Friday, February 15, 2008

Is it OK to profit from the very poor?

Slightly off topic, but I thought you might be interested:

One bright day in late 1999 I was travelling down the coast road south of Colombo in Sri Lanka. Between the road and the beach was a shanty town, crudely built shacks leaning against each other like late night drunks huddling for warmth.

"These guys must be really poor to live like this," I said to my companians (English & Sri Lankan), "but how come most of the shacks have a TV aerial?". Nobody could answer this conundrum.

Well, CK Prahakad can, in his amazing book Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits. Prahalad is an Indian-American Prof of Business Studies and is one of the most highly regarded business thinkers in the world. His argument is that neither aid nor government can alleviate poverty in the Third Word - only a strong local economy get people out of poverty and keep them out.

The book blasts a number of myths about the poor right out of the water, for example:

1. The poor do have money, it is just spread very thinly and can come to any one individual in fits and starts. Cumulatively they have much more money than the rich in their countries.

2. Paradoxically, the poor pay more for their products and services than the rich in their countries - this poverty premium ranges from 20% in staples like rice up to 600% for credit.

3. The poor have a better repayment record on debts than the rich.

4. The poor readily take up technology, education or no education.

Combining these facts with some innovation on product and service development can create a win-win solution - combining low cost products, technology, access to information and cheap(er) credit can give the poor access to the goods and services they require and dodge the middle men and corrupt officials who try and rip them off. The book gives numerous examples of where this has worked: for example prosthetic feet retailing for $30 when the US equivalent costs $8000.

The answer to my Sri Lankan puzzle is an easy one - people in shanty towns know they have broken the law by being there so invest little or no money in their homes in case the bulldozers turn up all of a sudden. They invest their money instead in products that they can take with them.

Despite its leaden prose, I found this book a breath of fresh air: both inspirational and unsettling. For a long time I've thought that international aid does more harm than good. It destroys local markets in, say, food and clothing, encourages corrupt officials to keep the country in poverty to keep the gravy train running, is ineffective (or there would much less poverty by now) and is often used in a neo-colonial manner to buy influence. I've been looking for the alternative and this seems to be it. My liberal sensitivity will just have to stomach the idea of profiting from the poor...



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