows corporations, governments, and nonprofits to deny this vulnerable population the protections it needs. Romanticizing the poor also hobbles realistic interventions for alleviating poverty.

 

Fighting poverty with business has become very popular. Organizations from the environmental think tank World Resources Institute (WRI), to the World Bank, to the United Nations Development Programme are promoting business strategies to increase poor people’s1 consumption and entrepreneurship. Business schools such as those at the University of Michigan and the University of North Carolina at Chapel Hill have set up centers to find out how businesses can better involve the bottom of the pyramid (BOP)—that is, the 2.5 billion people worldwide who live on less than $2 per day.

Meanwhile, books such as John Weiser’s Untapped, Craig Wilson and Peter Wilson’s Make Poverty Business, and Vijay Mahajan and Kamini Banga’s The 86% Solution suggest how serving the BOP can reap profits. Multinational corporations, including Unilever and S.C. Johnson & Son, offer products and services that both appeal to and purportedly aid the BOP. The world’s top CEOs discussed strategies for targeting the BOP at the most recent World Economic Forum. Even the term “bottom (or base) of the pyramid” has become common usage in both development economics and business.

Proponents of these market solutions assume that poor people are fully capable and willing participants in free market economies. For example, in the first paragraph of his best-selling book The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, University of Michigan business professor C.K. Prahalad urges readers to recognize the poor as “resilient and creative entrepreneurs and value-conscious consumers.”2 On its Web site Nextbillion.net, WRI emphasizes the “potential of the world’s poorest citizens as entrepreneurs, employees, and discerning consumers.” The United Nations’ Web site declares that microentrepreneurs are using small loans “to grow thriving businesses … leading to strong and flourishing local economies.”

Beneath these beliefs in the market readiness of poor people lies a more basic assumption: people in dire straits are well-informed and rational economic actors. Yet this view denies the fact that poor people often act against their own self-interest. Of course, wealthier people sometimes do so, too. But poor people face far worse consequences for their bad choices than do more affluent people. And so romanticized views of BOP people as value-conscious consumers and resilient entrepreneurs are not only false, but also harmful. These views lead states to build too few legal, regulatory, and social mechanisms to protect the poor, as well as to rely too heavily on market solutions to poverty.

I do not advocate sprawling governments, high taxes, or tightly regulated private sectors. For decades, such statist policies stifled economic growth in countries like India and China, and contemporary economic history clearly demonstrates that the free market system is the best way to achieve overall growth and development. I do believe, however, that states must impose some limits on free markets to prevent the exploitation of the poor. (As the recent collapse of U.S. financial markets shows, they also need regulation to prevent the self-destructive tendencies of free markets.) Another vital role of the state is to provide basic services such as infrastructure, public health, and education. More broadly, businesses, nonprofits, and governments must recognize that poor people face fundamentally different social, psychological, physical, and economic realities than do their wealthier counterparts.

BAD CHOICES
Many advocates of market-based solutions to poverty view poor people as rational consumers who, if given more options, would make better choices—that is, choices that would increase their economic welfare. They see no problem with encouraging the poor to spend their already meager incomes on low-priority products and services. They further argue that the poor have the right to determine how to spend their limited income and are in fact the best judges of what is in their best interests.

Yet these advocates do not acknowledge that the poor lack the education, information, and other economic, cultural, and social capital that would allow them to take advantage of—and shield themselves against—the vagaries of the free market. More generally, they do not recognize how strongly people’s backgrounds and experiences shape their desires and actions. As Amartya Sen, the Nobel Prize-winning economist, noted in his 2000 work, Development as Freedom: “Deprived people tend to come to terms with their deprivation because of the sheer necessity of survival, and they may, as a result, lack the courage to demand any radical change, and may even adjust their desires and expectations to what they unambitiously see as feasible. The mental metric of pleasure or desire is just too malleable to be a firm guide to deprivation and disadvantage.” In other words, poor people—even more than wealthy people—do not necessarily do or want what is truly in their best interests. Even The Economist, a stalwart advocate of neoliberal policies, agrees that the choices poor people make “are not always the best ones.”3

All people have moments of weakness when they make bad decisions—say, because they lose self control and yield to temptation. But poor people seem to lose control more often, for reasons that reflect the realities of their daily lives. For example, poor people typically do not have bank accounts, and so they are more likely to spend their readily available cash on impulse purchases, find economists Abhijit Banerjee and Esther Duflo.4 Some mundane temptations—such as giving their children a treat—prove especially difficult for poor people to resist because so many other people take them for granted.

