Is it Immoral to Earn Attractive Profits from Poor Customers?

By Paul Polak, Founder iDE, Author Out of Poverty

Is it Immoral to Earn Attractive Profits from Poor Customers?

There are at least 7 billion different perspectives on morality, but the viewpoint I like best defines sin as the failure to reach your potential.

By this definition we have at least 2.6 billion deep sinners – the 37% of people in the world who live on less than $2 a day. They are the future Steve Jobs’, Mohandas Gandhis, Madame Curies and Pablo Picassos who will instead eke out a living as drug dealers, child soldiers, prostitutes and destitute slum dwellers.

The three trillion dollars or more we have wasted in misguided development aid probably represent an even bigger sin. But it seems to me that the worst sin of all is our abject failure to achieve scale for the handful of projects that have produced measurable positive impacts on the lives of poor people.

How can we successfully achieve scale? It takes planning and designing from the very beginning, and the unleashing of powerful positive market forces at the locations where poor people are buyers and sellers. The only way to unleash those forces is to demonstrate to global businesses that they can earn attractive profits selling transformative products to poor customers. This is exactly what I have dedicated the rest of my life to accomplishing.

But, I am not an economist. How do some of the world’s leading economists view the prospect of earning sizeable profits serving poor customers at scale?

Is it immoral to earn profits selling to poor customers?

“No!” says Milton Friedman, the celebrated free market economist.

“…there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.” Friedman believes that a marketplace of enterprises earning profit within the rules is the most powerful lever to improve society.

“Yes!” says economist and Nobel Prize winner Muhammed Yunus.

“Poverty should be eradicated, not seen as a money-making opportunity.” Yunus believes that investors in social businesses should only get their money back. In my view, that adds up to a sizeable interest-free subsidy, which is a constraint to scale.

Why do I believe that the answer to extreme poverty is to earn attractive profits serving poor customers?

The microfinance movement and the work of iDE combined have probably helped about 50 million extremely poor people move out of poverty. Even if we have helped 100 million poor people move out of poverty, this amounts to less than 4% of the 2.6 billion people in the world who live on less than $2 a day. This is pitiful!

I define meaningful scale as any strategy or initiative capable of helping at least 100 million $2-a-day people move out of poverty by at least doubling their income. We desperately need to find ways to bring to scale the few comparatively successful models for development that are available.

What are the common features of initiatives that have truly helped extremely poor people move out of poverty?

  1. They begin by thoroughly listening to poor customers and thoroughly understanding the specific context of their lives.
  2. They design and implement ruthlessly affordable technologies or business models.
  3. Energizing private sector market forces plays a central role in their implementation.
  4. Radical decentralization is integrated into economically viable last mile distribution.
  5. Design for scale is a central focus of the enterprise from the very beginning.

It is clear that all of these factors are integral components of a business system, but this takes us back to the original question: should it be a business system that enhances the livelihoods of poor people without making a profit for outside investors? Or should it make a profit for investors as well as the poor people who are served by it?

To me the answer is obvious. The only way for a business to help at least 100 million poor people move out of poverty is to follow the laws of basic economics, which means providing an opportunity for both poor and rich investors to earn what they consider to be an attractive profit from their participation.

I have no doubt that there are huge profitable virgin markets all over the world serving $2 a day customers waiting to be tapped. By the laws of economics, creating a new market requires taking a very large risk, but the reward should be commensurate to the risk. If the new venture is successful, all the investors – the poor customer who buys the product, the shopkeeper who sells it, the company employee who makes or transports the product or manages the supply chain, and all the financial investors in the company – should make an attractive profit.

Here is an example: Coal contributes 40% of global carbon emissions and releases millions of tons of heavy metals and other pollutants every year, worsening climate change and sickening people around the world. Properly carbonized biomass can be substituted for coal and co-fired alongside it in proportions up to 80%. The world’s farmers produce four billion tons of agricultural waste each year. If 100 million tons of this agricultural waste could be effectively and affordably carbonized in decentralized rural settings, a multinational enterprise finding a cost-effective way to make it happen could reach global sales of $10 billion a year within five to ten years. Such a company would not only provide attractive profits to investors willing to take on the substantial risk involved, but would furthermore double the incomes of at least 100 million $2-a-day enterprise participants in developing countries.

