How the private sector can contribute to poverty reduction

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When MohammedYunus was still a teacher at the Chittagong University, he deplored the narrow vision of his peers and himself: “We professors are all so bright, but we don’t know anything of the poverty around us”. The banks gave only loans to the rich– because they had collateral to offer – and not to the poor. When he started lending a few dollars to some women, he discovered that they were very entrepreneurial and paid back their loans in time. And so he made them bankable and laid the foundations of the ’micro-finance revolution’. This story is known to the entire world now and has been well-documented; after due passage of time, it was rewarded with the Nobel Peace Prize in 2006.

What has worked in micro-finance could work in many more areas of non-financial services. Making markets work for the poor (MMW4P) is a promising approach to involving the private sector in development tasks, to creating wealth for the poor and to making many development tasks more sustainable and aid more effective.

William Easterly talks of two tragedies: the first tragedy consists of the sad truth that 12-cent malaria medicines do not reach poor children in Africa, and many have to die. The second tragedy is that those 12-cent medicines do not reach them despite the West having spent 2.3 trillion dollars in aid in the last 50 years. While he deplores this failure of the aid delivery system, he asks himself the provocative question of why it is – on the other hand – possible that nine million copiesof the latest Harry Potter book can be delivered to middle-class children in the US and Europe in one single day.

There are no simple answers to this question, but there is an urgent need to make aid delivery systems more effective and to learn from what private initiative can achieve. This may require a paradigm change in the way development agencies function: instead of top-down planning methods that produce many promises and few deliveries, development agencies should focus on what works. Easterly argues that ‘searchers’may be more successful than ‘planners’ and more pragmatic, bottom-up action-research activities may be needed to carefully find out which methods work before scaling-up can be envisaged. Professional market research methods should be used to understand poor people as customers, and to determine what they really need and can afford to pay, and to answer many more relevantquestions.

Market approaches to development require totally different – out-of-the box – business models in order to reach the poor. Seven case studies give deep insights into some of the most relevant development issues and to market-based solutions which are already effective or show great promise. A chapter is devoted to each study in this publication.

Supply chain studies

“Sustainable approaches to combat malnutrition – Small-scale production and marketing of Spirulina” is an attempt to find economically viable solutions to fight the‘silent massacre’ of micro-nutrient deficiencies affecting many hundred millions of children and causing brain damages, stunting and mental retardation.

“One fly is deadlier than 100 tigers – total sanitation as a business and community action in Bangladesh and elsewhere” describes the smart and bold approach that allows Bangladesh to achieve total sanitation by the year 2010. The approach is a combination of social pressure to ban open defecation and a thriving private sector of over 10,000 private latrine producers.

“Marketingsafe water – why it is so hard to get safe water to the poor and so profitable to sell it to the rich” analyses the marketing challenges of making cheap point-of-use water treatment systems such as SODIS, water filters and chlorination available to poor people, learning from the fastest growing markets of bottled water.

“Should bed nets be sold or given free – the role of the private sector in malaria control” describes the NATNETs story of insecticide-treated bed nets and the building up of a private sector supply chain of 6,500 retailers to make themavailable in every remote village in Tanzania. To make the bed nets affordable,a voucher scheme was implemented so that every pregnant woman can acquire a cheap net for less than a dollar, but buy the net from the local retailer. This social marketing approach is now being complemented with catch-up programmes of free distribution to reach a high coverage fast.

Value chain studies

“Ending poverty with water control and market access – linking small farmers to value chains and markets of the future” describes the 3-pillar approach of affordable water control technologies, private supply chain development to deliver these essential inputs to farmers, and linking them to high-value markets.

“Wherefarmer and fashion designer know each other – Globalisation with a human face in an organic cotton value chain” tells the story of the pioneering, and still largest, organic cotton textile programme ‘Naturaline’ of the Swiss retailchain COOP and similar initiatives by Helvetas where cotton farmers can participate in a better deal.

Transforming traditional industries

“The Herculean task of cleaning up the Asian brick industry” narrates the saga of the– most energy efficient – Vertical Shaft Brick Kiln and its dissemination from China to India, Nepal, Vietnam and other countries.

