Aid is Not the Answer

Wednesday, August 31, 2005

There is an inherent paradox in the debate about poverty alleviation that escapes even the most sophisticated observers in the West. Consider the conventional thinking about China and India: They are seen as a threat to the West. The fear is not only about “exporting well paying U.S. jobs” but also about competition for resources such as oil and commodities. Yet India is home to more than 500 million people who live on less than $3 a day. In China, the number may be around 400 million. Just these two countries represent 900 million people in poverty, a larger number than the entire population of Africa. There are about 600 million in Africa who live on less than $3 per day. Why, then, do China and India evoke fear and anger, while Africa elicits pity and guilt?

Despite the magnitude of their respective poverty problems, China and India may have a chance of meeting the Millennium Development Goals established by U.N. Their economies are following the lead of other countries that have raised their populations into a middle-class economic base. For example, between 1975 and 2004, GDP per capita in South Korea increased fourfold. Over the same period, Malaysian incomes rose threefold.

On the other hand, in those decades, per capita incomes in Nigeria declined by a tenth. Why? During the period 1955-2004, the West and multilateral institutions invested more than $1 trillion in aid and subsidies in emerging economies. But poverty persists. It would seem, therefore, that we need to challenge the role of aid and subsidies in promoting sustainable economic development. If poverty cannot be eradicated with humanitarian handouts alone, what is the alternative?

The G-8, led by Tony Blair and supported by Jeffery Sachs and Bono, believe that debt relief and a doubling of aid from rich countries to poor, especially in Africa, is the way to go. A less popular alternative focuses on the involvement of the private sector in poverty alleviation through the development of market-based ecosystems.

Irrespective of which route we take, we need to build an infrastructure to deal with poverty. There is an implicit aid overhead. According to Prof. Sachs, out of every dollar of aid given to Africa, an estimated 16% went to consultants from donor countries, 26% went into emergency aid and relief operations, and 14% went into debt servicing. How much of the remaining 40% escaped corrupt officials to benefit the intended recipients is not known.

Take America’s approach to aid. Of the $1 billion in food aid provided by the U.S. in 2004, 90% of it was spent on U.S. produce. George Bush’s plan for AIDS required that all groups receiving cash for drugs use FDA-approved drugs (typically expensive branded products) rather than invest in generic drugs and prevention programs likely to work in a specific country. The poor (the intended beneficiaries), or the NGOs and foundations working with them, receive a small percentage of the total aid and have very little say in how it is used. Aid may benefit aid givers and aid administrators as much as aid recipients.

In contrast, private sector investments must focus on making a return on investment. While building an infrastructure — in this case a market-based ecosystem — managers recognize that the percentage of funds allocated to overheads and non-revenue-generating investments must be stringently controlled. Because of the accountability for profits, private sector investments tend to be subject to less corruption.

Proponents of aid recognize, rightly, that the poor do not have access to even the basics of an acceptable quality of life. Somewhat syllogistically, they conclude from this that the poor cannot create wealth. Hence the need, they argue, to give them something — an exercise, in essence, of wealth substitution.

When established private sector firms (including multinationals) start to look at those at the bottom of the economic pyramid — about five billion people in all — as potential consumers, the entire process of poverty alleviation takes on a new perspective. The motivation of entrepreneurs and the private sector is profit. They recognize that there is money to be made by serving consumer needs in the poorest countries in the world. And they are right: On a purchasing power parity basis, just 10 countries — China, India, Brazil, Russia, Turkey, South Africa, Mexico, the Philippines, Indonesia and Thailand — represent a GDP of more than $15 trillion. This is a market that cannot be ignored. Innovative engagement in this new market will lead to large-scale wealth creation — especially if the focus is on a creative combination of global standards, local needs and local capabilities.

Consider “connectivity.” Between 1998 and 2004, the number of mobile-phone users in Africa grew 41-fold to 81 million — the fastest growth in the world. The spread of mobile phones in Africa illustrates the power of market-based solutions to usher in social and economic transformation. Bottom-of-the-pyramid consumers understand and accept high technology and are willing to pay for it. A focus on access, availability and affordability is needed to create markets at their level.

Entrepreneurs have created this capacity to “consume” connectivity in Africa. The spread of cell phones around the world — estimated to reach two billion by 2006 — will be accomplished by the private sector (likely in the face of stifling state regulation). The private sector has made investments to create a marketing ecosystem for connectivity. So why not in other products and services?

We have to stop thinking of the poor as victims, or as a burden, and start recognizing them as resilient and creative entrepreneurs and value-conscious consumers to foster fundamental innovations — be it in financial services, personal-care products or healthcare.

For example, in the Philippines, low-income consumers are starting to use the prepaid cards in their cell phones as currency. Unilever and P&G and a host of local firms sell world-class products — Sunsilk or Pantene shampoo — for less than $0.02 per mini-sachet in India. They had to build a whole new business model — manufacturing, packaging, distribution and market reach — to be profitable at these prices. And they are.

Narayana Hrudayalaya (a cardiac-care facility) is experimenting with health insurance for less than $0.20 per person per month in southern India. They have signed up two million subscribers so far. Out of this pool, 85,000 have received medical consultations; and 25,200 surgeries have been performed, including 1,700 heart surgeries. The facility has also built an ecosystem for telemedicine. Last year, they helped 5,880 patients — including 1,925 who received consultation and treatment at remote sites using telemedicine. Similar telemedicine initiatives are cropping up in eye-care.

The Gujarat Cooperative Milk Marketing Federation, popularly known by its famous brand name “Amul,” covers more than 2.4 million producer members in 11,600 Indian villages and collects and processes about two billion liters of milk per year. It sells a wide range of milk-based products, from pasteurized milk to pizza. Amul’s revenue for the year 2004-05 was $672 million.

The number of commercially based initiatives from local and multinational firms that will have a desirable social impact is growing rapidly. These offer us a distinctly clear alternative to poverty alleviation, based on markets rather than aid and subsidies. This is not to say that there are no circumstances when aid is appropriate. But aid just cannot be the default position for poverty alleviation.

Global firms increasingly realize that the bottom-of-the-pyramid markets are a source of innovation in business models — potentially, even, of “breakthrough” innovation. Innovations in technology, capital intensity, delivery, governance (e.g. in collaboration with civil society organizations) and price-performance levels are all needed to create a market at the lowest-income level. To “make poverty history,” leaders in private, public and civil-society organizations need to embrace entrepreneurship and innovation as antidotes to poverty. Wealth-substitution through aid must give way to wealth-creation through entrepreneurship.

Mr. Prahalad, the Paul and Ruth McCracken Distinguished University Professor at the Ross School of Business, University of Michigan, and CEO and founder of The Next Practice, is the author of “The Fortune at the Bottom of the Pyramid” (Wharton, 2004).

Source: The Wall Street Journal (link opens in a new window)