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Wednesday, July 09, 2008

A Dialogue on Philanthrocapitalism: Are BoP Businesses Useful Tools Against Poverty?

By Manuel Bueno

book coverThis is part 3 of our series reviewing Michael Edwards' Just Another Emperor and the concept of 'philanthrocapitalism'. Follow the links to read part 1 and part 2.

Recently, there has been some debate surrounding business involvement in philanthropy and its usefulness after the publishing of ?Just Another Emperor?? last March by Michael Edwards. Michael Edwards, Director of Governance and Civil Society at the Ford Foundation takes a critical look for the first time at a relatively new phenomenon: using sustainable business tools and models to solve poverty problems. NextBillion.net?s core content (and passion!) deals exactly with these issues.Constructive criticism is always welcome, especially if it is from someone who has worked at Oxfam, Save the Children and the World Bank. In the fight against poverty, Edwards makes a distinction between government, civil society and what he calls, philanthrocapitalists. According to him this last group is made of market agents that claim to be able to solve social problems through business approaches alone. Edwards states that, although these approaches are important, they are very difficult to operate successfully at scale and that they usually experience some trade-offs between their social and financial goals. Furthermore, he argues that civil society might be being damaged by these trends.

In some cases, I agree with Edwards conclusions, BoP business are not a panacea and they can sometimes get stuff wrong (witness Shell or Nestl?). BoP solutions should be used in conjunction with other market agents to maximize both wealth and social benefits. They need to move to a process of co-creation with the communities in which they work. This is nothing less than what is advocated by Simanis and Hart in their BoP Protocol 2.0 (for more details see Robert Katz's interview to Simanis). Poverty has no silver bullet, because it is not a simple problem. Doing business at the BoP is not like doing business in economically developed countries.

However, I do not agree with many of the premises that brought about these conclusions. Firstly, I am always reticent to accepting grouping different market agents and approaching them by default as if they were competitors. A ?Philanthrocapitalist? could be anything between Grameen and Wal-Mart. It is basically a fancy word for ?any businesses in poor communities?. Sorry, but aggregating such a huge group of agents is a recipe for confusion. Furthermore, there is a huge grey line between civil society and philanthrocapitalists. What about for-profit organizations such as E-Choupal or Basix whose vision is try to create social wealth in the communities they work in? Also, we must not forget that organizations are fictional entities. People build organizations ? by choosing to devote themselves to them, instead of choosing other more lucrative options, very much like NGO professionals. Therefore, when speaking about these market agents we must avoid confusing the map for the land it represents.

Secondly, Edwards states that ?the logics of business and social transformation are not just different - they pull in opposite directions in many important ways?. Again, it depends. Rio Tinto in West Papua? I agree. Kickstart in Africa? I do not think so. Compartamos in Mexico? The jury is still out. The same happens for businesses in the US. Is Exxon Mobile the same as Trader Joe?s? Is Google the same as General Motors? The same way that we should not simplify between different market agents, we should not simplify within a same group. Edwards? statement overly simplifies the role and jobs done by businesses in BoP communities.

Thirdly, business in the BoP is not about selling to the poor, it is about connecting communities and markets. It is about generating wealth, social and financial. To generate connections with other market agents (like the fisherman who calls different markets to see which has the best price) is generating wealth. To create jobs in BoP communities is generating wealth. To transfer technical knowledge and management know-how is generating wealth. All this is generating social and financial wealth, as it is to offer products with a better quality-price relationship than previous ones, or more often, to offer products which were unaffordable before. All in all, probably the most cogent argument in favor of businesses that create both financial and social wealth was made by Stuart Hart in ?Capitalism at the Crossroads?.

In all these three cases, Edwards takes a too narrow view of what business is and applies it to a too wide of a sample. Markets are not a zero-sum game in which businesses extract value from communities. Markets can only work when two parties freely exchange goods, becoming both of them better well-off after the exchange. Extractive businesses, or businesses which subtract from the social wealth of local communities, very rarely work with local BoP markets and so should not be called BoP businesses. Again, a BoP business is about creating social and financial wealth to local communities, and not only about selling them goods ? not less, because often these communities have no purchasing power, thus selling them goods alone is not a financially viable business option.

Markets are in many ways an expression of power and social relations within a society. As such they reflect the current economic and political state of the country. India's elections have been won and lost on the price of an onion (literally). Market inclusion is a sign of social empowerment. Markets work because they generate (and feed upon) trust among stakeholders and are as much about cooperation as about competition. This means that governments, civil society and market based operators are inextricably connected and tend to swim in the same direction. They do not compete for a finite set of resources, they build wealth upon it and they share from that created wealth. Governments get reelected, businesses make profits, civil society enjoys a better quality of life. This does not mean, however, that, as the status quo changes different sub-groups will not fight for predominance.

For example, when a developing country becomes wealthier, a middle class will tend to arise. These middle classes tend to disrupt the status quo. Wealth is a necessary but not sufficient ingredient in the creation of middle classes, which is where civil society comes in. Some commentators have argued that a recent case of such a new middle class upsetting the balance of power is Turkey. The new rural Anatolian middle classes (traditionally merchants, by the way) have challenged the status quo traditionally biased in favor of the urban elites. Twenty years ago their political party was banned by the military. Now that these middle classes are richer (among other things) the balance of power has changed and the outcome of this crisis is uncertain.

Of course, this is a simplified story, much more has happened in these last 20 years, but it exemplifies how wealth creation among other things has created and empowered middle classes. Middle classes are in most countries the bedrock of the values that Edwards advocates for in his book: transparence, participatory democracy and collective action. The case for civil society going alone against poverty or with the help public institutions has been often rebutted. Probably the most stinging criticism has come from William Easterly?s ?The White Man?s Burden? and the role of incentives to stimulate wealth generation. Equally, business at the BoP is a necessary actor against poverty but can?t and should not go alone either. Furthermore, some businesses and civil society actors, in their fight against poverty, might be now becoming a new merged different entity.
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