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

I just finished reading Freakonomics, the NY Times Bestseller written by ?rogue economist? Steven Levitt and journalist Stephen J. Dubner. It’s about using economic thinking and data analysis to answer practical questions and challenge conventional wisdom. Truly, there is nothing I love more than folks who consciously and skillfully upend easy assumptions. Except perhaps, those who find ways to prove what works using hard data. In the words of the recently-liberated Paris Hilton, ?that’s hot.?

As a result, I suppose that it’s not surprising that Freakonomics has inspired me to tackle two of the most difficult questions on my list of twenty:

1. How do you define success at the BoP?
2. How do you quantify it?

Well, fortunately for me, WRI and the IFC have gone a long away toward answering question #2 by publishing the report, ?The Next Four Billion.? We now have a very good idea of just how large these markets are. As we all know, assessing the size of the market is a key element of business planning and finance solicitation. We also know that the sizeable profit that accompanies sizeable markets is a great motivator for business development.

However, there is no consensus about how to define and quantify the social benefits derived from building BoP businesses. For example, does success result when the market shrinks, as previously unmet needs are met, or when it expands, indicating that more people are soliciting more services? Moreover, do products consumed and services rendered enhance their beneficiaries? quality of life, yield a higher GDP per capita, reduce disease prevalence, or create some other desirable socioeconomic benefit? If so, how do we know?

Clearly, I?m not breaking any new ground here. Socially-responsible businesses, investors, and CSR professionals everywhere have been trying to define and quantify the triple bottom line via social return on investment (SROI) analysis and other methods for years. Nonetheless, the question bears repeating.

If I go out and start a business providing mortgages to urban BoP dwellers, how do I define success? Is it enough to say that x number of families purchased homes using my services, or should my analysis be more comprehensive? For example, should I be concerned about whether the homes are environmentally sustainable? Or whether the new homes that I provide reduce or exacerbate socioeconomic inequality in a community?

I suppose that the first order of business is to determine which questions generate the most useful answers. The second, not surprisingly, is to figure out how to get those answers. The work of Garrick Blalock, who presented at the symposium ?Financial Inclusion, Innovation and Investments: Biotechnology and Capital Markets Working for the Poor”, sponsored by the Emerging Markets Program at Cornell University may be instructive on both counts.

As part of his discussion, he described the three levels of analysis used to identify the transfer of technology within foreign direct investment (FDI) flows. The ?macroeconomic approach? is to conduct a regression analysis of GDP growth and capital flows, a method that Blalock indicates lacks credibility for this application. The ?broad microeconomic approach? is to compare company level changes in firms exposed to FDI with changes in firms that have not. Finally, the ?narrow micro approach? requires that one simply asks individual companies whether or not they are receiving tech transfer via FDI. This approach, as Blalock humorously conceded, is considered ?career suicide? given its lack of quantitative rigor. (Ironically, this ?math and model? obsession in economics is exactly what the work of ?rogue? economists like Steve Levitt challenge. But I digress.)

Additionally, the Acumen Fund, assesses its portfolio investments using four key indicators: ?financial sustainability, social impact, scale and cost effectiveness.? The bigger picture analysis includes an evaluation of:

• Output: count of goods/services delivered on a scale and at a cost that is superior
• Impact: measurable improvements in quality of life at the Base of the Pyramid
• Systems change: transformation in the marketplace for critical goods and services in emerging markets

(http://www.acumenfund.org/Work/Metrics/)

I suspect that these strategies are indicative of the types of analysis that could be used to evaluate BoP business development. Perhaps the creative adaptation and application of SROI analysis is also something to consider.

I might have more to say about this were I to attend Dr. Ted London?s upcoming presentation of his paper, ?A Base-of-the-Pyramid Perspective on Poverty Alleviation,? which likely offers a more informed perspective.? Alas, my private plane will be in the shop. However, I?m fully confident that a full run-down of the event will materialize in nextbillion’s blogosphere soon.

In an ideal world, I’d like to see the pyramid flipped on its head. Wouldn’t we all? Hmm….
So let me be the first to challenge my own “easy assumptions” and throw the question back at you.

What do you think?