Trickle-up Economics

Thursday, March 29, 2007

An estimated 16 million South Africans lack an operating water supply at home and have to walk an average of one kilometer to fetch water. Assuming the average household is five people, that’s 3.2 million households. Picture each household making two trips daily; that’s four kilometers walked in order to obtain enough water for the day. Four multiplied by 3.2 million makes 12.8 million kilometers walked each day – the equivalent of walking to the moon and back 16 times. Give or take a busy day at the water source, it takes about an hour to make the trip. 6.4 million trips equals 6.4 million hours of fetching water, which is usually of suspect quality.

While it may appear that these millions of households play insignificant roles in the world economy, businesses are realizing the enormous purchasing power these neglected customers hold. A recent joint study, published by the World Resources Institute and the World Bank, enlightened the global community last week. The study is called “The Next 4 Billion,” and it examines the economics of base-of-pyramid populations. These are the populations defined officially by the World Bank as low-income – $3,000 per year or less, in locally adjusted dollars.

The study argues that by ensuring the market economy serves this base, the foundation of society if you will, the economic benefits will reach everyone. In fact, the better we serve the poor, the stronger the returns are to everyone. The study’s key observation is that even though one family might have little purchasing power, taken as a whole, the base of the pyramid holds massive market potential.

In Asia, 83 percent of the population lives at the base, representing 42 percent of total consumption. In Latin America, 70 percent lives at the base, representing 28 percent of total consumption. In Africa, 95 percent lives at the base of the pyramid, representing 71 percent of consumption.

These numbers reveal a serious lack of entrepreneurship from global businesses. These are massive consumer markets left untouched by the global economy, left instead to local informal markets for poor-quality goods and services. Many have to pay high opportunity costs to obtain basic goods, such as clean water. Think about those South Africans, who may also have to walk a kilometer, if not more, to school or to the nearest hospital. Those are hours that could be spent much more productively. By reaching these consumers with infrastructure and products tailored to their needs as an entire market, businesses can provide them with the opportunity to take part in the global market.

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Source: The Villanovan (link opens in a new window)