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Thursday, August 3, 2006

The Ghetto Tax

By Rob Katz

Checks CashedIn a report published last month, Matt Fellowes of the centrist Brookings Institution documents a "ghetto tax" paid by lower-income consumers in the United States ? essentially, proof that poor people in underserved areas pay more for basic goods and services. Sound familiar? In 2002, Allen Hammond (of WRI and NextBillion) and C.K. Prahalad published similar data on the high-cost economy of the poor in Dharavi, India. Prahalad later included these data in his 2004 book. Whether you call it a ghetto tax (Fellowes), poverty penalty (Prahalad), or BOP penalty (Hammond), the central point is the same ? poor people are often trapped in poverty because of the high-cost economies in which they live.

Businesses operating in low-income communities have price premiums for a reason ? they perceive a higher cost of doing business there. Are these costs real? Fellowes? report documents some cases where they are (security costs) and others where they are perceived (insurance premiums). The report uses unit price data from twelve major metropolitan areas in the United States to document the ghetto tax paid for groceries, transportation, financial services, and housing. Economist types will want to check out the methodology section of the report, but my review of it shows no glaring errors. Most interestingly, Fellowes claims that "reducing the costs of living for lower income families by just one percent would add up to over $6.5 billion in new spending power for [the poor]."

This is a staggering number ? it represents a real market opportunity supported by hard data. Will companies and entrepreneurs respond? I can?t help but think ? what would reducing the costs of living for even 25 percent of the world?s base of the pyramid communities would mean for spending power? How much new money would be unleashed ? and what are the implications for poverty and for business?

Related article ? see the New York Times? take.

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