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Eradicating Poverty through Enterprise ANEEL KARNANI The University of Michigan November 2007

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Page 1: Eradicating poverty through enterprise.karnani (1)

Eradicating Poverty through Enterprise

ANEEL KARNANIThe University of Michigan

November 2007

Page 2: Eradicating poverty through enterprise.karnani (1)

Eradicating Poverty

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Poverty Eradication

Increasing role for the private sector

• Development through Enterprise

• World Economic Forum

• World Bank: Private Sector Development

• United Nations: Inclusive Markets

• Bottom of the Pyramid (BOP) strategies

• World Resources Institute

• World Business Council for Sustainable Development

• Business as an Agent of World benefit

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Poverty Eradication

Private Sector

Poor as Consumers

Poor as Producers

Public Sector

Civil Society

Color Coding• BOP emphasis• My emphasis

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Bottom of Pyramid Proposition

“Low-income markets present a prodigious opportunity for the world’s wealthiest companies – to seek their fortunes and bring prosperity to the aspiring poor.”

C.K. Prahalad and Stuart L. Hart, The Fortune at the Bottom of the Pyramid, Strategy + Business, January 2002

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Role of Private Sector Poor as Consumers

Facilitate purchase

Marginal impact

Market is very small

Potential for exploitation

Lower price without lowering quality

Lower price and lower quality

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Exploiting the Poor

The poor often make choices that are not in their own self interest.

The poor are vulnerable: lack of education (often illiterate), ill informed, victims of social and cultural deprivations

Amartya Sen: “A person’s utility preferences are malleable and shaped by his background and experience, especially so if he has been disadvantaged. We need to look beyond the expressed preferences and focus on people’s capabilities to choose the lives they have reason to value. ”

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Alcohol and Poverty The poorer people spend a greater fraction of their

income on alcohol than the less poor.

Alcohol abuse exacerbates poverty: impact on work performance, health, accidents, domestic violence and child neglect.

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Fair & Lovely

A poor woman using Fair & Lovely “has a choice and feels empowered because of an affordable consumer product formulated for her needs.”

Hammond and Prahalad (2004)

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‘Fair & Lovely’ package

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‘Fair & Lovely’ Advertisement

A young, dark-skinned girl’s father laments he has no son to provide for him, as his daughter’s salary was not high enough – the suggestion being that she could not get a better job or get married because of her dark skin.

The girl then uses the cream, becomes fairer, and gets a better-paid job as an air hostess – and makes her father happy.

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Empowerment or Entrenching

Disempowerment?

“Fair & Lovely cannot be supported because the advertising is demeaning to women and women’s movement”

Ravi Shankar Prasad, Minister of Information and Broadcasting

A poor woman using Fair & Lovely “has a choice and feels empowered because of an affordable consumer product formulated for her needs.”

Hammond and Prahalad (2004)

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Market Failure

Need for legal, regulatory, and social mechanisms for protecting consumers.

Particularly difficult in the context of the poor in developing countries.

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Role of Private Sector Poor as Consumers

Facilitate purchase

Marginal impact

Market is very small

Potential for exploitation

Lower price without lowering quality

Good idea, but too rare in practice

Lower price and lower quality

Appropriate price-quality trade-off

Transparency

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Role of Private Sector Poor as Producers

Microentrepreneurs

Positive social impact

Minimal economic impact

Poor are not entrepreneurs; low value added enterprises

Increase productivity

Goods/services to increase productivity

Increase market access and efficiency

Cooperatives

Employment

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Romanticizing the Poor Harms the Poor

We should recognize the poor as “resilient and creative entrepreneurs and value-conscious consumers.”

C.K. Prahalad, The Fortune at the Bottom of the Pyramid, 2005.

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Increasing Employment Create jobs

Labor intensive, low-skill sectors

SMEs are the primary engine of job creation

Pro-business (especially pro-SMEs) policies and environment

Increase employability

Education

Vocational training

Reduce friction in labor markets

Motivation

Labor mobility

Information; enabling transition

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Job Creation and Productivity

Employment/Population

Late 1980s

Employment/Population

Late 1990s

China 51.0% 58.7%

India 29.5% 35.8%

Africa 33.4% 30.1%

Working Poor/Employment

Late 1980s

Working Poor/Employment

Late 1990s

China 79.6% 35.2%

India 75.0% 62.0%

Africa 63.4% 65.4%

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Role of Public Sector

The BOP approach relies on the invisible hand of free markets to eradicate poverty. We should instead require the state to extend a very visible hand to the poor to help them climb out of poverty.

Public Sector

Public Services and Infrastructure

Regulation

Equity

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Role of the Public Sector

The poor have suffered because of a massive failure of the state to fulfill its traditional functions of providing Literacy and basic education

Basic health care and public health

Safe drinking water

Sanitation

Basic infrastructure (transportation, electricity)

Public safety and security

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BOP: Dangerous Delusion

Failure of the state can not be remedied by increasing the role of the private sector. We need to enhance the ‘agency’ and the ‘voice’ of the poor.

Discussing the residents of the slums of Dharavi (in Mumbai), Prahalad and Hammond say that getting access to running water is “not a realistic option.” The poor “accept that reality” and they spend their money on things they can get now, such as televisions.

Even if the poor accept this reality, we should not.

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Dislodging sludge to keep water flowing in a sewer canal in the Janata Colony section of New Delhi.

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Poverty Eradication:Role of Private Sector

Help generate employment by creating (or facilitating) low skill jobs.

Focus on the poor as producers, and help increase their productivity and income potential.

Sell products/services appropriately targeted at the poor at prices they can afford, even (and usually) at the expense of quality.

Respect the vulnerabilities of the poor, even in the absence of other protective mechanisms