In addition, poor people more often encounter stressors—including hunger, pollution, crowding, and violence—that lead them to act in ways that may alleviate suffering in the short term, but hinder economic prosperity in the long term. Take bad behaviors such as smoking, drinking to excess, and eating fatty and sugary foods, for example. People everywhere smoke, drink, and eat “comfort foods” to take the edge off the hardships they encounter in their daily lives. Tobacco, after all, is an antidepressant, alcohol is a sedative, and comfort foods dampen the release of stress hormones in the body, as well as increase the production of dopamine—a brain chemical that produces feelings of pleasure.5

Accordingly, research documents that the less income people have, the more likely they are to smoke, binge drink, and eat a sugary, fatty diet.6 These behavioral patterns are reflected in people’s spending patterns: poor people spend a larger portion of their incomes on alcohol and tobacco than do more affluent people.7 Indeed, a recent field study in Sri Lanka reveals that more than 10 percent of poor male respondents regularly spend their entire incomes on alcohol.8

The world’s poorest people also spend a surprisingly large part of their budgets on ceremonies and festivals—which, in the absence of television and movies, are often the best distractions available. In Udaipur, India, for example, more than 99 percent of extremely poor people— that is, people living on less than $1 per day—had spent money on a wedding, a funeral, or a religious festival in the previous year.9 The median expenditure on festivals among these extremely poor households was 10 percent of their annual budget.

Mounting evidence suggests that just being poor hinders people’s ability to make good decisions. Dozens of psychological studies find that, compared to wealthier people, poorer people feel more powerless, depressed, and anxious, and believe that they have less control, mastery, and choice.10 “Perhaps at some level this avoidance is emotionally wise,” write Banerjee and Duflo: “Thinking about the economic problems of life must make it harder to avoid confronting the sheer inadequacy of the standard of living.” Similarly, almost 100 years ago George Orwell observed in his book Down and Out in Paris and London: Poverty “annihilates the future.”

DIRE CONSEQUENCES
The consequences of bad choices are bad for everyone, but even worse for the poor, who lack the resources—financial, psychological, social, and political—to compensate for their errors. Consider the story of Hasan, a rickshaw puller in Bangladesh who spends 20 cents per day on tobacco. When public health experts Debra Efroymson and Saifuddin Ahmed asked Hasan whether his three children ever eat eggs, he exclaimed: “Eggs? Where will the money come from to buy them?” But if Hasan didn’t buy tobacco, each of his children could eat an egg a day, and be healthier as a result.11 More generally, poor people “could easily save more without getting less nutrition by spending less on alcohol, tobacco, and food items such as sugar, spice, and tea,” Banerjee and Duflo conclude. For example, the typical poor household in Udaipur could spend up to 30 percent more on food if it did not spend money on alcohol, tobacco, and festivals.

Consuming alcohol and tobacco not only takes money away from a family’s nutrition, but also sets off a cascade of other problems that poor people more frequently encounter. Alcohol abuse, for instance, reduces work performance while increasing accidents, domestic violence, and illness. Because many indigent people earn their livelihoods through physical labor, falling ill means not earning money. Once sick, these people have no insurance or unemployment benefits to restore their health or to prevent their families from sliding even further into poverty. If they are lucky enough to live close to doctors and medical facilities, they rarely have the money to pay for these services. Even in the United States, poor people lack money for and access to high-quality medical services.

NO PROTECTION
Another reason that poor people suffer disproportionately for their bad choices is that corporations, governments, and nonprofits offer them fewer services and protections than they offer richer people. The annual report of virtually every large company claims its mission is to serve some larger social purpose besides making profits. Yet in a recent article about corporate social responsibility (CSR), The Economist concludes that for most large public companies, “CSR is little more than a cosmetic treatment.”12 Even nonprofits and foundations skew their offerings to better-off people, finds Stanford University political scientist Rob Reich (see “A Failure of Philanthropy” in the winter 2005 issue of the Stanford Social Innovation Review).

