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March 29, 2007

The World's Poor: Huge Market or Just a Marketer’s Fantasy?
    by Anne Moore Odell

New report from the International Finance Corporation and World Resources Institute measures the market-size of the Earth's people who live in poverty. -- That people live in poverty the world over is not a question. However, questions abound about the Earth’s poor. How, for example, can poverty be measured? What can be done to help people live healthier, fuller lives? How can businesses approach this population?

SRI Mutual Funds GuideA new report from the International Finance Corporation (IFC) and World Resources Institute (WRI) entitled "The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid," attempts to answer some of these questions by measuring the size of markets at the bottom of the economic pyramid. The report states that four billion people are living in "relative poverty" with the projected buying power of $5 trillion.

To analyze the size and scope of "Base of the Pyramid" (BOP) markets, WRI worked with the International Finance Corporation and Inter-American Development Bank to access national household survey data, using income data from 110 country surveys and standardized expenditure data from a subset of 36 countries. The report also includes analysis and case studies of businesses that have succeeded in the BOP markets. This is the first report to attempt to gauge the size of BOP markets.

One of the goals of generating the data found in the report is to help businesses create practices that stop or at least cut back on the "BOP penalty." The "BOP penalty" is when the poor actually have higher priced goods of lower quality relative to more affluent populations, or can’t even gain access to goods and services.

"Low-income communities are often served by monopolies - for food, water, transport, finance, and other basic goods and services," said Robert Katz, Research Analyst of the Sustainable Enterprise Program, World Resources Institute. "Absent competition from the private sector, these local, unregulated monopolies charge higher prices. For example, low-income communities often don't have public water service, leaving BOP consumers to purchase from private water vendors. These vendors charge anywhere from eight to sixteen times as much as the utility."

One example cited in the report of a company that has succeeded in the BOP markets is Mi Farmacita, a pharmacy franchise based in Tijuana, Mexico. Started in 2003, Mi Farmacita’s 47 franchises are placed in neighborhoods, eliminating travel costs to distant cities. People can receive inexpensive on-site doctor consultations and local pharmaceutical manufacturers allow franchises to sell low-cost generic medication. Stores have diversified their product and service offerings, including telephone and Internet usage, widening income-generating opportunities.

Breaking down the analysis by geographic region, the report asserts the Asian (including the Middle East) BOP market is the largest with 2.86 billion people and an estimated purchasing power of $3.47 trillion. The African BOP market includes 486 million people and has a purchasing power of $429 billion. Three hundred sixty million people are counted in the Latin American BOP market with a $509 billion purchasing power. The Eastern European BOP market includes 254 million people with a purchasing power of $458 billion.

The data show that the BOP is not monolithic. Some countries, such as Nigeria, have a very "bottom heavy" BOP, meaning that most of the population and income is centered in the lowest income segments. Others, including Ukraine, are equally interesting as a potential BOP market, but exhibit "top heavy" tendencies, most of the population and income is centered in the top three segments.

"Furthermore, the data show significant latent demand - untapped potential - in sectors such as IT and transport," Katz stated. "As incomes increase, the poor demand more and more IT and transport services. If a company could provide these services at lower cost or with better access to the BOP, they would find a lot of under-served demand - and untapped profits."

However, some experts disagree with the report’s numbers and the conclusions drawn from them. Aneel Karnani of the Strategy Group, Ross School of Business at The University of Michigan takes issue with the new report. Karnani told "Some earlier BOP articles used the $1500 PPP [purchasing power parity] standard. The Next 4 Billion uses $3000 PPP. This will, of course, lead to a larger market size. But, the report does not justify the $3000 cutoff level, which is much higher than any commonly used poverty line."

Do making profits and helping the poor go hand in hand? When billions of people living in poverty become full-fledged consumers, what is the environmental and societal impact? Both supporters and critics of the BOP proposal agree that the world’s poor need more and better services, opportunities and products. They need employment, education, health care and basic necessities like clean water and food.

"The best way to raise people out of poverty is to provide them employment opportunities at reasonable wages," Karnani said. "Private companies can help to create job opportunities for low-skill employees. They can also try to improve the productivity of the poor by investing in training, appropriate technology and capital, and achieving scale economies."

"The public sector too can help to increase the employability and productivity of the poor by providing basic services such as education, public health, and infrastructure. To some extent the private sector too can play a role in providing these services," Karnani added.

"The base of the pyramid is critical to sustainability. It is not enough for companies operating in emerging markets to ‘go green’ if they fail to create jobs and local wealth," Katz told "We cannot protect the environment without alleviating poverty, and vice versa. At the same time, companies that fail to address the BOP are missing an opportunity to generate shareholder value. Socially responsible investors should understand the BOP theory as both an opportunity and an obligation."

The non-profit, non-partisan WRI creates and promotes policies to help the environment and improve people’s lives. The IFC is the private sector arm of the World Bank Group. Its mission is to promote sustainable private sector investment in developing countries, helping to reduce poverty and improve people's lives.

© SRI World Group, Inc. All Rights Reserved.

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