Alleviating Global Poverty: The Role of Private Enterprise

By Lewis D. Solomon

In the book, Lewis D. Solomon develops the theme that the profit motive can serve as a powerful force for social good in developing nations, making a difference in the lives of those trapped in misery and helping millions out of poverty. After focusing on three US-based venture capital-like firms, the book presents evidence that for-profit corporations, many indigenous, funded in part by these capital providers have alleviated global poverty. These investee firms, which seek both financial and social returns, serve the impoverished by delivering critically needed but affordable goods and services, including quality education, preventive healthcare, light and power, and enhanced agricultural productivity.

• Language: English
• Publisher: Xlibris US
• Release date: Dec 5, 2014
• ISBN: 9781503516885

Lewis D. Solomon

Lewis D. Solomon is the Van Vleck professor of law at The George Washington University Law School. He is a prolific author of public policy, legal, business, and religious books.

Book preview

Copyright © 2015 by Lewis D. Solomon.

Library of Congress Control Number:      2014920479

ISBN:      Hardcover      978-1-5035-1686-1

Softcover      978-1-5035-1687-8

eBook      978-1-5035-1688-5

All rights reserved. No part of this book may be reproduced or transmitted

in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system,

without permission in writing from the copyright owner.

Any people depicted in stock imagery provided by Thinkstock are models,

and such images are being used for illustrative purposes only.

Certain stock imagery © Thinkstock.

Xlibris

1-888-795-4274

www.Xlibris.com

697703

CONTENTS

Introduction

1. Poverty In India: Its Dimensions, Causes, And Negative Consequences

2. Corporate Giving: The One-for-One Model

3. Helping Meet The Need For Capital In Developing Nations: Three U.S.-Based Capital Providers

4. Microcredit Loans As A Poverty Alleviation Tool: Fond Hope, Limited Promise

5. The Connectivity Revolution As A Poverty Alleviation Tool

6. Quality Education As A Poverty Alleviation Tool

7. Improving Preventive Healthcare As A Poverty Alleviation Tool

8. Providing Light and Power As A Poverty Alleviation Tool

9. Enhancing Agricultural Productivity And Incomes As A Poverty Alleviation Tool

10. Conclusion

DEDICATION

For

Laura and Michael

INTRODUCTION

Despite the progress made in some nations and regions, deep poverty remains a stubborn problem across much of the world. Enormous challenges persist even with the significant efforts over the decades and trillions of dollars expended by the public sector, international agencies, and charities to relieve poverty and its various dimensions.

This book analyzes two modes of for-profit poverty alleviation assistance: first, the one-for-one in-kind giving by U.S.-based corporations and second, the funding provided by U.S.-based venture capital-like firms to entities seeking both financial and social returns. Harnessing the power of the private sector—corporate givers, private capital providers, and for-profit businesses—can help lessen some of the world’s most intractable social problems, thereby lifting hundreds of millions of people out of poverty.

Generating transformational change often requires going beyond what the public and charitable sectors can accomplish and enlisting capitalists. A disruptive reordering requires both capital and expertise, opening the way for private enterprise to play a constructive role in advancing what is thought of as the common good throughout the world.

In many developing nations, low-income individuals and families do not trust the public sector to offer quality services of so-called public goods, such as education and preventive healthcare. They often prefer private sector alternatives.

The existing social challenges and the openness to private sector remedies present a huge, unmet demand, particularly with respect to basic human needs, thereby providing profitable business opportunities. Thus, for-profit, market-based solutions can generate significant, but complementary, financial and social benefits.

As detailed in this book, the best profit-seeking enterprises demonstrate that no trade-off exists between financial and social returns. These ventures achieve both goals, satisfying their customers and suppliers, running disciplined firms, efficiently controlling costs, and serving as responsible stewards of resources, financial, human, and material. They create value for society and financial returns for their shareholders.

A Qualitative Assessment of Poverty

As many as 4 billion people, a majority of the world’s population, who constitute the base-of-the-economic-pyramid, live in relative poverty.¹ Upwards of three billion people still live on less than $2 per day. They are vulnerable to falling ever deeper into poverty when hit by a negative shock, such as a healthcare crisis. One billion of them, the least fortunate, are mired in extreme poverty, living on less than $1 per day.² Among other challenges of daily living, the bottom billion are food insecure. They do not know where their next meal will come from.

