Profiting off the poor

Writing on Change.org, Josh Berkman finds it unacceptable that ‘social entrepreneurs’ are making a profit off of an extremely poor consumer base:

In many cases, it’s fine to profit from good ideas that can help people, but I’d say there’s something wrong when your target consumer is living on less than two dollars a day and is spending well over half her income to feed her family. It’s not cool to set up shop in a slum or a village without running water in the homes and charge the very poorest residents for products and services they need. The driving ethos behind these so-called new do-gooders appears to be that nothing is free, even if your target consumer makes less in a year than what you paid for your laptop.

Berkman goes on to to suggest an alternative approach: helping local communities and businesses create beneficial projects which tackle the same problems. I disagree with Berkman’s assessment of social entrepreneurs, for several reasons:

The first is a reality check – while social entrepreneurs obviously have an altruistic objective, the sine qua non of their work is profit. However morally objectionable you might  find the idea of poor people purchasing goods and services, without the expected profit, many of those goods and services would no longer be available. Entrepreneurs aren’t sitting on huge piles of cash, just looking for ways to spend it: they have investors who will only commit when they smell a future return (even if they might accept a lower-than-average return for socially-beneficial enterprises). I’m friends with a social entrepreneur who runs a low-cost private school franchise in urban Kenya, where many extremely poor households send their children, glad to pay a low price to ensure a better education. Sans profit, his schools wouldn’t exist, and those families would have to make do with Kenya’s lacklustre public schools.

I sense that Berkman wishes that social entrepreneurship would look a little more like traditional aid and be driven solely by need and pure altruism. Unfortunately, most of aid never reaches those lofty expectations, and even if it did, the above argument still stands: this chunk of money follows profits, not need.

The neccessary synthesis is that profit and need are not mutually exclusive and may be more closely aligned than aid and need. The aid-giver’s dilemma is huge: identifying and meeting true need through a haze of mixed signals, political problems and changing priorities, then attempting to identify the impact of that aid by leaping back over the same hurdles.

The entrepreneur’s problem is much simpler: design and offer a product. If it is valuable to the poor then there will be demand and hopefully profits will ensue. If not, the product fails. Either way, all the risk (and the cash!) is borne by the entrepreneur, which creates enormous incentives to get things right.

One of the most persistent and important criticisms of the aid industry is that the beneficiaries are voiceless – there is no way for the poor to vote on moving money from one project (or donor!) to another. Donors and charities are often ignorant of this, because no one really complains about getting free stuff, whether or not it is the most appropriate assistance. In contrast, the poor vote for goods and services every day with cash from their meager budgets. This is an extremely strong case of revealed preferences: we don’t need to ponder whether or not wildly successful ventures like mobile phones or M-PESA are useful to the poor – their enthusiastic uptake says it all.

Some of Berkman’s concerns are well-founded – the private system is not comprehensive – especially for those most concerned with social protection:

What good is nutritionally enhanced food if the people who need it most can’t afford it when global commodities prices spike or a bad weather year in a far away country creates perilously low crop yields?

But this is where government and/or aid should certainly play a role. It’s perfectly possible for one to complement the other, such as through subsidies , public-private partnerships, and regulation. Social enterprises are never going to be great at providing certain public goods or dealing with externalities, but in the absense of functioning public alternatives there isn’t much room for criticism.

Entrepreneurship is not the ultimate solution to all our woes, but it plays an intriguing and perhaps crucial role in the big picture. I find it much more disconcerting knowing there are people out there wasting millions of dollars of aid money on bad projects than knowing that a few people make an honest buck on products that the poor value.

3 thoughts on “Profiting off the poor

  1. Josh Berkman

    July 12, 2010 at 6:06pm

    I’m not arguing for the status quo as there are many problems with aid as it is deployed today. You are right; it falls well short of what’s needed. But AJWS has seen that when poor communities are equipped with the right tools, training, access to fair credit and financial resources so they can bring their programs to scale, they have the ability to develop their own enterprises that can create work and revenue and ultimately improve the quality of life for their communities in ways that are not exploitive.

    Western governments, by and large, have not focused on funding development projects in the Global South that empower the BoP and they have not championed local procurement, which could go a long way toward creating a foundation for long-term, sustainable development.

    Instead they have purchased massive amounts of food and other goods from large corporations and shipped these goods, on the taxpayer’s dime, to the developing world as in-kind aid. The effect of this sort of dumping, as well as trade policies that have allowed powerful corporations unlimited access to indigenous markets, has been to destroy peasant-owned businesses and create dependence on imported goods.

    Instead of sending food, perhaps large donors could provide cash vouchers so the poor could purchase some of these necessities–LED bulbs, drip irrigation etc–that they are now having to purchase with their meager incomes. There could also be incentives for “social entrepreneurs” to source locally.

    This would be a departure from traditional aid in that the focus is on empowering the poor by providing certain tools rather than dumping food and putting peasants out of business. I would simply like to see more of a focus on empowering the BoP so they can generate revenue and work and eventually become consumers on their own terms.

  2. Ranil Dissanayake

    July 13, 2010 at 7:30am

    Hi Josh.

    I think you’re mixing up a few things. Looking at the points you make:

    1) Yes, when given lots of support, poor communities can produce their own services and enterprises. This is something donors should do. It has nothing to do with social entrepreneurship. Until such a time when donors are providing the support that would lead to this, social entrepreneurs are filling a gap that provides local people with a service they need. The last sentence ‘in ways that are not exploitative’ implies that perhaps you think that not giving poor people stuff for free is exploitative. If this is the case, how far would this go? Would you import this practice to developed countries that have poor people? Purchasing a good is actually an empowering act. You are using your resources to make a decision, and how you do this will affect the products, the services and the businesses that will be available to you. Unless you are being compelled to purchase the good by the stifling of alternative, cheaper or better approaches, there is no exploitation in the relationship.

    2) Local procurement is a great thing, where the goods are available there. Again, this is a question of donor practices that has nothing to do with social entrepreneurship. A business, be it a local one or a multinational one will procure goods from where it makes most economic sense (many African businesses make most of their material procurements abroad, in particular from China and India, for cost/quality reasons). Donors, not being profit seekers are one of the few entities that can ignore this, and should procure locally to stimulate local business.

    3) Purchasing in-kind aid is again not to do with social entrepreneurship. In-kind aid is almost always sourced from (as you say) large donor country-based businesses that have no connection with the developing country they’re working in. Most social entrepreneurs set up their businesses in the country they’re aiming to support.

    4) Ditto trade policies, this is something for donor Governments to change.

    5) vouchers again, are a good idea, but where they spend them will depend on the extent of the market and the businesses that exist at home. Social entrepreneurs provide one segment of this market, which without them would be more under-developed than it already is. This relates again to point 1.

    Basically, I agree with the majority of what you say. But very little of it has to do with the role and effects of social entrepreneurship.

  3. Josh Berkman

    July 13, 2010 at 4:48pm

    Ranil,

    Just a point of clarification, on #3. I’m referring to the point made that I was arguing for more of the same type of international aid. I think the key to sustainable economic development is for large donors to rethink their aid programs and provide the type of support needed to really break the cycle of poverty.

    I also do think it’s a problem that social entrepreneurs will only source locally when it makes the most sense from a profit standpoint. I realize that the reason for going into business is to turn a profit. But when we’re talking about selling into these communities, perhaps maximizing profit should take a backseat to doing the right thing with regards to helping peasants generate revenue streams of their own.

    If that were the case, I’d have an easier time with this. That being said, this is a great discussion and a great blog.

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