Tuesday, October 6, 2009

Can the private sector reduce poverty?

- Ujjwal Gaur (M.A. Economics, I Year)

The incidence of poverty in India is no hidden fact, and the huge amount of inequality does concern all of us. Philanthropy, charity and government doles are not a long term sustainable solution to this problem. Below Poverty Line (BPL) people have long been viewed by the policy makers as a burden on the state, and hence are always considered as a liability. One possible approach to reduce this problem is to treat the BPL people as assets. This can be done if the market views this huge population of 456 million (World Bank Report, 2005) as a potential consumer base.

C.K. Prahalad identifies this consumer base in his book ‘Fortune at the Bottom of the Pyramid’ and uses the term ‘Bottom of the Pyramid’ to refer to this consumer base. This portion in the pyramid has the largest population base with the lowest purchasing power in the economy. When market recognizes the vast potential that lies in Bottom of the Pyramid (BOP) consumers, it would extend its services to them, which would make both consumers as well as the firms better off. But in order to have faith in this approach, we must not consider the market as an essentially exploitative institution. The whole point of this approach is to make the BOP market an integral part of the private sector, and not an extension of the existing Corporate Social Responsibility (CSR).

If we think of poverty as defined by Amartya Sen in his ‘capabilities’ approach, then we can acknowledge that being income poor is not the sole problem in being poor. One’s social status and self-esteem are also important capabilities. Poverty-

alleviation through market provides the poor consumers recognition, respect, fair treatment and the freedom of choice. This enhancement of their capabilities does help in reducing poverty to some extent, if we believe in the above definition of poverty.

Though the purchasing power of the BOP consumers is very less, but the size of this market should be alluring for the market to seek opportunities. In the past, market innovations in this regard have worked quite well. The best example could be the ‘shampoo sachets’ which were launched keeping in view the limited purchasing power of BOP consumers. As a result, now the penetration of ‘shampoo’ across India is 90%. So, it is evident that the firms are willing to innovate various products for the BOP consumers if they find adequate incentives.

BOP consumers would also have adequate incentive to participate in the market as consumers because they generally have to pay 5 to 25 times more than ‘mainstream’ consumers for the same services. Also, BOP consumers benefit the most if some new products are launched in the market which suits their needs.

Though this theory is based entirely on the empirical work of C.K. Prahalad, we must note that by this approach, only one aspect of poverty is being taken care of. Apart from the non-holistic nature of this approach, there is not much that policy makers can do to ensure participation by the firms and BOP consumers. Also, we must not forget that there might be some sectors where the private sector would not like to enter at all.

No comments: