As I mentioned in my introduction to “Base of the Pyramid” (BoP) businesses, many view them as the ultimate win-win scenario. Businesses can earn a fortune by maximizing profit and selling to the bottom four billion people in the world. The poorest consumers receive goods and services that are priced affordably and improve their lives. Therefore BoP businesses reduce poverty and simultaneously provide rich executives in the global North the incentive to pursue emerging markets. Simple. Win-win. Silver bullet. Panacea. Game over poverty. Goodbye commercials with starving children. Right? Well, not exactly.

Let’s take a step back and consider 5 reflections on BoP businesses…

#1 – Whose pyramid is it anyway?

The term “bottom (or base) of the pyramid” gets thrown around a lot in development circles, but what does it exactly mean? And is it even helpful in a developing country context? According to the original BoP authors (I’m talking Prahalad, Hart, London, Hammond for those who care), the BoP can mean anyone earning less than $2 a day, less than $1,500 annually (PPP), less than $3,000 (PPP), or merely any worker that does not have a formal job with a reliable salary.

According to these authors, the economic pyramid could look something like this:

The base of the pyramid is Tier 4 in the diagram above. According to this iteration of the BoP, there are currently 4 billion people in the world who earn less than $1,500 (PPP) annually.

The problem with this conception of the economic pyramid is in a country like Rwanda where I am now, 77% of the population doesn’t even make $500 annually, so you can forget the $1,500 cut off point that signifies the BoP. Therefore, any business in Rwanda is effectively a BoP business—from the giant telecom company, MTN, to a woman selling peanuts on the street corner. What this teaches us is that oftentimes terms like “BoP business” or “social entrepreneur” make a lot more sense in an American classroom or printed in the New York Times than they do on the ground in a country like Rwanda. Every business is serving the BoP, every entrepreneur views himself/herself as a social entrepreneur.

# 2 – How “private” is the private sector?

BoP businesses are billed as the private sector’s solution to poverty. Typically, poverty reduction strategies are financed by international aid, national governments, foundations, or individual donors. But the BoP literature makes a vastly different claim—business can solve social problems through “co-created” innovation. What I am finding in my case studies in the “off the grid” lighting industry here in Rwanda is every BoP business needs help in order to survive. The government offers tax incentives, the World Bank issues grants, foundations award cash prizes, NGOs and microfinance institutions help with financing, and the businesses use other parent companies to bankroll the BoP operations. Are these truly private sector businesses? Is this a case of socially minded investors providing “patient capital” and willing an industry into existence that can’t sustainably stand on its own two feet? This brings me to my next reflection…

# 3 – It is hard to make money at the BoP.

This point depends on the definition of the BoP, but assuming that a business wants to sell products to the base of Rwanda’s national economic pyramid, it is looking at an uphill battle. Every company I spoke to described major obstacles that had/have to be overcome in order to reach profitability. Those that are profitable rarely sell to the true base of the economic pyramid and instead go after the middle or upper class in a country like Rwanda, which may still qualify as the base of the international economic pyramid. Even the BoP darling, D Light, which has received millions in venture and philanthropic funding, has possibly fallen on hard times recently. Maybe the next addition of C.K. Prahalad’s book should be titled The Struggle for Profitability at the Base of the Pyramid.

My friend Francine shows off a light made by Nuru, a Rwandan BoP business.

# 4 – Consumption vs production at the BoP.

There are two ways to engage the BoP. One is to offer a product or service that is reasonably priced for the BoP market. This line of reasoning asserts that the poor are empowered through consumption. No matter what the product is—solar electricity, clean water, or cheap shampoo—the poor receive a sense of respect, recognition, or a boost in self-esteem when they purchase it. The other way to engage the BoP is to increase the production of the poor. Think of the woman at your church who sells jewelry from Haiti with the face of the Haitian child who made it attached to the bracelet. She is contributing to an increase in the production of the BoP by opening up new international markets through which producers can earn a higher income. I am a bit skeptical that increased consumption alone can lead to poverty reduction. It is possible that an exceptional entrepreneur selling goods to his/her local market can also empower the local market with skills, training and disposable income that can trickle down to other small business owners. However, an increase in productivity is a better long-term solution and likely includes capacity building and knowledge transfer.

