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Thursday, August 24, 2006

Response to "Mirage at the Bottom of the Pyramid"

By Al Hammond

Oasis or MirageDr. Aneel Karnani has posted a critique of Professor Prahalad’s book, The Fortune at the Bottom of the Pyramid and its thesis?as Karnani describes it?that multi-nationals will enrich themselves and the poor by participating in the base of the pyramid (BOP) market. Karnani describes this thesis as "at best a harmless illusion and potentially a dangerous delusion." He raises questions about the size of the BOP, its relationship to poverty, and calls for a focus on the BOP as producers.

While Karnani’s characterization of the Prahalad thesis is questionable, we can certainly agree with him that improving the productivity and welfare of BOP households is an important component of poverty alleviation. Our BOP work at Development through Enterprise has always been focused on improving both the productivity of the BOP as micro-producers and their welfare as micro-consumers-through access to information and connectivity, to financial services, to health care, to agricultural prices and inputs, and to more competitive and hence more equitable markets.

In response to Professor Karnani’s concerns about previous estimates of BOP size, we agree that a more sound empirical grounding is necessary to inform the debate. Our forthcoming publication, joint with the IFC, is based on a re-analysis of national household income and expenditure surveys?each with sample sizes in the tens of thousands and relevant to entire populations?from more than 110 developing countries.

Entitled "Tomorrow’s Markets", the publication will describe the BOP market based on purchasing power - by income level, by country and region. It will also analyze expenditure patterns by sector and by income level, focusing particularly on sectors that enhance productivity.

The point is that BOP households collectively spend money, lots of it, on a wide variety of goods and services, and are clearly willing to pay for services such as connectivity, clean water, financial services, energy, health care, and education for their children, as well as food, housing, and consumer goods. The BOP is already an economic actor, not just a passive, dependent group, and its collective actions define a market.

The pertinent development question is whether the BOP is well served by the present (often informal) markets, and whether there are unmet needs that could be better served by more competitive markets and broader participation by the legitimate private sector. Our analysis will attempt to answer such questions, with empirical data and well-documented examples. It will also clarify the difference between a poverty analysis (which seems to underlie Professor Karnani’s concerns) and a BOP market analysis.
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