The Value of Profiting from Poverty

By Kevin Meyer

I know that title alone is going to get a bunch of folks tied up in their undies but a story on CNN over the weekend made me think a bit.  And perhaps we do need to think a bit instead of accepting commonly-held perspectives.  Let's start with some brief background.

It started with such a simple concept: A solar light bulb that charges up during the day and lights the night when the sun sets. Inventor Steve Katsaros perfected his design in June 2010, and four days later he had a patent in hand.

He knew it was a good product, but he didn't know what to do with it. "It wasn't until after we created it that we asked ourselves, 'How do we market this,'" Katsaros says. "And we learned that the largest market was the developing world." As Katsaros began researching markets in developing countries, he began to realize that his solar light bulb could potentially make a huge impact on the 1.4 billion people around the world who don't have access to an electrical grid.

Ok now let's really get some of you twisted into a tizzy.

First, Katsaros had to answer a key question that would determine how he would have the strongest impact: should his company be nonprofit, or for-profit? Katsaros found inspiration from the 2008 book by Paul Polak, "Out of Poverty."

Polak, who has worked in developing nations for 30 years, believes that the charity model of aid used by nonprofit organizations doesn't work — despite its good intentions.The best way to help people, according to Polak, is to treat them as consumers. If you can sell to them, he says, you can help them.

"In the beginning I was a nut case and nobody paid attention," Polak says. "The consensus was 30 years ago that this is what caused poverty, and to be involved in business was outrageous and evil."

Today, that is starting to change, he says. But that doesn't mean that nongovernmental organizations have rolled out the red carpet for Polak's ideas. "Many NGOs say it's making money on the back of the poor, but I love to make money on the back of the poor," Polak says.

The evil! The horror!  And I'll admit that last statement even made my gut turn a bit.  But I happen to have also read Polak's book a year or two ago and was equally impressed.  Sometimes a new perspective is necessary.  And here it is.

"You can feel really good about yourself giving stuff away … but if you are going to sell things to people, you need to have respect for them because no one is going to buy something if you have contempt for them."

He says market forces will ensure that the right products get into the marketplace and ultimately lead to empowering people in developing countries to be better able to fend for themselves.

"If you have a village that's used to the dole, it's very hard to get them off of the dole," Polak says. "We have to face the fact that conventional development aid has failed. "It just doesn't work."

Now speaking of "villages on the dole" there was an interesting comment to the article:

"We have to face the fact that conventional development aid has failed." Is he talking about Detroit, Camden, Chicago, Newark, Gary, East St. Louis, North Miami Beach….?I

No kidding, but that's the subject for another day, if not another blog altogether.  Let's get back to the other perspective this article forces us to face, beginning with that concept of respect.

After interviewing more than 3,000 families who live on $3 a day or less, Polak concluded that they know best how to care for their families. They will respond to a free market that presents them with products that will fit their needs, he says.

"They are stubborn creative survival entrepreneurs," Polak says. "They make life and death decisions about how to spend their meager income. They are used to investing their money very wisely."

Compare that to just throwing a bunch of "good ideas" at a population that may not accept them.  The article goes into considerable detail about such failures – including a "merry go-round water pump" that relied on kids to play on it to pump water.  Guess what happened when the kids got bored.

So we have the technology value and selection property of the free market.  What else?

Polak markets a pump of its own, which costs about $8 to make and sells for $25. Polak says a small family farmer who buys a pump can increase his annual income by $100.

He says they have sold 1.5 million in Bangladesh alone and have created thousands of jobs in turn. "We have 3,000 (villages) dealers making an income and 3,000 well drillers making an income, and 75 workshops making the pumps making an income," Polak says.

A self-replicating supply and distribution chain that is able to get the product into far more people's hands, far more efficiently, than simply air-dropping boxes of them.

And that is one of the key tenants of the social entrepreneurship model. It helps create more jobs and a network of dealers and distributors that can then be utilized to sell more products and ultimitely build a more robust economy in developing countries.

That's a model Katsaros hopes to replicate with his solar light bulbs. "This is something I personally believe in, to create smaller entrepreneurs around the globe," he says. "It's a business model I really love and believe in."

In Kenya and Tanzania they sell what they call "business in a box kits," 144 bulbs along with displays and fliers. Would-be entrepreneurs can go village-to-village selling the bulbs and establishing a network of customers.

So a brief recap.

The goal is to get a life-enhancing product to as many desperate people as possible.  By leveraging respect for people, market-based product selection and improvement, and incentivized distribution channels the product reaches far more people, while creating far more jobs, than simply throwing free products out of planes.

Explain the evil again?  Which is more important – achieving the goal or maintaining a self-centered supposedly moral perception?