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

Eradicating Poverty Aneel Karnani 2 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

Eradicating Poverty Aneel Karnani 3 Poverty Eradication  Private Sector  Poor as Consumers  Poor as Producers  Public Sector  Civil Society Color Coding BOP emphasis My emphasis

Eradicating Poverty Aneel Karnani 4 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

Eradicating Poverty Aneel Karnani 5 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

Eradicating Poverty Aneel Karnani 6 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. ”

Eradicating Poverty Aneel Karnani 7 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.

Eradicating Poverty Aneel Karnani 8 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)

Eradicating Poverty Aneel Karnani 9 ‘Fair & Lovely’ package

Eradicating Poverty Aneel Karnani 10 ‘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.

Eradicating Poverty Aneel Karnani 11 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)

Eradicating Poverty Aneel Karnani 12 Market Failure  Need for legal, regulatory, and social mechanisms for protecting consumers.  Particularly difficult in the context of the poor in developing countries.

Eradicating Poverty Aneel Karnani 13 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

Eradicating Poverty Aneel Karnani 14 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

Eradicating Poverty Aneel Karnani 15 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.

Eradicating Poverty Aneel Karnani 16 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

Eradicating Poverty Aneel Karnani 17 Job Creation and Productivity Employment/Population Late 1980s Employment/Population Late 1990s China51.0%58.7% India29.5%35.8% Africa33.4%30.1% Working Poor/Employment Late 1980s Working Poor/Employment Late 1990s China79.6%35.2% India75.0%62.0% Africa63.4%65.4%

Eradicating Poverty Aneel Karnani 18 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

Eradicating Poverty Aneel Karnani 19 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

Eradicating Poverty Aneel Karnani 20 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.

Eradicating Poverty Aneel Karnani 21 Dislodging sludge to keep water flowing in a sewer canal in the Janata Colony section of New Delhi.

Eradicating Poverty Aneel Karnani 22 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