Misfortune at Bottom of Pyramid

Management guru CK Prahlad is famous for his book “The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits.” This shows that the poor, often neglected by corporations as having no purchasing power, can be converted into the fastest-growing market in the world through innovations that improve affordability and tailor products to the needs of poor.

Leftists accuse Prahlad of wanting to let corporations loot those at the bottom of the pyramid. Prahlad protests that cost-cutting innovations don’t just create profits, they provide the poor with affordable, quality products and connectivity to the world. He rejects the notion that only governments and NGOs can reduce poverty. The private sector can play a major role, by providing goods cheaply and harnessing the entrepreneurial talent of the poor.

I attended a recent lecture by Prahlad on “Democratising Commerce.” He identified five ways to improve affordability. First, easy payments in installments (which have revolutionised rural sales of TVs, cellphones, two-wheelers and houses). Second, dramatic cost-cutting (some goods and services in India cost just 2-10 % of the US cost). Third, goods in small rather than large packings (eg. shampoo in sachets instead of bottles). Fourth, pay-by-use (paying Rs 20 for internet use at an e-café instead of buying a computer). Fifth, direct distribution, cutting out intermediaries (eg. ITC buying directly from farmers at e-choupals, and selling to them directly through Choupal Sagar shops).

Supplying goods and services at 2-10% of the US prices may sound impossible. In fact it is happening already. Drugs for combating AIDS cost barely $ 200/year in India, against $ 15,000/year in the US. An artificial foot in the US costs $ 12,000, whereas Jaipur Foot, a world-famous Indian invention, costs just $ 10. A heart operation at Escorts Hospital or Narayan Hrudayala costs 5-10% of the US rate. A cataract eye operation at Aravind Eye Hospital costs less than 2% of the US rate.

Private educational and health services are expanding fast and filling the gap created by third-rate government facilities. In some places a majority of the poor send their children to private schools. Private providers supply over 80% of health services in India, the highest ratio in the world.

Amul’s model harnesses marginal farmers to supply milk more profitably than giant dairy corporations. Cellphones enable Kerala fishermen to auction their catch at sea and get the best prices. Soyabean farmers visit ITC’s e-choupals to look up Chicago market prices, since Chicago is the global hub for soyabeans.

Microfinance now reaches millions of poor women. Microfinance views the poor not as objects of charity but as budding capitalists lacking capital. The bank-SHG linkage promoted by NABARD now provides bank loans to a million SHGs. Some of these loans have been securitized and sold on debt markets, using the most sophisticated and profitable markets to serve the poor. Federations of SHGs in Andhra Pradesh have become grain traders, procuring over one million tones of maize.

I myself have written glowingly on many of these topics. But I am less gung-ho than Prahlad. Yes, corporations have indeed played a role in reducing poverty, but how big is the impact? The latest provisional poverty data for 2004-05 suggest that poverty reduction since 1993 has been just 0.7 percentage points per year, as against one percentage point per year in earlier times. So, at the very time when e-choupals, MFIs and cellphones have proliferated, the rate of poverty reduction appears to have declined.

The total number of people below the poverty line is 300 million, not much lower than India’s entire population at independence. This is best described as misfortune at the bottom of the pyramid.

It would be wrong to think that private initiatives are useless. Rather, they are insufficient to offset the massive impact of stagnating agricultural output in a country where 60% of the workforce is still in agriculture. I would also say that some of the examples given by Prahlad as bottom-of-pyramid strategies are rather misleading.

Japipur Foot is a great innovation, and by serving 16,000 people per year it is the world’s greatest provider of artificial legs. Yet that number is negligible compared with 300 million poor people. Besides, what percentage of Jaipur Foot beneficiaries are poor? The poor constitute less than 30% of India’s population. They are the least informed, and have the least money to travel to Jaipur. I would be surprised if they account for over 10% of beneficiaries.

Aravind Eye Hospital and Narayan Hrudalaya have made sterling efforts to reach the poor, yet their reach is limited to a few lakhs at most. By Indian standards these are boutiques, too small to tackle poverty wholesale.

Yes, AIDS drugs are cheap in India. But how many poor people can afford drugs at $ 200 (Rs 9,000) a year)? And how many blood testing clinics exist in poor tribal and hill areas to even identify those with AIDS?

Escorts Heart Hospital is a very bad example given by Prahlad. Yes, it is cheap by global standards. But it is used overwhelmingly by those at the top of the Indian pyramid. I myself had an angioplasty there, and I am not poor.

I am glad that farmers now use e-choupals to look up Chicago prices. But I am pretty sure that these farmers are at the top of the rural pyramid, not the bottom.

ITC found that state electricity and telecom services were so lousy and unreliable that e-choupals could not use them. Instead, it opted for solar power and VSAT, which hugely raised costs. To me, this drives home the point that the private sector cannot achieve much unless the government does it bit for the poor. Free power and subsidized fertilizer used mainly by the biggest farmers will not relieve poverty. We need world class roads, telecom and electricity in every village to democratize commerce. That will typically require public private partnership, harnessing government finance with private provision. That will then improve the ability of the private sector to contribute to poverty reduction.