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FINANCE: Never Too Poor to Spend?

Emad Mekay

WASHINGTON, Mar 20 2007 (IPS) - The World Bank is encouraging foreign investors and businesspeople to start pursuing the world’s four billion poor people as a potentially lucrative market worth five trillion dollars, much bigger than previously thought.

“Total annual household income of five trillion dollars a year establishes the BOP (Base of the Pyramid) as a potentially important global market,” the Bank says in a new report, jointly authored by the Washington-based World Resources Institute (WRI).

The International Finance Corporation (IFC), the private sector arm of the World Bank Group, says the report provides accurate data on market potential that paves the way for “private sector engagement”.

“The fundamental message of this to the business community is ‘hey guys there’s a five trillion market here, are you interested?” Allen Hammond, WRI’s vice president for innovation, told IPS.

“The second message is to the development community and it is ‘gee which makes more sense – to clamour for more aid or to try to frame the whole poverty alleviation in terms of access to opportunity and attract private sector investment’?”

This is the first time that the World Bank has measured the size of markets at “the base of the economic pyramid (BOP)”. The authors say they reached their findings by using income and expenditure data from household surveys in 110 countries.

The Bank report follows in the footsteps of another Washington-based public lender, the Inter-American Development Bank, which lends only to Latin America and the Caribbean, in eyeing the often neglected market.

The IDB announced its push into the disadvantaged people’s market in Latin America last year.

The study also claims that the so-called traditional poverty reduction methods championed by the World Bank itself, and that depend on aid and concessional loans, may not be as effective as “market-based approaches”.

This is mainly because the private sector is more efficient than governments in delivering essential services to a large population, according to the report.

Bank officials used the study to once again market their long-time advice of deregulation, opening up for foreign businesses, economic liberalisation and free trade.

“The report also highlights the need for governments to pick up the pace of reforms to the operating and regulatory environment, so that it becomes easier to do business,” said Michael Klein, a World Bank and IFC vice president.

The study, “The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid”, estimates that these impoverished consumers make up a 20-billion-dollar market in the water sector, 158 million dollars in health care, 332 billion in housing, 433 billion in energy and a hefty 2.9 trillion dollars in food market potential.

“There is now enough information about these markets, and enough experience with viable business strategies, to justify far closer business attention to the opportunities they represent,” says the report, which the WRI says received support from Intel, Microsoft, the Shell Foundation and Visa.

The study defines poor people as those with incomes below 3,000 dollars a year in local purchasing power.

Individually, they are not an attractive market. For example, poor people’s incomes average less than 3.35 dollars a day in Brazil, 2.11 in China, 1.89 in Ghana, and 1.56 in India.

“Yet together they have substantial purchasing power,” the study declares.

“Most people in the BOP have no bank account and no access to modern financial services. Most do not own a phone. Many live in informal settlements, with no formal title to their dwelling. And many lack access to water and sanitation services, electricity, and basic health care,” it says.

The Bank says that poverty hotbeds in Asia, including the Middle East, represent the largest such potential market, followed by Eastern Europe, Latin America and Africa.

The report estimates that the Asian market, with 2.86 billion people, represents a potential of 3.47 trillion dollars, while Eastern Europe’s 254 million poor would offer 458 billion dollars, Latin America’s 360 million poor people some 509 and finally Africa, with 486 million poor people, represents a market of 429 billion dollars.

The World Bank has long been accused by watchdog groups of using its influence to implement “development” policies that favour international corporations and businessmen. This report is one of the first clear examples of the Bank unabashedly promoting such ideas.

Critics say that privatisation of basic services such as health and water have in fact burdened the poor, and argue that rich corporations are the last place lower-income people should look to find an escape from their misery.

“The type of investments the IFC is promoting is the market seeking investments, which has been proved to be the worst type of investments for the poor. This tends to be a parasite investment where it comes to transfer income from the population in the country to the company instead of enabling the transfer of knowledge, experience and skills to the country,” Aldo Caliari of the Centre of Concern in Washington told IPS.

Furthermore, many poor have few or no resources or rights as consumers, making them easy prey for unscrupulous businesspeople.

“This is about the companies entering those countries having more business. It’s troubling to see that a pubic institution is thinking of how to create profits for companies,” he said.

Yet World Bank officials argue that poverty alleviation is an almost inevitable side benefit of the free-market process.

“This approach can help frame the debate on poverty reduction more in terms of enabling opportunity and less in terms of aid,” says the report.

“A successful market-based approach would bring significant new private sector resources into play, allowing development assistance to be more targeted to the segments and sectors for which no viable market solutions can presently be found.”