04 Apr 2007  Research & Ideas

The Business of Global Poverty

Nearly half of the planet's population subsists on $2 a day or less. What role should business play as the world confronts what may be the most explosive socioeconomic challenge of the new century?

 

Every night on the outskirts of Manila, thousands of people lie down to sleep amid acres of rotting food and industrial detritus in a vast urban dumping ground called Payatas. At dawn, they rise and swarm across a featureless landscape of trash and filth, hunting for scraps of anything they can eat or sell. Payatas and the orderly, verdant Harvard Business School campus—nearly equals, as it happens, in terms of the acreage they occupy—are separated by a gulf far greater than any measure of miles or statistics. Yet as HBS professor Kash Rangan hurries past Baker Library on his way to meet a class, places like Payatas, or the teeming streets of Calcutta, or the favelas of Rio de Janeiro—places where only the entrepreneurial survive—are never far from his mind.

According to the World Bank, nearly half the world's population—some 2.8 billion people—subsists on $2 a day or less. The number of people living in poverty at the bottom of the wealth pyramid, versus the relative handful at the pyramid's peak, represents what is potentially the most explosive socioeconomic challenge facing the world. Now, with markets in the developed economies experiencing slow growth and with the top tiers in emerging markets relatively small, business is beginning to eye this huge population at the bottom of the pyramid (BOP) as a viable and essential market. Indeed, it is only in the last decade, thanks in part to academic research, that business has come to realize that while BOP individuals may only have tens of dollars a year to spend, that disposable income, multiplied several billion times over, represents significant purchasing power. With this realization have come some dramatic shifts in business thinking, sparking innovative experiments involving marketing approaches, distribution networks, product packaging, and financing instruments to meet the needs and requirements of very poor customers.

As members of the School's Global Poverty Project (GPP), Kash Rangan, John Quelch, and other faculty members have studied and researched the issue of business and global poverty for some time. They believe that in pursuing its own self-interest in opening and expanding the BOP market, business can make a profit while serving the poorest of consumers and contributing to development. As Rangan explains, "For business, the bulk of emerging markets worldwide is at the bottom of the pyramid so it makes good business sense—not a sense of do-gooding—to go after it." Today, market forces, private-sector know-how, and grassroots initiatives such as microfinance are all being looked to as tools to alleviate poverty. Business, once viewed by many critics as part of the problem, is increasingly being called on to be part of the solution. How business can do this most effectively is the focus of the GPP's research and scholarly activity.

Multinationals leading the way

While GPP faculty note that it is too early to declare any models runaway successes, they point to some unique ways that multinational corporations (MNCs) and local businesses are serving the previously invisible BOP market: Nestlé, with its "milk-district model" that encourages supporting businesses to spring up around its dairies in rural India; CEMEX's program of affordable payments and materials that enables impoverished Mexican families to build their own housing; or in Brazil, with Kodak's no-frills camera/film packages, or the department store Magazine Luiza's … merchandise, payment plans, and customer service, all designed to make consumers out of those outside the formal economy. "The GPP's intent is not to discover the next big idea," Rangan says, "but to find models that business can use to engage with the base of the pyramid."

Poverty can only be truly addressed if you meet four conditions.

In December 2005, the GPP convened a three-day colloquium, "A Conference on Global Poverty: Business Solutions and Approaches," with a goal of beginning to identify the characteristics of successful enterprises and leaders in this realm. The nearly 100 academics, business practitioners, and nonprofit executives from fifteen countries who gathered for the event examined the operational and cultural obstacles that impede success in fighting poverty. They also considered the impact of business as a poverty alleviator and whether business engagement alone is sufficient to lift individuals out of poverty broadly. "The aim of the conference and the resulting, just-published book, Business Solutions for the Global Poor, is to accelerate the adoption of new, scalable solutions to the global poverty problem," notes HBS professor John Quelch, a member of the conference committee. (Quelch, Rangan, and Latin America Research Center executive director Gustavo Herrero [HBS MBA '76] are the book's co-editors, with Research Associate Brooke Barton.)

The 2005 conference was followed that spring by an MBA elective, Business and the Bottom of the Pyramid, taught by Rangan and Senior Lecturer Michael Chu, former president and CEO of ACCION International, a microfinance organization focusing on Latin America. Last fall, a series of seminars on business and global poverty was held; more conferences and seminars are set for the coming months. Baker Library is building an electronic library of BOP cases, articles, and other materials, the first such comprehensive compilation anywhere.

Globalization has not really hurt those making $5 a day or less. But it has not helped them.