The only way a company like this can reach scale is with the financial backing of for-profit venture investments. And the only way to justify those comparatively high-risk, early-stage investments is if the company provides the opportunity to make exceptionally good profits if it succeeds.

We have two options. One is to keep hoping that governments will come through with billions of new aid dollars, keep asking individuals to dig deeper for charity dollars, and hope that the low-or-no-profit venture capital space takes off and becomes a truly global phenomenon. We could plod along full of hope but low on results, celebrating increases in impact of fractions of a percentage point.

The other option is to blend the designer’s sensibility, the artist’s creativity, the ground-level aid worker’s understanding of local context, and the entrepreneurs’ dynamism and drive for success, and create profitable global companies that serve poor customers with products and services that help them rise out of poverty. We could unleash the full power of the greatest force in human history – profit – and start ending poverty by the hundreds of millions.

It would be immoral to do anything else.

Editor’s Note:

This blog was first published on Out of Poverty and is reproduced here with permision.

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4 Responses

  1. Great thought provoking comments. Thank you.

    I was a student in the last class Milton Friedman taught at the University of Chicago and have spent my career as a financial economist–the last 15 years as an independent microfinance consultant.

    Free markets are the greatest engine of wealth creation and opportunity we have ever seen. Harnessing their power through microfinance and truly inclusive businesses in the many segments of the Bottom of the Pyramid space is brilliant and full of possibility–mostly not yet realized. It could yield the solution to the greatest humanitarian crisis on earth–extreme poverty–the source of more unnecessary deaths than any other cause and the blunting, as the author notes, of over a billion lives.

    Even Milton Friedman acknowledged that monopolies and oligopolies can become a problem that restrict innovation and competition that markets can’t easily or quickly correct under certain circumstances. The circumstances he noted were the influence and control of governments to restrict competition. We have unfortunately seen that in international business from otherwise great companies–who don’t play within the rules of the game or more recently use government influence to skew the rules of the game in their favor and against competition and innovation. This can and does often hold poverty in place and cause other market distortions that harm the public good and often the poorest–e.g. case in point the US Farm Bill with its commodity subsidies for the past 4 decades.

    Paul Collier, author of “The Bottom Billion” makes two brilliant observations in his book that raise some serious questions about some of the comments made above. I have kept their spirit but modified them a bit.

    1. The view that the world is the rich billion and the rest or the rich billion and the BOP is out of date. The world is 3-part in the 21st century—1) the rich billion, 2) 4-5 billion in the “rising global middle class” and 3) the Bottom Billion who are very much left behind and NOT INCLUDED in most of BOP business, most of economic development and even most of microfinance.

    2. Any view of the world that sees all poverty as the same is not only inaccurate but virtually assures that development, business or microfinance will serve the less poor and ignore or exclude the Bottom Billion.

    For mainstream microfinance and development the sweet spot is the rising global middle class (above extreme poverty but not part of the top billion of the world.)

    It makes “good business sense, good profit sense, and good market sense” to serve the rising global middle class and exclude and ignore the Bottom Billion and that is what Paul Collier, and I agree, is exactly what most of the world economy, economic development, BOP business and even microfinance do today.

    I wish ending extreme poverty was a profitable business or fit better into profitable microfinance, but it doesn’t, at least not yet. So we have the opportunity to laud the great work being done for and with the rising global middle class AND find new and creative ways to include BB people that may not rely solely on profit incentives.

    This is actually not free market heresy, Muhammad Yunus has seen the practical world of exclusion of the poorest. He offers us the idea of profitable/cost covering approaches that are not profit maximizing because they include the poorest or BB.

    A more complete free market approach sees the costs of market distortions AND sees the monetary value we can choose to place on ending extreme poverty as a public good even if it is less profitable than exclusionary business. If we creatively use markets and some not profit maximizing business to include the BB, we can maximize the sum of private profit plus public good and end extreme poverty more quickly.

    This will make us all collectively better off and give the rest of us over a billion new customers for everything we want to sell to a billion people no longer dying and spending nothing in extreme poverty.

    The simplistic free market argument that “free” markets (which aren’t really free in important ways such as in food and agriculture–Read WSJ writer, Roger Thurow’s “Enough”) and profit incentives alone will automatically end extreme poverty is flawed.

    We need a more complete free market thinking that values the public and humanitarian value as well as private good of ending extreme poverty.

