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can companies reduce poverty

the aneel karnani and ck prahalad flare-up (which atanu has covered here and here) has piqued my interest in an old question. how can companies reduce poverty?

according to karnani, ck prahalad’s fellow professor at the university of michigan, the BOP proposition that selling to the poor can simultaneously be profitable and help eradicate poverty is “at best a harmless illusion and potentially a dangerous delusion”. that the only way to alleviate poverty is to raise the real income of the poor. for his part, prahalad asserted it can. that companies merely selling to the poor do reduce poverty. that by selling at more competitive rates, they free up swathes of an household’s disposable income.

in this post, i will not go into all the other stuff they tangled on — about the size of the bop is and so on. the central question, on whether the bop concept can reduce poverty, is more interesting. in this context, a paper co-authored by the head of itc e-choupal, s sivakumar, karnani himself, and some professors from mumbai’s sp jain institute for management studies, is interesting. this paper (mail me if you would like a copy), written about a year ago, says…

The rich have a high capacity to consume – and this is not because of lower unit costs of some items of consumption but it is because of high levels of income. Conversely, the poor have a low capacity to consume – and this is not because of high unit costs of consumption but essentially because of a low level of income…

…Notably, current engagements of ‘selling to the poor’ are often cases of selling essentially to those low-income individuals who are already above the clutches of the poverty trap. These individuals do not suffer from the scourge of ‘poverty’ and business should not be under the mistaken belief that servicing this segment is alleviating poverty.

companies can reduce poverty. but the claim that even selling to the poor reduces poverty seems tenuous to me. and the thought that occurs to me every single time in this context is unilever’s attempts to sell its toothpastes, soaps et al to the rural poor through self help groups. to be sure, the women selling the stuff were richer than before. but what about the rest of the village? was more money flowing into the village? or flowing out of the village? a long time ago, while working on a businessworld cover story that contrasted itc choupal and hll shakti, my boss indrajit gupta and i had a long chat with sivakumar. at that time, he cleaved bop companies into three categories. much later, while working on another story, i wrote about that discussion.

Indeed. Sort through the companies eyeing the opportunity that the bottom of the pyramid connotes, and you will find four categories. Those that boost rural incomes through traditional (agriculture, handicrafts) and non-traditional (BPO) means; those that sell productive investments to the poor (like Agrovet); those that, while doing nothing to boost incomes directly, make the poor far more financially robust (weather insurance, health insurance schemes like Yeshasvini, the commodity exchanges); and, then, those that rejig their product and distribution mix to make the product more accessible for the poor (HLL’s Project Shakti). In this last category, while there might be some incremental job creation, the impact on the village economy (in terms of whether more monies flow in or out) is still open to debate.

in their paper, sivakumar and karnani outline how companies, in the first lot described above, can reduce poverty. they say…

A self-reinforcing process where business invests to develop the productive capacity of the poor and then leverages such capacity as inputs to strengthen business competitiveness and growth proves to be a sound business model to create unprecedented economic and social value.

This process begins with a buy-in by business and the poor into the idea of creating self-reinforcing interest and culminates into consolidation of efficient value chains as well as higher scales of operations for business, on one hand, and reduction of poverty and of economic dualities in society, on the other.

The essential requirements of this model are:
1. The productive capacities of the poor are organized, developed and leveraged as inputs to business;
2. Such process contributes to creation of commercial value for business;
3. Such commercial value yields economic surplus i.e., the commercial value exceeds all costs involved in its creation, and / or strengthens the competitiveness/growth of business; and
4. The poor are remunerated in a fair manner for the goods/services that they provide.
Consequently, the poor do become an important part of the definition of business, to the benefit of business and themselves.

i think rama bijapurkar is planning to write a column on all this stuff soon. i gather she buys into the ck prahalad school of thought. should be interesting to see what she says.

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