In addition, many corporations exploit poor people’s vulnerabilities, such as their lack of education and their desire for cheap relief from chronic distress. For example, in Malaysia, bottles of samsu— cheap spirits that poor people favor—claim to be “good for health [and to] cure rheumatism, body aches, low blood pressure, and indigestion.” Labels also claim that samsu is good for the elderly and for lactating mothers, finds Australian public health expert Mary Assunta.13 In an ironic twist on the BOP strategy of selling goods in single servings so that poor people can afford them, samsu is available in small bottles of about 150 milliliters and is sold for as little as 40 cents. “It is obvious that these potent drinks are packaged to especially appeal to the poor,” writes Assunta.

Local alcohol producers are not the only ones exploiting indigent people; multinational corporations are also getting in on the act. DOM Benedictine, a French liqueur that contains 40 percent alcohol, touts its health-giving and medicinal properties to poor people in Malaysia. United Kingdom-based Diageo likewise assures Malaysian consumers that Guinness Stout promotes virility. Although laws in the European Union ban advertisements that claim alcohol improves health, African nations either do not have or do not enforce these laws. Advertisers therefore capitalize on the reputed aphrodisiac qualities of beer to promote it heavily to poor people.

It is not only tobacco and alcohol companies that exploit the weaknesses of the poor: Even Unilever, a consumer products company, preys on the anxieties of disadvantaged people. The multinational corporation markets a highly profitable skin-whitening cream called Fair & Lovely to women in 40 countries across Asia and Africa, especially India. Allen L. Hammond, former vice president of WRI and a leading advocate of marketing to people at the bottom of the pyramid, says that Fair & Lovely is a positive example of BOP strategy because it makes poor women “feel empowered” and think that they have choices.14

Although Fair & Lovely is doing well for Unilever, it probably is not doing much good for its purchasers or for society. Fair & Lovely’s commercials typically depict a depressed woman with few prospects who gains a brighter future by attaining either a husband or a job after making her skin markedly fairer. Several nongovernmental organizations (NGOs) and government officials say that the ads are racist and sexist, and that they entrench women and darker-skinned people’s disempowerment.15 Nevertheless, Unilever still claims to be socially responsible.

Corporations not only work around existing protections to sell poor people things that they do not need, but also work with governments to rewrite laws in their own favor. For example, SABMiller has enjoyed great success in Africa with Eagle, a cheap beer made from locally grown sorghum rather than imported malt, reports The Economist. In Uganda, Zambia, and Zimbabwe, SABMiller can price the beer lower than mainstream clear beers because governments reduced the taxes the corporation has to pay. Meanwhile, these countries pass up valuable alcohol taxes that other countries would likely use to support public education and rehabilitation programs.

Tobacco companies are similarly notorious for persuading governments to relax restrictions on the production and promotion of tobacco products (see, for example, “Smoke and Mirrors” in the summer 2008 Stanford Social Innovation Review).

Should poor people have the right to consume alcohol, tobacco, and other unneeded products? Yes. Should companies have the right to profit from the sale of these products to the poor? Of course. But in rich, capitalist economies, governments put some constraints on these rights, such as “sin taxes,” advertising restrictions, and prohibitions of sales to minors. Yet in many developing countries, these constraints are either poorly enforced or missing entirely.

Governments have a responsibility to guard their most vulnerable citizens from unsavory practices. Yet governments in all countries have problems regulating markets. This is all the more true in developing countries with corrupt governments that are in cahoots with firms. And even when governments in poor countries have good intentions, they often lack the resources and competence to design and administer appropriate regulations.

Other social mechanisms for protecting consumers are likewise very weak in developing countries, and even more so with regard to poor people. Emerging economies often do not offer Alcoholics Anonymous, residential detox programs, or the nicotine patch. The civil society organizations that do exist in these economies usually lack the resources to offer much protection to anyone.

SMALL CHANGE
Despite the many disadvantages that indigent people face in the marketplace, nonprofits, governments, and businesses are flocking to market-based poverty alleviation programs. For instance, microcredit, the newest silver bullet for reducing poverty, has attracted many billions of dollars in funding. Microcreditors make small loans to poor individuals or groups of borrowers—called microentrepreneurs—whom mainstream financial institutions have traditionally snubbed. Many people have made grand claims about the impact of microcredit, including Muhammad Yunus, founder of Grameen Bank and winner of the 2006 Nobel Peace Prize, who said, “We will make Bangladesh free from poverty by 2030.”16

