Profiting off the poor

Writing on, 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.