The Bottom of the Pyramid: The Need to Integrate the Poor in the Growth Story: Part 1

The "fortune at the bottom of the pyramid," a phrase coined by Prahalad and Hart in 2002, led to a lot of excitement since companies were enthralled with the idea of finding new profit seeking opportunities and markets especially among the low income segment section in the developing nations. The proposition also syncs well with the first of the UN Millennium Development Goals, which call for an eradication of extreme poverty and hunger in the world—i.e., to cut down by half the proportion of people living on less that US$ 1 per day from 1990 until 2015[1].

The BOP rationale believes that there is profit to be made by ‘doing good’. This is quite different from the corporate philanthropy or the commonly understood definition of corporate social responsibility which typically does not require an income generating component. Essentially sustainability is conceptualized as a source of revenue rather than merely an expense.

However some ethical considerations need to be kept in mind especially with context to the developing nations and they are:

  1. What roles are envisaged for the poor by corporations? Are they just viewed as consumers or considered stakeholders (suppliers, producers, partners)
  2. What solutions are required to ensure that the cycle of prosperity continues? In other words even if companies develop innovative products, poor people need real money to be able to buy them.

Some suggested solutions in this regard quoted in various research publications and my personal viewpoints on each topic are given as follows:

Microcredit: The 2006 Nobel Peace Prize to Dr Muhammed Yunus propelled to the forefront the benefits of extending timely credit to the poor in a simple manner. In India the Self Help Groups (SHG’s) were encouraged by the Reserve Bank of India (RBI)/NABARD as enablers of financial inclusion. The ’new-age’ microfinance companies led by SKS Microfinance, Asmitha, Spandana etc made microcredit ‘en vogue’. Led by foreign-educated managers and quite blatant in their agenda of profiteering from the poor, these companies managed to convince the regulators, investors (PE Funds etc) to invest in the ‘poor story’ [2].

The subprime crisis in the West helped the Indian microfinance institutions (MFIs) [3] attract private equity investment totaling INR 3.86 billion (USD 84 million) between January and June of 2010—an increase of approximately 15 percent over the first half of 2009. The increase was attributed to the high profitability of the majority of Indian MFIs, (high interest rates of approx 30-60 percent per year) and high repayment rates (exceeding 95 percent in most cases). In fact even foreign pension funds such as ABP [4], a Netherlands-based pension fund, invested $30 million in Global Microfinance Equity Fund (GMEF), a microfinance private equity fund managed by Grassroots Capital. In 2009, another Dutch pension fund had invested $60 million in the GMEF [5].

However the key question that remains to be answered is whether microcredit availability actually helps in poverty alleviation?

Even mature SHG’s linked to SHG promoting institutions (SHPI’s) like federations [6] struggle with providing market linkages to their members. There are various reasons for this such as:

  •  Not an area of expertise for SHPI’s
  • Products/ Output of various SHG’s is diverse (non standardization)
  • Lack of bandwith to undertake additional activities: NGO’s that typically promote SHPI’s are dependant upon grants, funding themselves and have to be very efficient to keep themselves sustainable at times.

Hence microcredit may be utilized for consumption purpose, to cater to emergencies and essentials or may even be used for onward lending. Weaning away from the mother federation thus becomes practically impossible since these groups are unable to locate markets and hence become independent.

Marketing mobiles, salt, shampoo etc to this section of the population can certainly help the organizations concerned but how are these ‘buyers’ expected to get the funds to be able to buy these products on a sustainable basis?

Initiatives like E-Coupal are great but there is still a vast section that is excluded due to various factors ( eg: exclusion of certain states/areas, types of crops/produce, logistics and costs involved etc)

Creating (Meaningful) Jobs: Both the government and industry need to partner to make this proposition work. Government poverty alleviation programs like Food for Work, NREGA [7], or even the recent NRLM usually get diluted in their impact, due to weak program design issues. It would be logical to assume that discrepancies would get fixed based upon historical data and experience-but that does not happen. Industry can step in by partnering with genuine entities so as to offer some livelihood options which will motivate good performance.  

For example, Pune-based BAIF’s organic mango initiative under the aegis of its “Wadi Model” is an example of a strategic partnership between ITC and the tribals of South Gujarat. The result was a win-win situation wherein the private sector (ITC) benefited by getting good quality organic mangoes and the tribals getting a sustainable source of livelihood. The combined strengths of all the three entities viz (BAIF, ITC and the tribals) were used effectively. ITC brought to the partnership the much needed market linkage and a demand for the produce. BAIF having expertise in the development sector and in working with the poor helped in planning, guidance, procurement and provided the much needed linkage with ITC. The tribal community brought to the relationship their hard work and their most precious resource: their land. (To be continued in Part 2)

[Photo Source: Google Images]

[1] UN 2006.

[3] Source: Micro Capital Brief –July 23 2010

[5] Grassroots Capital closed the fund at $117.5 million, and as per a company statement. , declared, that it planned to invest in around 50 microfinance institutions in different parts of the world such as India, Latin America and Africa from its total corpus.

[6] Self Help Promoting Institutions (SHPI’s): Self Help Group Federation

A SHG Federation is the apex SHG unit / mother organization that spawns the grassroot level SHG’s and nurtures them by making resources in terms of funds, counselling and guidance available to them.  It is a community based institution which is owned and managed by members of the SHG’s.

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Tags: Asia, Bottom, Food, India, NREGA, Pyramid, Work, for, groups, help, More…micro-finance, of, poverty, self, the


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