In focusing on meeting the essential needs of and uplifting the globe’s low-income socioeconomic members, income represents an imperfect poverty measure. Qualitatively, it is more useful to think of the poverty-stricken multitude as not integrated into the global capitalism system.³ They comprise subsistence farmers and their families in the countryside. They include the residents of urban slums who do odd jobs to survive. It is a world of people who run small, local enterprises and enter into barter exchanges. Unable to participate in the formal marketplace, in part because of the difficulty and expense of legal registration of enterprises and other assets, as the result of unreasonable costs, rampant corruption, and outdated rules and regulations, they live in the informal economy.

As developed in Chapter 1, India provides a window onto poverty, its multiple dimensions and its causes, including overpopulation, lack of jobs and education, cultural barriers, and inadequate infrastructure. Among other negative consequences, poverty often results in child malnutrition and stunted growth, inhibiting physical and brain development, and contributing to increased morbidity and mortality, thereby perpetuating the cycle of poverty.

Limits of the Donor Aid and the One-for-One Approaches

The big social challenges posed by the earth’s massive underclass have provided a fertile field for those offering solutions. Striving to address social ills through top-down, micromanaged solutions, policymakers traditionally looked to foreign aid provided by the public sector and philanthropy as the way out of poverty for impoverished nations, individuals, and families. The Big Aid approach has focused on an infusion of huge amounts of money for an extreme makeover in education, healthcare, and agriculture, which, according to its proponents, is requisite to breaking the poverty trap and facilitating long-term, self-sustaining development.⁴

Today, however, policymakers no longer assume that large sums of external money will inevitably lead to across-the-board social improvement in emerging nations. Public sector aid programs, whether bilateral, such as the U.S. Agency for International Development, or multilateral, such as the World Bank, although helpful in some instances, have historically suffered from a lack of accountability, mismanagement, waste, and corruption.⁵

We now know that poverty and its diminution represent complex processes. Poverty in any developing nation stems from a tangle of political, economic, social, and historical factors. Thus, economic development and poverty alleviation depend on the emergence of political economy institutions and social norms that are often difficult for outsiders to understand, much less change in any meaningful way.

These traditional forms of assistance are likely unsustainable. In a time of worldwide fiscal austerity, there is not enough bilateral or multilateral public sector assistance to address the widespread poverty of those at the lowest tiers of the global economic pyramid and the attendant social issues they face. Also, philanthropic capital cannot meet these massive needs or make more than a dent in intractable social problems, except perhaps in healthcare.

Furthermore, these external handouts often make recipients more, not less, dependent. By failing to take advantage of the innovative potential of recipient individuals, external solutions, whether in the form of public sector assistance or charitable donations, may prevent people from creating and implementing their own approaches through the public and private sectors within their own countries.

A similar criticism exists with respect to one-for-one programs sponsored by for-profit, U.S.-based enterprises. As examined in Chapter 2, under a one-for-one program, when a consumer purchases an item, such as a pair of shoes, a corporation donates another pair to an impoverished resident of a developing nation. In addition to perpetuating dependency, despite these firms’ best intentions, the programs fail to create formal economic sector jobs requisite to improving the recipients’ wellbeing. More people need a way to earn the money necessary to lift themselves out of poverty. In contrast, the for-profit U.S.-based and indigenous social entrepreneurs analyzed in this book see the poor as customers who can make choices for themselves rather than passively receiving charity, whether provided by the public sector, philanthropic organizations, or corporations.

The Private Enterprise Alternative

This book analyzes how capitalism, via private capital and for-profit enterprises, can help alleviate poverty in developing nations by solving, at least to some degree, intractable social problems. Generally speaking, a market-driven, decentralized, for-profit approach, often based on disruptive innovation, can be a force for good, not an evil to be avoided or curtailed. Market-based solutions can enable emerging nations to move beyond the traditional high subsidy, donor aid strategy.

The profit motive generally offers a greater push than the incentives offered to public sector or nonprofit providers to serve more customers and deliver quality goods and services more efficiently, at lower costs. Thus, profit-seeking businesses can serve as positive change agents. Although capital providers, entrepreneurs, and capitalists, more generally, may make mistakes, they can more often effectively achieve socially beneficial outcomes than elected officials and policy experts. They can put capitalism to work for the greater good.

These for-profit ventures often bring to the marketplace new solutions for unmet social needs. These firms provide a level of impact that nonprofit organizations typically do not enjoy. In many emerging countries, they represent an ever-growing impatience with public sector response rates to making essential changes and meeting social needs. These entities, typically led by dynamic entrepreneurs, often want to accomplish something noble and thus improve the lives of the poverty-stricken in a sustainable, profitable, and scalable manner. Ideally, those business pioneers want to achieve these results without politics or bureaucracies slowing them down.

The Importance of External Private Capital

As examined in Chapter 3, external private capital and expertise can play a critical role in poverty reduction. These capital providers, whether nonprofit entities, such as the Acumen Fund, for-profit organizations, such as Gray Ghost Ventures, or hybrid for-profit-nonprofits, such as the Omidyar Network, invest because they believe that a key driver of the next phase of economic development and poverty alleviation in emerging nations will come from profit-making businesses, especially those enterprises selling goods and services that meet basic human needs.

Whether through their loans or equity investments, these external, non-public capital providers strive to utilize finance to do social good. They find projects that philanthropic donors or governments cannot or will not undertake. Striving to build sustainable, profitable, scalable enterprises, they seek out talented entrepreneurs with sound business plans, who, however, may be in short supply. Their risk-taking capital embraces and acknowledges both success and failure, with the latter serving as a feedback loop for learning.

Where the poor live, capital is typically rare and expensive. Apart from borrowing from local moneylenders at usurious interest rates or from family or friends, profit-seeking entrepreneurs generally lack the requisite funds to get their businesses off the ground. They need assistance, in the form of capital and skill building, for their entrepreneurial efforts to succeed.

Instead of public sector-led or donor-financed assistance, we increasingly look to external capital providers to fuel the engine of development by helping build for-profit social enterprises from the bottom up. These firms provide funding for the best of these solutions and help build organizational capabilities.

The Role of For-Profit Businesses in Poverty Alleviation

In many instances, as analyzed in this book, the profit motive can be an effective engine for providing goods and services that match existing, unmet needs. Chapter 6, 7, and 8 focus on for-profit businesses, funded by the three U.S.-based private capital sources, which provide essential goods and services, including education for children, preventive healthcare, and lighting and power, requisite to a dignified life for millions of people at the base-of-the-economic-pyramid. Through enhanced education and better preventive healthcare, for instance, these profit-seeking firms offer opportunities for many in areas where the public sector often has failed to deliver. By enhancing lives and facilitating social change and economic development, these enterprises help lift individuals and families out of poverty.

Beyond meeting basic human needs, the key to poverty alleviation centers on raising the real incomes of the poor. Simply put, the poverty-stricken need more money. For-profit businesses can help achieve this objective in three ways.

First, the poor at the bottom-of-the-economic-pyramid often live in a world of high cost microeconomic systems. Imprisoned by local monopolies, poor distribution mechanisms, and powerful middlemen, they face exploitation by low quality goods and services providers, paying predatory prices five to twenty five times more than what the affluent pay for similar items.⁶ By decreasing the cost of goods and services, for-profit enterprises thus reduce the poverty penalty and improve the disposable income of the poverty-stricken.

Second, increased incomes also result from modern technology and greater agricultural productivity. As examined in Chapter 5, enhanced connectivity, brought about by cellphones, and the accompanying access to financial services, including mobile money transfers, has vastly enhanced the lives of the poverty-stricken.

With large numbers of the globe’s poor living in rural areas, their poverty must be addressed and the agricultural sector strengthened. For-profit enterprises have enhanced agricultural productivity, as discussed in Chapter 9, thereby enabling farmers to generate more income. Economic improvement in rural areas not only benefits the poor living there but also alleviates, to a degree, migration to the cities.