As I argued in an earlier article in this magazine, however, microcredit does not signifi cantly alleviate poverty (see “Microfinance Misses Its Mark” in the summer 2007 issue of the Stanford Social Innovation Review). The problem with microfinance is that it romanticizes poor people as creative entrepreneurs. Most microcredit clients are not entrepreneurs by choice; they would gladly take a job at reasonable wages if one were available. This should not be too surprising. Most people do not have the skills, vision, creativity, and persistence to be an entrepreneur. Even in developed countries with high levels of education and access to financial services, about 90 percent of the labor force is employees, not entrepreneurs. Meanwhile, as borrowers struggle to repay loans that are unlikely to lift them out of poverty, some microfinance institutions earn handsome returns—such as the 100 percent compounded annual rate of return that investors in Banco Compartamos received (see “Microloan Sharks” in the summer 2008 issue of the Stanford Social Innovation Review).

Another BOP strategy for alleviating poverty is to create, package, and market products to poor people. Not only will these BOP businesses bring the world’s most isolated, impoverished people into the fold of the marketplace, the thinking goes, they may also make multinational companies a fortune. Prahalad argues that the poor, defined as people living on less than $2 per day, represent a market size of $13 trillion. Other economists make even grander assertions; Hammond once asserted that the BOP harbored $15 trillion in commerce.

Yet these estimates of market size are gross exaggerations. Using calculations from World Bank data available in 2006, I estimated elsewhere that the BOP market was $300 billion in 2002.17 And then once again, using data from a 2007 report coauthored by Hammond and called The Next Four Billion,18 I estimated a global BOP market size of only $360 billion, which is quite close to my earlier estimate.

My calculations suggest that the BOP market is far smaller than Prahalad and other BOP proponents estimate. Their assumptions are problematic in many other ways as well (see sidebar “The Mirage at the Bottom of the Pyramid”). And as I argued earlier, poor people are often not in a position to take advantage of market opportunities—and might even be vulnerable to exploitation. Consequently, many BOP programs currently on the ground are not likely to improve the lot of poor people.

MORE GOVERNMENT, PLEASE
I have found little evidence suggesting that poor people are particularly discerning consumers or creative entrepreneurs. Instead, and on many counts, they are worse consumers and entrepreneurs than their wealthier counterparts, and they suffer the worse for it. Yet corporations, governments, and NGOs romanticize the poor. As a result, they continue to rely too heavily on market solutions to poverty.

This is not to deny that free markets can help reduce poverty. In fact, the private sector must play a critical role. Rather than viewing the poor primarily as consumers, people interested in economic development should approach the poor as producers. The best way to alleviate poverty is to raise the real income of the poor by creating opportunities for steady employment at reasonable wages. Firms can do this by creating more employment opportunities in labor-intensive industries and investing in upgrading the skills and productivity of poor people, thus increasing their income potential.

For their part, governments need to help create and grow private enterprises in labor-intensive sectors of the economy through appropriate policies (such as deregulation), infrastructure (such as transportation), and institutions (such as capital markets). They must also protect poor consumers through legal and regulatory mechanisms. NGOs and social activists can help by exerting pressure on governments and companies.

Poverty cannot be defined only in economic terms; it is also about a much broader set of needs. But many market approaches to reducing poverty focus solely on economic ends, viewing social, cultural, and political benefits as by-products. In contrast, I think that social, cultural, and political benefits are desirable in and of themselves. We should emphasize the role of governments and public policies in cultivating and safeguarding these other noneconomic ends. By emphatically focusing on the private sector, market-based poverty alleviation programs distract people from correcting the frequent failures of governments to fulfill their traditional and accepted functions of ensuring safety, providing education, protecting health, and building infrastructure. No alternative to government has proven able to serve these functions.


Aneel Karnani is an associate professor of strategy at the University of Michigan's Ross School of Business. His research focuses on competitive advantage, strategies for growth, global competition, and emerging economies. Karnani is also the author of "Microfinance Misses Its Mark," which appeared in the summer 2007 issue of the Stanford Social Innovation Review.

Notes

1 All the research cited in this paper defines poverty as per capita consumption of $1 or $2 per day, measured according to 1990 prices. The World Bank first proposed these definitions of poverty, and experts in development economics and public policy commonly use them.

2 C.K. Prahalad, The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, Upper Saddle River, N.J.: Wharton School Publishing, 2004. 3 “Another Day, Another $1.08,” The Economist, April 28, 2007.

