Forty percent of the world's population lives on less than $2 per day, according to the World Bank. Yet even in the midst of the current economic meltdown, there is reason for new optimism in the fight to reduce global poverty.
The optimism starts with the evolution of microfinance, which has proved not only that the poor are credit-worthy, but that banking institutions serving the poor are investment-worthy. In addition, microfinance is tapping into a technological revolution that enables areas with deficient land phone service to leapfrog ahead to cellphones and broadband. And, as this takes place, both philanthropy and capital markets are paying careful attention.
The significance of microfinance, beyond the lives it touches directly, is that it has taught us what is necessary to vanquish poverty. Any strategic model that seeks to actually roll back global poverty must have four fundamental attributes. First, it must reach massive scale. If we are unable to reach billions of people, we'll be fighting a fire with eye drops. Second, it must achieve permanence. Poverty will not be defeated in just one generation, so we have to make sure that what we do will reach today's poor, their children and their grandchildren. Third, the model must become progressively better, gaining continuous efficacy. Fourth, it must become progressively cheaper, achieving continuous efficiency.
The only way to achieve all four of these attributes simultaneously and consistently is through the one vehicle rarely associated with the war against poverty: private enterprise. Companies are born, they prosper, they get tired, they become lazy and they die. What's required is the creation of industries, where open competition brings forth scale, permanence, continuous efficacy and efficiency. And there's only one way to create an industry: by developing economic activity and superior financial returns.
In concept, that sounds simple enough. But with depressed global markets and diminished domestic markets, how can new industries be created? What sectors can support them?
The answer lies with what Luis Alberto Moreno, president of the Inter-American Development Bank, calls "opportunities for the majority." Business executives around the world have learned to serve very well the upper-income markets, the A, B, and C+ segments that usually account for 15% to 20% of a developing nation's population. At the other end is the E segment, the 10% of the population that earns much less than $200 a month and which is dismally served. Between these two are the C and D segments, 70% to 75% of the population, the bulk of the base of the pyramid, which is served badly to very badly. And therein lies the opportunity.
The IDB, the World Bank and the World Resource Institute jointly analyzed it in an extensive study called "The Next Four Billion." They estimate that these 4 billion people, "two-thirds of humanity," represent a market that spends $1.2 trillion a year, or more than $5 trillion adjusted for purchase price parity.
What this market can sustain becomes clear when we consider some examples. In Mexico, as in almost all of Latin America, the law guarantees every citizen access to health care and medicines, irrespective of their ability to pay. If a doctor at a public health clinic prescribes drugs, a poor woman can get them for free at the public clinic pharmacy. But when she gets there, studies show that the pharmacy is out of stock 82% of the time. In other words, the poor end up buying their medicines from the same drugstores as everybody else.
In 1997, an entrepreneur started a pharmacy chain, called Farmacias Similares, which targets the base of the pyramid and has two pillars: First, the medicines on its shelves must be at least 30% cheaper than at traditional pharmacies (sometimes they are 75% cheaper); second, almost all of its pharmacies have a clinic attached where you can see a doctor for 25 pesos, or less than $2, and access rarely takes more than 15 minutes (rather than the typical six hours in the public health system). Today, the chain has 3,916 outlets and annual sales of $800 million (U.S.). Each month, 12 million Mexicans buy their medicines at Farmacias Similares, and each month, 3.5 million Mexicans access health care through the clinics next door.
If, on average, the drugs at Farmacias Similares are around 35% cheaper than at conventional pharmacies, one can conclude that this chain with $800 million in sales is transferring to the pockets at the base of the pyramid approximately $450 million every year. To that we have to add that access to the doctor for 3.5 million Mexicans a month dropped to 15 minutes, a significant benefit for those who are poorest and self-employed, for whom lost time is always money. Taking this into account, one can easily add another $450 million of value for the base of the pyramid. Therefore, the existence of Farmacias Similares has meant a benefit of $900 million a year to the low-income sectors of Mexico.
Another example is Compartamos Banco, the largest microfinance bank in Latin America. Established in 2000, with an initial investment of $6 million, it only serves the base of the pyramid. With 1.1 million clients, its average loan size is still under $500. In April 2007, in an initial public offering, it sold 30% of its shares through the Mexican stock exchange. The capital markets valued the enterprise at $1.53 billion.
Successful industries create scale. If those industries serve the markets of the majority, and those markets receive better services less expensively, then wealth is transferred to those markets.
That's a model that can be sustained; a model that can truly take the fight against global poverty to scale and provide real hope of winning the war.
Michael Chu is senior lecturer at Harvard Business School and former CEO of ACCION International, the nonprofit global microfinance organization.
Source: Forbes at http://www.forbes.com/2009/04/22/poverty-microfinance-world-bank-opinions-contributors-latin-america.html
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