Third, wages earned from jobs in the formal economic sector lead to rising incomes. In concept, successful, profitable social enterprises that meet essential human needs by offering goods and services at affordable prices could create jobs for the talented, but impoverished. Some 40 to 50 percent of all adults in many developing nations in Africa, Asia, Latin America and the Caribbean work in the informal economic sector.⁷ Because they cannot find employment in the formal economic sector, they lack access to good jobs as well as some type of social safety net. Thus, job creation in the formal economic sector will enable the poor to improve their working conditions and earn more money. Poverty will take care of itself, particularly, as one entrepreneurial development organization noted, Small and growing businesses represent one of the most promising ways to create stable, quality jobs for the poor.⁸ However, it is uncertain whether for-profit social ventures, funded by external non-public sector capital providers, will grow and serve as engines of formal economic sector job creation.

Apart from the successful poverty alleviation models of businesses blending profit and social objectives detailed in this book, two caveats exist. First, it is uncertain whether numerous for-profit enterprises can successfully couple the generation of sufficient financial returns with meaningful efforts to solve social problems. Business innovations to meet major social issues are often hampered by inefficiencies, among other factors, that prevent these firms from receiving sufficient compensation for their efforts, even if they create value for their customers, thereby impairing their sustainability and profitability.

Second, it is unclear whether numerous for-profit endeavors can build large-scale, market-based solutions for poverty alleviation. Operating as a for-profit entity generates capital to help a business scale up. However, firms face challenges both internal, such as attracting and retaining talented employees, and external, such as inadequate infrastructure and rampant corruption.

Chapter 10 offers a brief conclusion, highlighting the problems external capital providers and aspiring, profit-seeking social entrepreneurs face in alleviating poverty globally.

The Importance of Empirical Evidence

In the context of so many of the world’s people in need and the uncertainties surrounding the economic development puzzle, verifiable evidence has come to the fore. Pioneered by the Poverty Action Lab (now the Abdul Latif Jameel Poverty Action Lab) at the Massachusetts Institute of Technology, researchers look to rigorous, randomized controlled trials, the gold standard, to determine the effectiveness of proposed anti-poverty solutions to see if they work.⁹ Through the systematic, large-scale testing of policies and approaches, the evidence-based strategy gives an objective assessment of a program’s impact on participants. These tests enable policymakers to identify the most effective ways to intervene to assist the poor and gather support for these endeavors. These studies will hopefully guide policymakers to design better solutions and stop funding programs that do not work.

Throughout this work, where appropriate, I draw upon this research as a backdrop for the poverty attenuating efforts of U.S.-based capital providers and for-profit ventures. For example, over the past two decades, considerable private capital has flowed to microfinance organizations, which make microcredit loans to the impoverished. Chapter 4 focuses on two intermediary microcredit organizations, both backed, in part, by two U.S.-based capital providers, which fund entities making microcredit loans. In concept, microcredit loans are designed to empower the poor, especially women, by enabling them to open small businesses. Despite proponents’ fond hopes, empirical research has shown that microcredit loans offer only a limited promise as a poverty alleviation tool. These loans often fund consumption, not small business formation and development. They do not lead to formal economic sector jobs for non-entrepreneurs.

Notes

1 Allen L. Hammond et al., The Next 4 Billion: Market Size And Business Strategy At The Base Of The Pyramid, International Finance Corp. and World Resources Institute, 2007, 3, 13. C.K. Prahalad, The Fortune at the Bottom of the Pyramid (Upper Saddle River, NJ: Wharton School, 2005), pioneered in advocating the business strategy of targeting the bottom of pyramid (BoP) demographic as customers, not beneficiaries. For a critique of the BoP business strategy see Aneel Karnani, Fighting Poverty Together: Rethinking Strategies for Business, Governments, and Civil Society to Reduce Poverty (New York: Palgrave Macmillan, 2011), 59-84 and Aneel Karnani, The Mirage of Marketing to the Bottom of the Pyramid: How the Private Sector Can Help Alleviate Poverty, California Management Review 49:4 (Summer 2007): 90-111.

2 Ashish Karamchandani, Michael Kubzansky, Paul Frandano, Emerging Markets, Emerging Models: Market-Based Solutions To The Challenges Of Global Poverty, Monitor Group, March 2009, 17. For World Bank poverty estimates see World Bank, World Bank Updates Poverty Estimates for the Developing World, 2013 (March 6, 2014).

3 Ted London and Stuart L. Hart, Creating a Fortune with the Base of the Pyramid, in Next Generation Business Strategies for the Base of the Pyramid: New Approaches for Building Mutual Value, eds. Ted London and Stuart L. Hart (Upper Saddle River, NJ: FT Press, 2010), 8.