4 Abhijit V. Banerjee and Esther Duflo, “The Economic Lives of the Poor,” Journal of Economic Perspectives, 21, 2007.

5 Tanja C. Adam and Elissa S. Epel, “Stress, Eating, and the Reward System,” Physiology & Behavior, 91, 2007.

6 John W. Lynch, George A. Kaplan, and Jukka T. Salonen, “Why Do Poor People Behave Poorly? Variation in Adult Health Behaviours and Psychosocial Characteristics by Stages of the Socioeconomic Lifecourse,” Social Science & Medicine, 44, 1997.

7 Shubhashis Gangopadhyay and Wilima Wadhwa, Changing Pattern of Household Consumption Expenditure, New Delhi: Society for Economic Research & Financial Analysis, 2004.

8 Bergljot Baklien and Diyanath Samarasinghe, Alcohol and Poverty in Sri Lanka, Gjøvik, Norway: FORUT, 2004.

9 Abhijit V. Banerjee, Angus Deaton, and Esther Duflo. “Wealth, Health, and Health Services in Rural Rajasthan,” American Economic Review, 94, 2004.

10 See John Mirowsky and Catherine E. Ross, “Social Patterns of Distress,” Annual Review of Sociology, 12, 1986; and Alana Conner Snibbe and Hazel Rose Markus, “You Can’t Always Get What You Want: Educational Attainment, Agency, and Choice,” Journal of Personality and Social Psychology, 88, 2005.

11 Debra Efroymson and Saifuddin Ahmed, Hungry for Tobacco: An Analysis of the Economic Impact of Tobacco on the Poor in Bangladesh, Dhaka, Bangladesh: PATH Canada, 2001.

12 Clive Crook, “The Good Company,” The Economist, January 20, 2005.

13 Mary Assunta, “Impact of Alcohol Consumption on Asia,” The Globe, 2001. Also see Mary Assunta, S.M. Mohamed Idris, and Mohamed Azmi Abdul Hamid, “The Alcohol Problem in Malaysia,” The Globe, 2001.

14 Allen L. Hammond and C.K. Prahalad, “Selling to the Poor,” Foreign Policy, May/June 2004.

15 Aneel Karnani, “Doing Well by Doing Good Case Study: ‘Fair & Lovely’ Whitening Cream,” Strategic Management Journal, December 2007.

16 “Bangladesh Will Send Poverty to Museum by 2030,” Financial Express, February 18, 2007.

17 Aneel Karnani, “The Mirage of Marketing to the Bottom of the Pyramid,” California Management Review, June 2007.

18 Allen L. Hammond et al., The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid, Washington, D.C.: World Resources Institute and International Finance Corporation, 2007.

 
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COMMENTS

  • Mr. Karnani’s thesis deserves considerable attention. Yet his criticism is one that only address a certain type of BoP strategy. Some of the initial enthusiasts, I think, were guilty of overgeneralizing the way in which multinationals engage with the poor - they often made no distinction between selling to them as consumers and selling to them as producers. Mr. Karnani’s argument addresses the former, and importantly so. Selling alcohol to low-income consumers is quite obviously a bad poverty reduction strategy, and should be criticized as such.

    But what of those companies - such as Amanco in the Americas - selling to producers? There is a real difference between selling beauty products to the poor, and selling irrigation kits to low-income farmers. Unlike beauty products, those irrigation kits are used as a factor input for future production, helping businesses grow. Amanco is a primary - albeit rare - example of this approach left ignored in Mr. Karnani’s analysis. The same can be said of medicines, technology, credit, etc.

    Or what of more innovative inclusive business models that incorporate organized low-income producers into a company’s value chain? SMEs that supply to larger multinationals? Again, the author dismisses the wide variety of possibilities in engaging with BoP markets.

    I also believe he is dangerously deterministic. Inserting the Orwell quotation (“poverty annihilates the future”) suggests that as long as one is poor, one cannot progress; and as long as one cannot progress, one cannot escape from poverty. Such a supposition is frightening in its cyclical and paralyzing reasoning. You only need to look around you for evidence to the contrary.

    Lastly, I somewhat sympathize with Mr. Karnani’s concern that everyone is in a mad rush to adopt market solutions to poverty without due consideration for the proper role of government. Though in this case, he is the exaggerator—any glance at the current dominant initiatives of the development community, from the MDGs to Bono’s RED campaign, show that basic market mechanisms of feedback and accountability and profit generation are far from being widely adopted.

