Abstract
A libertarian movement (often referred to as ‘bottom of the pyramid’ or BOP strategies in the business literature) that emphasizes free markets to reduce poverty has grown strong in recent years. It views the poor as ‘resilient and creative entrepreneurs and value-conscious consumers’. This romanticized view of the poor is far from the truth and harms the poor in two ways. First, it results in too little emphasis on legal, regulatory and social mechanisms to protect the poor who are vulnerable consumers. Second, it results in overemphasis on microcredit and under-emphasis on fostering modern enterprises that would provide employment opportunities for the poor. More importantly, the libertarian proposition grossly under-emphasizes the critical role and responsibility of the state in poverty reduction.
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Notes
For another case study in this vein, Karnani (2007b) focuses on skin whitening cream marketed by Unilever.
This article focuses on poverty alleviation, not profit-maximizing strategies for firms; however, this advice to companies is riddled with fallacies – see Appendices A and B.
In response to my article, Prahalad insisted, in an interview published in Fast Company in February 2007 (http://www.nextbillion.net/news/c-k-prahalad-pyramid-schemer, accessed 16 october 2009), that he had not overestimated the size of the BOP market.
See, for example, The ‘Bird of Gold’: The Rise of India's Consumer Market, McKinsey Global Institute, May 2007, and From ‘Made in China’ to ‘Sold in China’: The rise of the Chinese urban Consumer, McKinsey Global Institute, November 2006.
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Appendices
Appendix A
Fortune or mirage at the BOP?
Fortune at the BOP: Large multinational companies can make a fortune by selling to the poor people at the bottom of the pyramid.
Mirage of a Fortune: The alleged large and lucrative market at the bottom of the pyramid is a mirage, and companies are much better off targeting the growing middle class in emerging economies.
Appendix B
Size of the BOP market
The growing appeal of the BOP proposition has been fueled by the argument that poor people represent a large and lucrative market. Prahalad (2005) argues that the poor, defined as people living on less than $2 per day, at purchasing power parity (PPP) rates, represent a market size of PPP$13 trillion. Allen Hammond, vice president of the World Resource Institute (WRI) and a leading advocate of the BOP proposition, asserts that ‘the buying power of these poorer markets weighs in at a staggering $15 trillion a year’ (Wall, 2006). Given such large estimates, it is not surprising that the BOP proposition has become so popular.
In an earlier article (Karnani, 2007c), I argued that such BOP market estimates are gross exaggerations. Using rough calculations from then-existing World Bank data, I estimated the BOP market to be $1.2 trillion at PPP, and $0.3 trillion at exchange rates, in 2002. From the perspective of multinational companies, the BOP market size is $0.3 trillion, since companies necessarily convert local currencies into home currency at exchange rates.Footnote 3
We now have new data to resolve this debate. The report The Next 4 Billion, released in 2007 by the International Finance Corporation (the private sector arm of the World Bank group) and WRI, estimates the size of the BOP market based on unique (and previously unreleased) access to the household surveys of 146 developing and transition countries.
I have calculated the BOP market in 2002 using data from The Next 4 Billion for a poverty line of $1000 at PPP (which corresponds roughly to the commonly used $2/day in 1990 prices standard). In that case, the global BOP market size is only $0.36 trillion at exchange rates, which is remarkably close to my earlier estimate.
The alleged large and lucrative market at the bottom of the pyramid is a mirage. Fueled by rapid economic growth, the shape of the economic pyramid is changing in many developing countries, leading to a rapid emergence of a middle class. Companies seeking new profitable opportunities are much better off targeting this vast new pool of consumers – the fast-growing middle class – in the emerging economies, especially China and India.Footnote 4
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Karnani, A. Failure of the libertarian approach to reducing poverty. Asian Bus Manage 9, 5–21 (2010). https://doi.org/10.1057/abm.2009.20
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DOI: https://doi.org/10.1057/abm.2009.20