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September 27, 2004

'It's expensive to be poor'

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James Surowiecki's penetrating, succinct comment on living at the bottom of the economic ladder.

The always original and interesting financial columnist for the New Yorker wrote this week about the enormous opportunity that lies hidden in plain sight for anyone willing to turn her profit-seeking eye on the poor.

Surowiecki notes that buying in small amounts, which is all a poor person can do, is always more expensive than buying in bulk.

And of course, we all know that people with tons of assets get the lowest interest rates, whereas those with nothing pay exorbitantly for the privilege of borrowing.

Put $50 in a savings account at the bank, and they'll take 10% of your assets a month as a maintenance fee.

Put $50,000 into that account, and suddenly not only are there no maintenance fees, but you're getting a nice chunk of change as interest every month, along with free checking, etc.

Put $500,000 into that bank, and suddenly the bank's increased the interest rate it's paying you.

And so it goes.

Richard P. Feynman, in his legendary remark to one of his classes at Cal Tech ("There's plenty of room at the bottom") jump-started the field of nanotechnology.

Surowiecki notes that there's plenty of profit to be made at the bottom as well.

Who's gonna collect it?

Here's his column.
________________________

PENNY-WISE

The notion that we live in a global economy is now a commonplace.

Supply chains extend halfway around the planet, and no respectable corporation would dare show its face without at least pretending to have well-defined global strategy.

The funny thing about the global economy, though, is how much of the globe has been left out of it.

Four billion people still earn less than four dollars a day, and as far as the global economy is concerned they hardly exist - except, of course as cheap labor.

After all, if you were the C.E.O. of a big company, whom would you rather have as customers: the rural poor in Uttar Pradesh or upscale suburbanites in greater Phoenix?

But perhaps it makes better sense for companies to see the poor as patrons worthy of their solicitations.

Though developing nations don’t have much money on a per-capita basis, together they control enormous sums; the ten biggest developing countries have about fourteen trillion dollars in annual purchasing power.

Most corporations assume that the world’s poor are so preoccupied with getting by that they’re indifferent to the allure of consumer goods or new technology, but the evidence suggests that poor consumers are similar to rich ones: they like to shop.

"Poor people want quality services, they want high standards for their products, and they want them at an affordable price," C. K. Prahalad, the author of a new book about fighting global poverty called "The Fortune at the Bottom of the Pyramid," told me recently.

"This is a huge opportunity for businesses."

It may seem improbable that you can make money by selling to people who don’t have much, but, as Prahalad demonstrates, companies that have actually bothered to try are flourishing.

Unilever helped create the shampoo market in India, and now owns a large share of it.

Hindustan Lever has built a lucrative business in Africa and India selling brand-name consumer goods, from lotion to salt.

Casas Bahia, a department-store chain, now sells more than five billion dollars’ worth of brand-name electronics and appliances to working-class Brazilians every year.

Big companies often disdain what they think of as the low-end market, because they make a lot less money on each sale than they do selling high-end goods.

But, because of the sheer size of that market, they can still make a lot of money on it.

This isn’t exactly a radical concept: it’s what companies like Pillsbury, Quaker Oats, and Singer Sewing Machine did in America in the nineteenth century and, to a certain extent, what Wal-Mart is doing now.

Bringing technology to local farmers and merchants in developing countries has proved lucrative as well.

In South Africa, Standard Bank has set up an A.T.M. banking network for low-income customers, which has widely expanded their access to credit.

The Indian conglomerate I.T.C. has equipped hundreds of homes in the rural province of Madhya Pradesh with computer kiosks that are hooked up to the Internet; soy farmers use them to monitor prices and sell their crops.

These are subsistence farmers, many with tiny plots of land and little bargaining power.

The computers enable them to circumvent middlemen, who tend to charge excessive commissions, and consult the Chicago Board of Trade to determine what prices to charge.

It isn’t altruism that inspires companies to make these investments; it’s the prospect of profit.

The profit motive, indecorous though it may seem, may represent the best chance the poor have to reap some of globalization’s benefits.

Through the years, the poor have received assistance from innumerable government agencies and nonprofit organizations, and they’ve been an exploitable labor source, but they have almost never been treated simply as customers.

And that’s a pity, not because the private sector is inherently superior to the public sector but because, in the world we live in, businesses control an enormous amount of skill, manpower, and capital.

If you’re a customer, you reap the benefits of all that. If you’re not, you don’t.

Critics of consumer capitalism like to think that consumers are manipulated and controlled by those who seek to sell them things, but for the most part it’s the other way around: companies must make what consumers want and deliver it at the lowest possible price.

In a market economy, the best thing to be - aside from an oil company, perhaps - is a customer.

Consumerism, of course, has its pitfalls and is hardly a cure-all.

But if companies started trying to sell things to the poor it would have immediate consequences, chief among them a reduction of the so-called poverty penalty.

It’s expensive to be poor.

Poor people pay more to eat, buy, and borrow, because they have so few choices and so little bargaining power, especially in the developing world.

Moneylenders, purchasing agents, and retail stores typically have local monopolies that allow them to gouge their customers.

If more companies reach these customers, prices will fall.

There are, as ever, monumental prejudices and impediments to overcome.

Executives scoff at pennies.

Anti-globalization activists take customerization to mean McDonaldization.

Then, you have to contend with the local monopolists who make huge sums of money selling to the poor, and the local government officials who profit from helping keep those monopolies in place.

To tap the fortune at the bottom of the pyramid, we may have to "save capitalism from the capitalists," as the economists Raghuram Rajan and Luigi Zingales put it.

Oddly, it’s corporations like Unilever and I.T.C. that are best positioned to do so.

Big business has spent a lot of time pretending to make up for all the bad things it’s done in the developing world.

Now it should try to make up for all the good things it hasn’t.

September 27, 2004 at 09:01 PM | Permalink


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