Rangan and Chu's course, now a full-credit offering as of this semester, takes an in-depth look at microfinance, an important and relatively new poverty-alleviating weapon. Introduced about thirty years ago, this system of very small loans to grassroots entrepreneurs such as street vendors, subsistence farmers, or home-based businesses has enjoyed widespread success. Indeed, the 2006 Nobel Peace Prize was awarded to Muhammad Yunus and the microcredit Grameen Bank he founded in Bangladesh more than two decades ago. With interest rates ranging from zero to 20 percent, Grameen's average loan (no collateral required) is $200. Its repayment rate is about 98 percent. Some 7 million poor people, almost all of them women, have Grameen loans; Yunus asserts that microfinance is helping to reduce Bangladesh's poverty levels by 2 percent a year.

Paying the way with microfinance

Michael Chu, a private-equity specialist at KKR before joining ACCION International, was instrumental in spreading microfinance throughout Latin America while ACCION's CEO. In Bolivia, ACCION linked the microfinance field to capital markets through the founding of BancoSol, a microfinance institution that became the nation's most profitable bank.

"Poverty can only be truly addressed if you meet four conditions," Chu explains. "You must have huge scale to reach the billions who are in poverty; solutions must be enduring and last over generations; solutions must be truly effective and make a difference; and all this must happen efficiently. Only through a commercial approach can you achieve all those things, and the great power of microfinance comes through its ability to generate profit. There is no contradiction between social impact and good profitability; in fact, profitability is central to that social impact."

Eliminating, or even alleviating, global poverty is an enormous task. About a billion of the world's people live in slums, and Payatas resident Ronald ("Bobby") Escare is one of them.

As described in a recent article in Harper's magazine, Bobby can make $3 on a good day foraging for copper wire and aluminum cans. During the eight years that Bobby has lived in Payatas, three of his children—ranging in age from nine years to three months—have died. The lives that he and his Payatas neighbors lead resemble those of other inhabitants of the chaotic megacities of Latin America, Asia, and Africa whose daily existence, in the words of journalist George Packer, is "the furious activity of people who live in a globalized economy and have no safety net and virtually no hope of moving upward." "Globalization has helped emerging economies distribute their products and services around the world but there's been no systematic way to link the extra wealth that has been created to spur poverty alleviation at the BOP," Kash Rangan says. "Yes, economies, and with them, the middle classes in emerging countries, have grown. But inequality within countries has also grown. Globalization has not really hurt those making $5 a day or less. But it has not helped them."

The wealth created by globalization, Rangan declares, requires blueprints from governments to use those resources to help people escape poverty. In the private sector, Rangan sees a positive trend among multinational corporations within industries to set and adhere to minimum standards for labor, the environment, and human rights. Their self-interest—specifically, the need to maintain their moral and literal licenses to operate in these countries—requires it. "Although it may increase their cost of doing business, businesses have nonetheless taken the lead here, and strong governance will emerge," Rangan observes. "But it's a slower process than people imagine. At the GPP, we don't expect change overnight. But we feel that we can help advance the business process in a direction that makes commercial sense and is the right thing to do."

Absent a Visible Hand, Capitalism Can Make Matters Worse

by HBS Professor Bruce Scott

Unfettered capitalism exacerbates income inequality and can undermine capitalism or democracy, or both, asserts HBS professor Bruce Scott. "To put an egalitarian face on capitalism, it's often noted that more than 50 percent of Americans are shareholders," Scott observes. "But it's also true that 10 percent of Americans own about 80 percent of the stock. In Latin America, 2 or 3 percent could easily hold 90 percent. So when we talk about 'maximizing value for the shareholder,' we are talking about enriching the rich. In much of the world, and in Latin America in particular, thoughtful business leaders worry that capitalism, especially U.S.-style capitalism, threatens to destabilize their democracies."

At last fall's GPP seminar series and in his forthcoming book, Capitalism, Democracy, and Development, Scott argues that capitalism does not depend on democracy, freedom, or private enterprise. What it does require is physical security, and then a set of rules and regulations that are appropriately enforced by an accountable political authority. (Scott details these ideas in a chapter in Business Solutions for the Global Poor that examines the success of the so-called Arizona Market, a spontaneously generated market in war-torn Bosnia that was nurtured by NATO troops. The local NATO commander was the crucial political authority in the market's formative period.) "Everything we do in the United States starts from the presumption that we are physically safe and that, for the most part, the rules are fair and fairly enforced," Scott says. "As a way to think in American terms about the issues surrounding inequality in developing countries, imagine trying to help poor people in the Jim Crow South while ignoring segregation. Much of the world is living under conditions that are comparably distorted."

To be a positive, effective force for development, Scott concludes, a capitalist system must be understood to be more than the "invisible hand" that is implicit in the pricing mechanism. "Capitalism also has a visible hand that is the expression of public policy through legislation and regulations administered by a bureaucracy," he says. "That visible hand creates, enforces, and modernizes all market frameworks. To ignore this reality is like ignoring segregation in the Old South."

Reprinted with permission from "The Plight of the Global Poor: Is It Any Business of Business?" HBS Alumni Bulletin, Vol. 83, No. 1, March 2007.
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About the author

Garry Emmons is senior associate editor of the HBS Alumni Bulletin.