4 Jeffrey Sachs in The End of Poverty: Economic Possibilities for Our Time (New York: Penguin, 2005), advocated and implemented, through the Millennium Villages Project (MVP), one of the most ambitious experiments in international economic development, targeting agricultural, medical, and educational interventions. Although Sachs believed that no social problem existed that could not be solved by a massive influx of resources, the MVP encountered unexpected woes in two African Villages as one journalist documented. Nina Munk, The Idealist: Jeffrey Sachs and the Quest to End Poverty (New York: Doubleday, 2013).

5 For a critique of top-down prescriptions leading to large-scale interventions impeding local people’s ability to solve their own problems see William Easterly, The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good (New York: Penguin, 2006). Easterly advocated a homegrown, ground-up, domestically oriented development approach based on individual dynamism in a free society.

           Studies of donor aid offer mixed reviews on its long-term economic development impact. A meta-analysis of 97 economic studies concluded that aid had only a small impact, at best, on economic growth. Hristos Doucouliagos and Martin Paldam, The Aid Effectiveness Literature: The Sad Results Of 40 Years Of Research, Journal of Economic Surveys 23:9 (July 2009): 433-461. François Bourguignon and Mark Sundberg, Aid Effectiveness: Opening the Black Box, American Economic Review 97:2 (May 2007): 316-321, concluded that many forms of aid are often ill conceived, do not comprise an optimal use of resources, and that a fragile and tenuous, at best, relationship exists between aid and development. Others find that foreign aid generally promotes long-term economic growth. See, e.g., Camelia Minoiu and Sanjay G. Reddy, Development aid and economic growth: A positive long-run relation, Quarterly Review of Economics and Finance 50:1 (February 2010): 27-39 and Michael A. Clemens et al., Counting Chickens When They Hatch: Timing And The Effects Of Aid On Growth, Economic Journal 122:561 (June 2012): 590-617.

         Providing a balanced view, Paul Collier, The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It (New York: Oxford, 2007), concluded that much aid is harmful and fails to reach its intended goal, but is necessary in limited situations and sometimes can be helpful if given with well-defined restrictions and more effective supervision and evaluation.

         For an analysis of the transformation of the U.S. Agency for International Development using loan guarantees to get local banks to finance projects and giving funds to foreign development groups, not consultants, see Ron Nixon, In Switch, Development Agency Welcomes Business and Technology to Poverty Fight, New York Times, April 8, 2014, A8.

6 C.K. Prahalad and Allen Hammond, Serving the World Poor, Profitably, Harvard Business Review 80:9 (September 2002): 4-11, at 5, 8 (The High-Cost Economy of the Poor).

7 International Labour Organization, Global Employment Trends 2014: Risk of a jobless recovery?, International Labour Office, 2014, 24 (Figure 9. Estimated informal employment shares, 2011 (percent)). See also International Institute for Labour Studies, World of Work Report 2013: Repairing the economic and social fabric, International Labour Organization, 2013, 12 and International Labour Organization-Department of Statistics, Statistical update on employment in the informal economy, June 2012.

8 Aspen Network of Development Entrepreneurs, Engines of Prosperity, Impact Report 2012, Aspen Institute, 2013, 9.

9 Abhijit V. Banerjee and Esther Duflo, Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty (New York: PublicAffairs 2011), summarized evidence-based, poverty alleviation research. See also Ian Parker, The Poverty Lab: Transforming Development Economics, One Experiment at a Time, New Yorker, May 17, 2010, 79-89 and Maureen Tkacik, The Pragmatic Rebels, Bloomberg Businessweek 4186 (July 5-11, 2010): 56-62.

1

Poverty In India: Its Dimensions, Causes, And Negative Consequences

India, a vast and complex place, faces a dual structure political economy.¹ Two distinct sectors exist: one defined by modern technology, a high ratio of capital to labor, and elevated worker productivity and wages. A large number of smart, well-educated people live in this sector. The other sector possesses all the opposite traits, leading to massive poverty, extreme socioeconomic deprivation, and increasing inequalities across the rural-urban divide and across class lines,² particularly in cities. Heartbreaking poverty fills the streets and the fields.

After providing a brief overview of the post-independence Indian political economy, this chapter surveys the