Traditional economic sectors like brick-making provide seasonal jobs to millions of poor migrant workers. Traditional brick kilns are using a low-investment-least-cost technology and are highly polluting while the working conditions are often appalling.

This book is a synthesis of market approaches to development that work and provides the lessons learned from the seven case studies. These findings can be summarised in a nutshell as follows:

Supply chains

There are quite robust theoretical conclusions available with respect to making supply chains work. Intensive marketing and social marketing efforts based on the 4 Ps of marketing and based on sound market research are needed to create markets for the products and services that are public goods such as combating malnutrition, improved sanitation, access to safe water and reducing child mortality from diarrhoeal diseases and malaria. Basically, the secret consists of simply making the supply chains profitable: as soon as it pays for retailers, wholesalers and manufacturers to produce, to stock and to sell those goods and services, thriving markets can emerge and can do wonders.The most critical issues are a) awareness creation and b) solving the affordability issues. Poor people cannot pay larger sums up-front and sometimes it is an insurmountable hurdle for a family earning less than one dollar a day tospend 1, 5 or 10 dollars in one go. Innovative financing mechanisms such as instalment buying, rental or leasing could be the ‘oil’ to make those markets work.

Value chains

More and more agricultural goods are being sold in industrially-processed form or by supermarkets even in developing countries. These marketing channels require that small farmers get organised and are linked to value chains driven by private sector companies: small farmers are less at risks from exploitation than from marginalisation and it is thus more important to have a contractual relation– of course a fair deal – with organised value chains. The value added in today’s world is more and more created by branded products of large private companies and those are – contrary to the common belief –often (although not always) interested in decent and reliable relationships with their suppliers. They are more interested in quality performance, reliable delivery schedules than on the lowest prices; more and more products need to be traceable and certified whether they are produced under sustainable social, economic and environmental conditions. It is a challenge but also an outstanding opportunity for small farmers to participate in such value chains, provided they get the necessary support with inputs, technical assistance and it will only work if they are well organised. Most small farmers are faced with high transaction costs due to low and irregular volumes and thus not able to market their products best.

Sound contractual relations between small farmers provide also new opportunities to create a globalisation with a human face: if the fashion designers and the sales staff and the clients know who has produced their cotton, their coffee or their fruits, this may add additional value to agricultural products and overcome the commodity trap where raw materials are just a cost factor. Nestlé – one of the largest food processors in the world –has created the concept of shared value added: this provides new opportunitiesfor farmers to benefit from the value created by branded products, provided they can deliver the required qualities and quantities.

Transforming traditional industries

A series of measures and interventions are needed to upgrade traditional industrial sectors such as the brick or the carpet industries: new technologies, designs, marketing initiatives are needed to make those industries more competitive and to provide decent working conditions in an environment that is – so far – mostly interested in lowering the costs. More efficient technologies can save million tons of CO2 emissions and at the same time provide better bricks with much better insulation properties and even lower costs per unit of construction wall. However, switching to those more sustainable technologies requires higher initial investments and as long as polluting technologies are allowed, there is little incentive for changing over. Strong environmental and social regulations are as important as suitable financing mechanisms: as in the case of energy-saving lamps, the higher up-front investment needs to be compensatedwith incentives, for example from carbon finance made available in the form of up-front loans that can be paid back with efficiency gains.

Finally, the book discusses the challenging roles of development agencies as facilitators who should act, not on behalf of the private sector, but in a subtle way support it so that it can perform its tasks. Market approaches to developmentare demanding – no doubt – but they provide unimaginable opportunities and hope. There are examples where markets have worked extremely well for the poor: in India, 6 million new mobile phones are sold – per month! – and Africa hasthe fastest growing mobile phone market in the world: more than 200 million mobile phones have been sold in Africa in the present millennium – startingfrom almost zero – thanks to excellent marketing efforts and innovative pricing mechanisms. If we can learn from this, there is hope of achieving theMillennium Development Goals as well.

Berne, August 2008 — Urs Heierli