Bottom of the pyramid model is no superhero. But…1

Peter Parker, aka Spider-Man, cannot and will not save the entire world; at the same time he doesn’t have dark insensitive streaks anymore, at least as on today. C.K. Prahalad’s bottom of the pyramid (BoP) model that argues for eradicating poverty by making profits – it appears – is no superhero in the global war on poverty. Combating poverty (like many others) is essentially complex; there is no singular straight-line answer. However, unlike the shotgun arguments emanating from anti-globalization crowd, the BoP model isn’t evil either.

Prahalad claims that over 4 billion poor with less than USD 2 (PPP) per day would form “latent” consumers, serving who, companies, particularly MNCs, can make profits taping into this multi-trillion dollar market. However, there are two blind beliefs here:

1. Such a blanket thesis lumps the poor as a monolithic group2. Even in terms of income, there would be good number of people who would be earning zero (or at times negative) to less than USD 1 per day. Most important, even if the poor are lumped into a monolithic group, such individual families would be just one accident away from a grotesquely miserable life; road/work-related accident, illness, natural disaster, neighborhood violence, death of the bread-winner and so on would shunt them into immensely severe poverty for at least a generation (if not, let’s assume, generations). In such contexts, BoP would be a supremely sexed-up model.

2. In addition, the claim that there are over 4 billion people with less than USD 2 per day (PPP) is an overestimation. In 2005, there were 2.65 billion people with less than USD 2 per day (PPP), and 872.32 million who were ultra poor – less than USD 1 per day (PPP) (data calculated from World Bank’s PovcalNet). Moreover, PPP (income or potential markets) is not a great measure for trade and profits at the global level; Karnani (2007) rightly argues: “From the perspective of a multi-national company from a developed country, profits will be repatriated at the financial market exchange rates, not at PPP rates”. He further says, unlike the claim – USD 13 trillion market (PPP) at the BoP – it is actually 1.2 trillion dollars (PPP) as the average poor would fall at USD 1.25 per day (PPP); not USD 2 per day (PPP); and also as it isn’t 4 billion people.

1 First published On Oct 6, 2009 at: http://mskiran.wordpress.com/2009/10/06/bottom-of-the-pyramid-model-is-no-spidey/

2 Prahalad in his response to Karnani (2007) says: “The focus of the book is on 5 billion underserved. They are also poor. But it is naïve to believe that 5 billion represent a monolith (are one segment) [emphasis added by me]. Every experiment described in the book does not necessarily have to serve all the segments of the 5 billion underserved. No single bussiness model can do that.” However, Prahalad’s idea of poor not being a monolith is extremely restrictive – as it ignores, like: existing level of governance (central, local), health, literacy, life expectancy, infrastructure, employment oppurtunities etc. in different countries (and also within countries).

Paul Collier’s influential book – The Bottom Billion: Why the poorest countries are failing and what can be done about it – argues around 60 countries largely from Africa, Central Asia, and Asia (excluding India and China) are home to impoverished one billion poor in this known world who diverge “from an increasingly sophisticated world economy, integration will become harder, not easier” (2007: 4). How would BoP model fit in such economies is a fair question to ask.

Furthermore, in addition to the above two alleged basic beliefs, there are more on the list. A few of them: among the bottom billion countries, one can also notice sheer absence of capabilities among governments to facilitate business activities and also to rationally regulate such activities. Absent the “fairly” “competent” “governments”, markets (formal economy) hardly thrive. Moreover, Nobel laureate Joseph Stiglitz, forcefully argues that markets are not efficient on its own, particularly the role of government is crucial and necessary:

“At least since Adam Smith, most economists believed that competitive markets are efficient, and that firms, in pursuing their own interests, enhance the public good ‘as if by an invisible hand.’ A major achievement of economic science during the first half of the twentieth century was finding the precise sense in which that result is true. This result, known as Fundamental Theorem of Welfare Economics, provides a rigorous analytic basis for the presumption that competitive market allocate resources efficiently. In the eighties economists made clear the hidden information assumptions underlying that theorem. They showed that in a wide variety of situations where information is costly (indeed, almost always), government interventions could make everyone better off if government officials had the right incentives. At the very least these results have undermined the long-standing presumption that markets are necessarily efficient.

… The older theory said that no government, no matter how well organized, could do better than markets. If that was true, then we had little need to inquire into the nature of government.”