    Nonetheless, it is critical that we recognize that government does have a role to play, and that the market is not the end-all solution (lest we forget the Washington Consensus). In that sense, the author’s words of caution about romanticizing market-based approaches should be heeded. After decades of patronizing language and programs from charities and development agencies, there is undoubtedly a tendency to take a 180-degree swing in romanticizing the poors’ ‘rational’ economic decisions. Tempering excitement with reality is important.

    For those enthused with the possibilities of emergent inclusive business models, we should also couple our excitement with the expectation that real growth will occur when the West redesigns the international trading system, for example, letting Africa sell its agricultural products on the world market (lifting cotton subsidies will lift African GDP by the hundreds of billions, not BoP programs). Nevertheless, I still hold true that BoP strategies are one of many emergent ideas that have immense potential to positively contribute to providing the poor with the same opportunities we are granted, and should be recognized - with due caution - as such.

  • BY Dick Dassow

    ON February 26, 2009 10:11 AM

    What do you think of Paul Polak’s book:  OUT OF POVERTY?

  • Generally well written, but with two major flaws

    Firstly, in reality most commercial BOP programs do not target those in extreme poverty, they target those on or just above the poverty line; and many of the BOP programs do create jobs as they often employ the poor as effective distribution and sales channels.

    Secondly, most of the poor who benefit from micro-credit are not entrepreneurs in a Western sense. They are often just farmers and use loans to breed more animals, grow more crops or maybe pay school fees. Neither requires vision, creativity or persistence necessarily -and the extra skills that might be needed (indeed that generally add more value than the loans themselves) are provided by the micro finance institution (in their own interest, since the more skills they provide, the more money the client makes and the better their repayment rate).

    Of course, if Mr Karnani realized this, he would realize that micro-credit is actually helping the poor become producers; which Mr Karnani rightly points out, does add real value.

    I would also request that Mr Karnani not use the terms micro-credit and micro-finance interchangeably. Micro-finance is a much wider term that includes other useful financial services such as insurance, financial transfer services and savings services.

  • Owais Parray's avatar

    BY Owais Parray

    ON March 18, 2009 01:15 AM

    A well written counter argument to what was/is considered as one of the major breakthrough in poverty eradication. I think Mr. Karnani looks at a small segment though in the BOP model- consumption. He has rightly pointed out the irrational choices that people with limited incomes can make and how businesses can exploit this in the name of market solutions for poor. But, as I said, this is only a small part of the BOP model. Access to economic services is an important area where the BOP model offers great potential. There are so many examples of it that I find it hard why the author does not take note of them: the Grameen, BRIs etc. have helped to create services which are valued by poor and low income households and which have brought economic benefits to them. We all however know that such market solutions are not enough to address structural poverty. Government can do a lot in this regard. But I believe market solutions to income poverty combined with government interventions are a better strategy. I also disagree with the notion that poor are not entrepreneurial. Entrepreneur does not necessarily mean someone who engaged in business. Entrepreneurism can exhibit itself in different forms. Poor suffer because they lack opportunities and access and that is what interventions- be it BOP or others- should try to address.

  • BY JC Dwyer

    ON March 30, 2009 10:56 AM

    As an anti-poverty advocate, I appreciate his willingness to tell it like it is. Front-line groups like food pantries and soup kitchens - and their clients - are often much more willing to talk about personal/behavioral problems in the community than are the putative advocates for that community. And I think it enhances their (our) advocacy to admit when personal/behavioral deficits contribute to social problems like hunger, and incorporate them into our pitch when possible (stressing the structural factors of course).

    But I’m not sure I agree with his conclusions about investment in poor communities. It’s true that not everyone can be an entrepreneur, but I think giving the ready few an opportunity to build businesses from the ground up is a more sustainable kind of community development in the long-run than just incentivizing big outside companies to swoop in and provide McJobs. In either scenario, increasing the quality of public education is key.

  • BY Dr.S.K.Bharti

    ON April 7, 2009 12:22 AM

    The Microfinance and Livelyhoods programe will be very sucessfuly technic for sustanable development of the poor.

