NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

As it should be clear by now to our frequent and not so frequent readers, the BoP is potentially a huge market. Within this potential market there are different segments depending on who products are directed to, which needs they address, or what income and educational levels the target customer has. Depending on the target geographic area, BoP members may face totally different needs and constraints.

Another important differentiating feature of BoP communities are the violence levels they face. For example, it could be argued that the Indian BoP is exposed to comparatively less violence than Colombian BoP. As I pointed out in a previous post, this is important because BoP communities are especially vulnerable to violence and crime. It has been shown that younger, lower income and less educated men are more at risk of being homicide victims, while women and their children are most affected by forced displacement (Moser, 1999).

Francisco pointed out in his post launching NextBillion en Español, that one of the defining characteristics of Latin American BoP markets are relatively higher levels of chronic violence. Such violence can come in many forms such as Colombia’s narco-guerrillas, slum violence in Brazil, Tijuana’s border drug wars in Mexico or Guatemala’s, Panama’s, El Salvador’s and Hondura’s “maras”. Additionally, Latin America has a recent history of violent dictatorships which often literally terrorized its own people and which has left deep scars from which many communities are still recovering.

Among Latin American countries, Colombia normally tops the list in terms of violence. Its homicide rate is estimated to be three times higher than Mexico’s or Brazil’s and the kidnapping rate is the highest in the world (Gaviria and Velez, 2001). Moreover, guerrilla and paramilitary attacks often pave the way for common delinquency (Sanchez et al., 2003). As such, it comes as no surprise that Latin American BoP ventures have to somehow take into account in their business plans the effects of violence and maybe even the possible ethically sound business opportunities it might create. In this vein, Francisco recently posted in ‘NextBillion en Español’ an article about the integration of former guerrilla members in the economy and the importance that private businesses will play in these initiatives, as well as a post about a conference that will address the role of Microfinance in helping this process.

Violence has a significant repercussion on investment levels through its effects on property rights. In societies suffering high violence levels, property rights tend to be comparatively weaker. Weak property rights in turn discourage firms from reinvesting their profits, even when bank loans are available (Johnson, McMillan and Woodruff, 2002), which will have negative consequences on private sector development. However, until now there has been little evidence on how exactly violence shapes investment decisions at the BoP household level, which is most important for business development enterprises.

One of the first studies to shed light in this area is a recent Working Paper from the World Bank entitled “Household Investment under Violence – The Colombian Case” by Rebekka Grun. This paper makes a distinction between two kinds of violence: guerrilla or paramilitary violence, which poses a threat to the state’s authority, and common delinquency, such as gang violence. The main difference among these two is that guerrilla type of violence tends to displace affected citizens, while delinquency does not.

The study finds that displacement threats decreases the security of owning fixed assets, such as housing, diesel generators or land, because they can’t be taken away when escaping (in Colombia it is estimated that around 65% of displaced people flee more than 50km). On the other hand, common delinquency creates more insecurity in ownership of mobile assets which can be stolen and carried away, such as mobile phones or motorcycles. Based on such results, I would venture that terrorist states like Burma, Sudan or North Korea, would also show the same effects than the ones found for guerrillas, since they too tend to threaten displacement of their citizens as a means of punishment.

Such results point to broadly two types of private sector development strategies depending on the type of violence (if any) that the country is suffering and has important implications for BoP business models in violence-prone regions. For example, renowned economist Hernando de Soto postulated in his bestseller The Mystery of Capital that assigning property rights to the poor would result in higher income levels thanks to the increased investments it would stimulate. However, this effect may be stunted if such populations are subject to guerrilla warfare. In this case, it might be better to stimulate businesses which require fewer investments in fixed assets (which would be incurred when opening a shop) and greater investments on comparatively mobile assets (such as transportation or communications). On the other hand, BoP communities with high levels of delinquency instead of guerrilla violence might be comparatively better off by doing the exact opposite.

For example, the CEMEX business model that stimulates fixed investments in housing may not do that well in certain areas of Colombia (for more details look into these case studies, 1 and 2, or get a copy of CK Prahalad’s “Fortune at the Bottom of the Pyramid,” which includes a more detailed case study), while mobile phone banking strategies may be less successful in some extremely violent Guatemalan neighborhoods (for more details look into my study on mobile phone banking or a more recent CGAP publication about mobile phone banking step-by-step guide).

Finally, the economic benefits of using an adequate investment approach to different violence types may have positive effects too in deactivating such conflicts by enticing delinquents or guerrillas to reintegrate in the economy. In this way, developing a common marketplace with broadly agreed rules could also encourage the settling of disputes through peaceful means as it did in Brcko in the former Yugoslavia.