# 5 – We want to help the poor as long as we don’t have to live with them.

[Note: None of the companies I spoke to in Rwanda fit this description, but I can personally feel this way sometimes when I take an honest look in the mirror.]

What is a more sustainable poverty reduction strategy: Creating a new company that sells goods to the base of the pyramid or empowering Rwandan businesses to hire and train more Rwandans? If we are only looking at the income side of poverty (please note that poverty is about much more than dollars and cents), I lean toward the second scenario. The problem with the second scenario, helping Rwandan businesses hire more Rwandans, is that it means actually moving to Rwanda. I think this is why BoP businesses are so popular with Western MBA and graduate students. We want it all—poverty reduction, profitability and at least six months a year on the beach with our family and friends. The problem is real poverty reduction, real development means making a long-term commitment to walk with the poor, understand a foreign culture, possibly learn another language (for an example of dear friends who are doing this well, check out Karisimbi Business Partners). I fear that BoP businesses emerge out of business plans that take our own comfort and limitations into consideration. Are BoP businesses about the young capitalists who want to make a difference? Or are they about those in need? I fear that many market-driven poverty reduction strategies implicitly or explicitly take into consideration the comfort of the Western experts who are writing the business plan, a mistake that severely undermines their effectiveness.

I hope these reflections caused you to pause and think about both the potential and the limitations of BoP businesses, an example of the “new form of capitalism” that I have been researching. I will be thinking and writing on these issues for the next three months and will keep you posted as new reflections arise.

Much love from Rwanda,

|Ryan|

Last night we had the “Open Forum” in Manchester, a roundtable discussion about current events with IDPM students and local Rotarians. This is a collection of outtakes from the commercial we made announcing the event. Enjoy!

|Ryan|

The Open Forum (click on the video above for a preview) is a roundtable discussion featuring six IDPM students with experience on five continents. The roundtable discussion will cover topics including: economic development, cross-cultural dialogue, politics and current events. I will be participating in the Open Forum alongside five colleagues hailing from China, South Africa, Jordan, Nigeria and The Netherlands. The goal is to not only have a meaningful discussion amongst colleagues studying at the IDPM, but invite local business leader in Manchester to engage with international students studying in their backyard. The event is sponsored by The Rotary Club of Manchester Breakfast and will take place on June 1st. If possible, I’ll try to get some video footage of the event for those of you back in the U.S. who won’t be able to attend. 

Wish me luck…hopefully I can make the USA proud.

|Ryan|

Young Egyptians talk about the revolution they started and how they plan to see it through to completion. In a very human moment, I realized they are right around my age. “They are just like me…they are just like me,” I kept whispering in disbelief as tears welled up in my eyes. They have dreams of completing their degrees, finding jobs, creating change in this world, but they are putting all of that on hold to fight for justice and democracy in Egypt. They are just like me…but more brave than I will ever be. 

The “Young Revolutionaries” come on at the 4:05 mark in the video below:

Chongqing, China. Heard of it? My guess is that you haven’t. I hadn’t until about two months ago when I met my friend Zhiqing (he goes by Harry), who has lived in Chongqing his whole life. Here are some mind-blowing statistics regarding Chongqing and China in general:

- Chonqing’s population is 32 MILLION and it is considered the fastest growing city on the planet.

- There is so much construction in the city, taxi drivers get lost because their GPS maps and software are immediately out of date when they buy them off the shelf. Harry told me he may get lost when he visits his family this week because he hasn’t been home in six months.

 -Currently in the UK, two cities have a population of more than 1 million. The US has 10. China has 43 and it is predicted by 2030 there will be 221.

- In 2009, the GDP of Chongqing grew by 14.9 percent, twice China’s national rate and 5.5 times the US’ current growth rate.

-Chongqing is upgrading in its manufacturing sector. It is mostly known for cars, but now does business with 3 of the top 6 laptop manufacturers in the world.

I’m hopping on a plane tomorrow for Beijing. It will be my first time visiting an Asian country and I look forward to passing along little anecdotes or bits of information about China while I’m there.

|Ryan|

PS – To read more about Chongqing, click here or here. Also, you can watch a brief video from CNN at the top of this post.