  • BY Retail Anarchy

    ON April 21, 2009 05:26 PM

    Those that are living on less than $2 a day could probably couldn’t give a tinkers’ about market strategies, or consumer demographics or any economy issue whatsoever.  Why?  They live on $2 a day.  They are too busy trying not to starve to death.  We think of five dollar dinners as being cheap, whereas the BOP lives on less than half of that per diem, and they probably have children to feed on that as well.  When you can’t necessarily say that you’ll be able to not starve to death next winter if the harvest doesn’t come in well, the next wedding or funeral has a lot more importance and seems worth it to spend on events. And do poor people make bad choices at times?  Sure, but then again, but if the people that preach stentorian from the mount about it were living in perpetual misery, they’d want to drink too.  It’s like the stereotype of the perpetually drunken Irishman from the 18th century onward - if you lived your life in debilitating poverty, under an oppressive regime, you would want to drink too.

  • BY Michael Brown

    ON May 13, 2009 02:04 PM

    Dr. Karnani’s point about the poor not necessarily making the most informed decisions is spot on. On the other hand, the suggestion that the poor may not be as entrepreneurial as others is really not backed up by the Somali nomadic diaspora or the Western Sahelian Sarakole experience either. The poor as the Somalis have amply demonstrated for 20 years in fact can transfrom wealth on the hoof into houses and educations in a phenomenon that has taken them from the central rangelands to the Gulf States, London, Rome and Minnesota. Both as individuals and as families. All this while the World Bank had them listed in 1982 when the phenomenon really ratcheted up in significance as the poorest people on earth per their development index. In their case, lack of certain social capital did not hinder entrepreneurialsm and even a global perspective before it was chic. The Sarakolle/Soninke/Sahelian community generally ability to uproot and head for France to repatriate eearnings is arguably another example of BOPer entrepreneurialism in contexts of weak social capital.

    I would argue as a complement to Dr. Karnani’s principal thesis that the lack of analytical capacity at BOPer community levels to identify optimal and feasible development and investment pathways for individuals and community’s as a whole, is THE major constraint to global development, and keeps BOPers poor. Until more sophisticated analysis of economic, social and ecological variables impacting communities and their individual members can be made, development will remain a piecemeal endeavor. This however would require a different strategic tack than donors are willing to take, as the facile reliance on “needs assessments” based on participatory rural appraisal methods would suggest.

  • Diego Ramirez's avatar

    BY Diego Ramirez

    ON June 29, 2009 04:54 PM

    The thesis is well written. But I assume you had not live near the BOP.
    First, you can see the impact of a microcredit in somebody, who was not eligible to a job but he is enough entrepreneur to star his own business (informal business).

    Second, I dont believe that your solution ( I will quote “The best way to alleviate poverty is to raise the real income of the poor by creating opportunities for steady employment at reasonable wages. Firms can do this by creating more employment opportunities in labor-intensive industries and investing in upgrading the skills and productivity of poor people, thus increasing their income potential.”) it is enough good in a time of economic depression.

  • What this text forgets entirely is the feedback effect it’s suggestions will create. The article unambiguously suggests that exposing people to the “vagaries of the free market” is somehow a crime.

    But the vagaries of the free market are nothing more than actual, factual reality. Reality has many vagaries, from climate change (whether positive or negative), to natural disasters, population growth/decline. How exactly is exposing people to this and demand they find solutions for survival and productivity a crime ? If you see that then God, or nature itself (darwin if you like), or “gaia” if you’re so inclined is a criminal.

    But the fact is, even a criminal God would simply be a fact of life. So it is useless to blame God, darwin, gaia or climate change. They’re reality, they’re fact. You HAVE to deal with them, just as you have to open a door before walking through it. It is that simple.

    The alternative, of course, is to shield these people from reality. Of course, we ourselves are not isolated from reality. Our umbrella results from an excess capacity developed mostly by our parents and ancestors. Despite what it looks like it is not infinite, and it is not above the “vagaries of the free market”, whether that means climate change, or economic crisis, or banking collapses.

    In other words, WE are not reliable. So let’s evaluate 2 scenario’s :
    * we enable microcredit and demand people take care of themselves. We attempt to create a middle class, preferably a massively large middle class. IF it works, these people are more or less safe : they’ve learned to deal with the “vagaries of the free market”, and are perfectly capable of adapting themselves to whatever God, gaia and darwin might throw their way. Even if the worst happens, the people will deal with it as best as they can, or, if we’re lucky, as could as we could have dealt with it.