BoP essentially piggybacks, solely, on market-based economic activity mechanism [i.e. approaching market as a stand-alone entity]. Thus, BoP assumes everything about the markets is working well. Put differently, given a well-functioning and monitored markets, BoP would be successful. However, this assumption itself will be a huge challenge. Another Nobel laureate Amartya Sen (2006: 136-138) cautions against such presumptions as “[m]arkets do not – and cannot – act alone. There is no ‘the market outcome’ irrespective of the conditions that govern the markets” (p. 137) which could be achieved by public policies to “supplement” market economy to promote the enabling conditions like, regulatory body, distribution of physical resources, human capital development, social insurance, prevailing rules of business engagement, political & economic institutions and so on. Thus, sole focus on BoP would necessarily overlook such enabler conditions needed for a market economy. Atkinson (1995: 30) states that “lack of absolute capabilities” would also “depend on the supply side of economics”; he further argues that high-quality products with low price would reduce the number of people excluded, at the same time firms might not find it profitable “to supply poor households unless, for example, they are required to do so as part of regulatory process”. In this backdrop, the BoP model anchoring only on economy of volumes might be a challenge.

To be fair, Prahalad (2004: 83-85) provides some factors that are essential for market economy, which he calls Transaction Governance Capacity (TGC) – its components are: laws to protect property, micro regulations, social norms, institutions for enforcements. However, all of it would only provide a restrictive and ungenerous outlook on the enabler conditions needed for markets (when compared with what Sen and Stiglitz argue for, most vigorously and eloquently).

And, crucially, BoP doesn’t talk about basic or formidable old-school arguments about the essentials needed in poverty reduction: universal literacy, education, employment, health, gender equality, and governance. Of course, Prahalad talks about health issues, but his examples are restricted to providing minimal assistance for selective ailments that fall under ophthalmology. Do only eye related selective ailments hinder humans? Health is

arguably, essentially, and easily a bigger field and a challenge in poverty reduction. Countries like India need more doctors, medical colleges, health workers; not just couple of cute examples.

More so, BoP model is rooted in emerging markets like India, Mexico, Brazil et al; not the bottom billion. Of course, this doesn’t mean that BoP model is not at all instrumental; it provides important role for companies in emerging markets that also are home to largest number of poor in this known world. Emerging markets also potentially offer larger market base as opposed to bottom billion countries that are small and chaotic compared to India. What about: Somalia, Haiti, Malawi, Ethiopia, Democratic Republic of Congo, Sudan, Central African Republic and all. To add, emerging MNCs are found in emerging markets like China, India, Mexico; not in bottom billion.

However, the positive ripples caused by the BoP model is promising and needs immediate focus, for which Prahalad should be enormously appreciated. For instance, Bill Gates’ concept of “creative capitalism” that is hugely influenced by C.K. Prahalad – and builds on BoP – calls for a mix of profits, public recognition, altruism (philanthropy), and collaborative effort. Put differently: serving the poor would help in brand building; governments in developed countries should recognize such initiatives and should provide such companies with monetary and policy incentives. These observations of Gates, in sum, clearly demand focus and wider debate rather than solely making profits directly from the poor, particularly in the bottom billion countries.

References:Atkinson, A.B (1995), “Capabilities, exclusion, and the supply of goods”, in Basu, K., Pattanaik, P & Suzumura, K (ed.), Choice, Welfare, and Development: A festschrift in honour of Amartya Sen, Oxford University Press, New Delhi, pp. 17-31.

Collier, P (2007), The Bottom Billion: Why the poorest countries are failing and what can be done about it, Oxford University Press, New Delhi.

Gates, B (2008a), “A new approach to capitalism”, speech delivered at the World Economic Forum, Davos, January 24. Reprinted in Kinsley, M and Clarke, C (ed.) 2009,Creative Capitalism: A conversation with Bill Gates, Warren Buffett, and other economic leaders, Simon & Schuster: London, pp. 7-16.

Gates, B (2008b), “How to fix capitalism”, Time, vol. 172, no. 5, 11 August, pp. 24-29.

Karnani, A (2007), “Fortune at the Bottom of the Pyramid: A mirage: How the private sector can help alleviate poverty”, Ross School of Business Paper No. 1035.

Prahalad, C.K (2005), The Fortune at the Bottom of the Pyramid: Eradicating poverty through profits, Wharton School Publishing/Pearson Power, New Delhi.

Sen, A (2006), Identity and Violence: The illusion of destiny, Allen Lane, New Delhi.

Stiglitz, J (1993), “Information”, in David R. Henderson (ed.) The Fortune Encyclopedia of Economics, Warner Books, pp. 16-21.