Today there was breaking news out of Bangladesh when Muhammad Yunus, founder of the Grameen Bank and 2006 Nobel Peace Prize winner, was forced to step down from his position as managing director. He has been accused by Bangladeshi Prime Minister Sheikh Hasina of “sucking blood from the poor in the name of poverty alleviation” and embezzling $100 million (the PM’s claims were politically motivated and he has been cleared of all wrong doing regarding the embezzlement charge). Back in October, The Wall Street Journal reported that the Indian state of Andhra Pradesh temporarily shut down the microfinance industry after it was discovered that high interest rates had triggered more than seventy suicides in the region. Scholars such as NYU professor Jonathan Morduch have argued “new studies find limited benefits for microfinance borrowers.” Is this the end of microfinance?

In one word: No. The industry is enormous and continuing to grow.  There have been multiple IPOs in recent years of microfinance institutions, the industry is attracting venture capital from some of the biggest names in Silicon Valley with loans totaling $70 billion to 91 million borrowers worldwide.  However, recent developments within academia and the microfinance industry have led me to pause and write five microfinance reflections:

Reflection #1: Americans Love Microfinance

Microfinance fits neatly into the American psyche. Think about it—the idea is to not to give money to the poor, but to loan it to them. This is classic “pull yourself up by your bootstraps,” “a hand-up not a hand-out,” free-market, entrepreneurial, American rugged individualism type thinking. One of my professors claimed 75% of the New York Times’ writing on international development centers on microfinance. I don’t think that was a peer-reviewed study, but an interesting estimate nonetheless.

Reflection #2: Microfinance Must Be Part of a Larger Development Framework

The biggest qualm I have with microfinance is that many view it as a silver bullet. This isn’t microfinance’s fault per se—it’s ours. We just like the idea so much (and it is an innovative idea) we decide to throw our support behind it without questioning whether it is part of a larger development framework. Microfinance works for entrepreneurs who have never had access to formal capital markets. Let’s not fool ourselves into thinking every person is an entrepreneur, it’s just not true. Microfinance’s effectiveness varies by region, industry and the type of entrepreneur that is being lent to. Let’s also not fool ourselves into thinking microfinance can reduce poverty alone. Many people need food, shelter, and education. Others require job skills so they can start a business. Microfinance will anecdotally, but not consistently, succeed as a one-time intervention.

Reflection #3: The Risk of Credit: Lessons from the Global Financial Crisis

2008-2009 reminded us that taking on risk is…well, risky. We all know someone who defaulted on a loan, couldn’t pay off a credit card or lost a job because of the global financial crisis. Let’s think long and hard before we encourage impoverished individuals to take out a loan. Their safety net is much weaker than ours is in the United States. For many, defaulting on a loan doesn’t mean losing a home, but their livelihood.

Reflection #4: Don’t Stop Supporting Microfinance, but…

I want to clearly state that if you invest in a microfinance institution directly or through a third party (e.g. Kiva, Opportunity International, Hope International), please continue to do so. Actually, go make another loan right now. I applaud the microfinance industry and its backers. BUT I do want you to think about the development ecosystem that surrounds the microfinance institution you support. We talk a lot about repayment rates and the number of borrowers in the world, but less about poverty reduction. This is because poverty reduction is more complex and context-specific (see Reflection #2)

Reflection #5: Hold Ideology Loosely

Be willing to invest in a development strategy that runs contrary to your ideology. Would you support aid to governments in South America that promote a social protection agenda (AKA “just giving money to the poor”)? Would you support aid to shore up a developing country’s slow, bureaucratic, state-run education system? I know that I tend to give in ways that I want to give, in ways that make sense to me. The problem is I’m not the recipient, I don’t know the culture, and normally, I don’t know best. I would recommend giving to organizations that have been rooted in a particular culture for a long time and understand the specific needs (like PIH or BRAC). It’s fine to have an ideology, or way you view the world, just don’t let your conservative/liberal, faith-based/non-faith-based, east/west paradigm lead you to believe that development is about you. It’s not. Donors are integral, but also limited in their knowledge and expertise.

Microfinance is officially here to stay. I hope these five reflections will help you think about it in a new way, or possibly for the first time.

|Ryan|