    * we shield the poor from nature. We “extend our umbrella above them” so to speak. We provide food, clothing, everything. We use our umbrella (which means large third world factories) to do so, and we provide these products, grain, clothing, ... free of charge. The net effect is that we directly pit “free” grain against farms. Free clothes against local industry, and so on and so forth. And then ... Obama fails to prevent another banking crisis (or something else happens). So what happens next ? Well there are no farms for the poor, we outcompeted them with free grain. There is no industry, and therefore no clothes, since we destroyed every industrious local that produced them. There is ... nothing.

    The carrying capacity of the land goes from “basically infinite” (since it simply depended on external help) to ... zero. So what happens next ? Can you say “Rwanda” ?

    As everyone realizes but is afraid to say : ONE of these courses of action is sustainable, the other is a “let’s fix the next month, and leave the disaster we cause next year to next year’s politicians” policy. One of these policies results in mass casualties and war, the other results in a few very sad fotos of underfed children.

    It is beyond obvious which of the two tactics would be the choice of a responsible adult. But it is also abundantly clear which policy democrats, and lefties in general, will choose. But don’t worry, you’ll feel good today, and when you send in the soldiers next year to rectify the situation after the massacre, halliburton (or whoever) will massively profit. And the bodies ? They’re not the result of the leftist policies, they’re the result of that one guy that killed the priest (or president, or orphan, or ...). Yes, yes, cleary he’s guilty. Clearly it was his “nationalist” attitudes. Clearly it was the result of the “nazis”, cleary ...

    But lefties, lefties are innocent. Despite the mountains of corpses.

  • Sam F's avatar

    BY Sam F

    ON May 24, 2010 12:51 PM

    I was really surprised when I knew that 2.5 billion people worldwide live on less than $2 per day. How it possible. And in some countries as I know production of Unilever and S.C. Johnson counts as brand. I visited the site of professor C.K. Prahalad Nextbillion.net and I can say that it is a very good work he does. It’s obvious that the site was made by proffesionals and it is very informative. I saw that The United Nations’ Web site declares that microentrepreneurs are using small loans like payday loans online “to grow thriving businesses … leading to strong and flourishing local economies.”
    Different kind of loans can really help to develov small business from little to middle or higher. If people don’t have their own reserves to invest in some projects only banks can help them. But it should be more privilege conditions of getting and paying off. It can really help some poor people become more richer.

  • Mike STephen's avatar

    BY Mike STephen

    ON July 7, 2010 07:37 AM

    this is only a small part of the BOP model. Access to economic services is an important area where the BOP model offers great potential. There are so many examples of it that I find it hard why the author does not take note of them: the Grameen, BRIs etc. have helped to create services which are valued by poor and low income households and which have brought economic benefits to them. We all however know that such market solutions are not enough to address structural poverty.  Government can do a lot in this regard. But I believe market solutions to income poverty combined with government interventions are a better strategy. I also disagree with the notion that poor are not entrepreneurial.

  • Mr Karnani’s description of the poor and the obstacles to their participation in market-based solutions, especially as consumers, is a needed dose of reality. While I fully support the use of social businesses to attempt to alleviate poverty, we should be aware of the unique challenges faced by the poor. In the long run, the most effective solutions will include a combination of market-based and non-profit/government policies. I agree with Mr Karnani’s assertion that government’s role is to create the infrastructure and stability required to allow the poor to act as rational participants in the economy and to regulate the market in such a way that prevents the kind of exploitation referenced in his story.

  • Karnani’s article takes the tone of “Patronizing the Poor” which is not much better than romanticizing them. I disagree with several of his comments and hopefully will have time to write a full counterargument soon.

  • “but even worse for the poor, who lack the resources—financial, psychological, social, and political”

    I’m not sure that point of view on this is entirely accurate, we’re assuming people are psychology unequipped (aka too stupid) to make the choice to not buy tobacco, coffee, tea, etc…when they could save that money and spend it on something more valuable.

    I would say this is just human nature, a certain percentage of people will spend money on vanity or addictive products even when logically we know it’s not the right thing to do.

  • BY Jennings R

    ON December 3, 2013 05:46 PM

    Many of the arguments here are valid. In a way this article seems to imply though that poor individuals are incapable of making good decisions. I think that this is often not the case.
    Also, this article implies that we all should have an innate ability to only spend money on things that make sense. But many people do not have and do not want to have this point of view.

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