Aneel Karnani suggests that current thinking about reducing poverty is based on an unrealistic view of the poor and inadequate expectations about how governments can best address the problem.
A libertarian movement that emphasizes free markets to reduce poverty has grown strong in recent years. The think tank, World Resource Institute, advocates “development through enterprise” and emphasizes business models driven by a profit motive that engage the poor as producers and consumers. Business writers argue that selling to poor people at the “bottom of the pyramid” (BOP) can simultaneously be profitable and help eradicate poverty. The BOP proposition has caught the attention of senior executives and business academics, too. Many multinational companies have undertaken BOP initiatives; top CEOs have discussed this topic at recent sessions of the World Economic Forum; and several business schools have set up BOP centres.
This libertarian approach to reducing poverty assumes that the poor are fully capable and willing participants in the free market economy. We are urged to recognize the poor as resourceful entrepreneurs and pragmatic consumers, who use small loans to grow thriving businesses and provide for their families, and thus contribute to strong local economies. However, we are not provided any empirical support for these assumptions about the behaviour of the poor as consumers and entrepreneurs.
I believe that these views of the poor are empirically false. This romanticized view of the poor does not help them, but actually harms them. 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 underemphasis on fostering modern enterprises that would provide employment opportunities for the poor. More importantly, the BOP proposition grossly underemphasizes the critical role and responsibility of the state for poverty reduction
This is not to advocate a return to the kind of statist policies that stifled economic growth for decades in countries such as India and China. Contemporary economic history clearly demonstrates that the free market system is the best way to achieve overall growth and development. But that does not mean that there is no role for the state; it needs to impose some limits on free markets to prevent exploitation of the poor. Another vital role is to provide basic services such as infrastructure, public health and education. Both of these state responsibilities are even more critical in the context of poverty reduction.
The BOP proposition views the poor primarily as consumers, as untapped purchasing power. In this view, providing increased consumption choices to the poor person will increase his welfare, assuming he is a rational consumer. It is almost an item of faith among development economists that the poor act rationally. Civil society organizations have often argued that targeting the poor as a market might cause them to wastefully spend part of their already meagre income on low-priority products and services. The BOP proposition argues that the poor have the right to determine how they spend their limited income and are, in fact, value-conscious consumers – that the poor themselves are the best judge of how to maximize their utility. Only the expenditure patterns of the poor, and not their utility preferences, can be directly observed.
The BOP proposition assumes, on ideological grounds and without empirical evidence, that the poor must be maximizing their utility preferences and that these preferences are congruent with their true self-interest. This is free market ideology taken to a dangerous extreme, and such thinking harms the poor.