  2. There is only one thing missing in the use of profit to lift millions out of poverty.

    Business often overlooks the impact of its product or service on human health.  A product that leads to poor health, especially among the poor, eventually weakens the entire economy. 

    Witness the world’s wealthiest country with uncontrollable health care costs, a country whose chronic illnesses are largely linked to environment and lifestyle.  And thus to many consumer goods and the methods used to produce them. Think highly processed foods, tobacco, harsh chemical cleaners, PCBs, etc. Much profit has been made on these consumer goods.

    However, business is now bringing natural, nontoxic to the marketplace, so the problem is not business and profit per se. 

    The problem is business not ethically asking itself what the impact of its proposed activity is on the health of the consumer and the environment. 

    CocaCola’s decentralized distributorships in Africa may raise the income of small, bicycle peddlers, but the empty calorie drink makes no nutritional contribution, doing great harm over time to its impoverished consumers.

    And why must it be ‘global’ business that saves the masses?  Business can be local and successful and without massive capital or risk. 

    Not fast enough?  Not ‘scalable’?  Perhaps.  But only from lack of will, focus and attention to method and impact among the governments and philanthropists whose intent is otherwise laudable. 

    Friedman believes that a marketplace of enterprises earning profit within the rules is the most powerful lever to improve society.  I agree, but only once ‘the rules’ are expanded to exclude harm to human and environmental health. 

    It does not work to leave protection of human health to government, nor even to the consumer in a world that has become so complex and specialized.  Today government and consumer are up against the power of business and profit, especially that of today’s multinational, global corporations.

    It there a role for global business in lifting millions out of poverty?  Do some advances need the power of business to scale up?  Yes.  But it is a dangerous thing to turn business loose in the developing world with income generation, profit and scaling up as the primary points of consideration.

     

     

  3. I am all for mass business models that make profits for their investors and enable the bottom billion as customers to gain the primary benefit. I am however seriously concerned by your example business of “carbonized biomass”. Let’s face it this is really just another term for charcoal, a product that is rampantly leading to deforestation, soil erosion, declining crop yields and contributing further to global warming. Added to that the 4 billion tons of agricultural “waste” has only one rightful place – back in the soil that it came from in the first place, maintaining the ecosystem.

    True at the moment too many farmers – especially across Africa – are burning it off rather than ploughing it back into the soil. This burning just sends huge amounts of energy up into the skies and I am sure this is the energy you wanted to capture through carbonizing the biomass. But even if we could only get that same 100 million tons of biomass back into the soil instead of removing it from the farm system we could make a real impact on reducing the year on year decline in soil fertility that is slowly but surely dragging even the less poor down into long term poverty.

    The more we take out of the soil system the more has to be replaced. A typical exploitative business model would love to see farmers selling off their biomass and, with their new income, importing into their farming systems quick win inorganic fertilizers to fill the gap but this has the same effect on the farm as the bottle of Coca Cola has on the body, a quick energy rush that leaves the body more drained afterwards than it was before. Far healthier to eat fruit or drink whole juice – so keep that biomass in the farm system, develop a business model that encourages and enables the farmer to do that and you will truly benefit the bottom billion. If you can do it with a good return for the investor all the better but please do not promote a business model that merely perpetuates the energy guzzling systems that maintain the current imbalance in the world’s energy system.

  4. I believe the question is not a real question. At the best it might just reveal that yes some people do feel bad (moral issue or ethic issue) by making profit from the poor. I don not think someone should try to look for a “justification” of his or her own behaviour in trying to look for validation from others… That is a bit “immoral” to me. You do not have to convince anyone, you feel like it or you don’t, and people will always be free to think whatever they want to think about you.

    It is your freedom and your responsibility… And accept that people do think differently and may not like it.

    “Free market”? I don’t know what this “thing” is… Does anyone ever met this thing? Or is it a ghost? A video game for adult? A God? What I see in real is that market is an epi phenomenon of human interactions, relationships and behaviours… And in this is all about believes, ethics, moral, culture, psychology, fears, confidence, trust… What is moral for you may not be for the guy in front of you, and both have the freedom to choose what you believe in.

    As a consumer if I do not like your product, your attitude, your “moral” I am free to pass my way… And this is about market! As a citizen, if I do not like how you behave, I am free to tell you and to react to it. As a business associate if I do to like what you do, how you do it, I am free to not make business with you…

    So if you choose to be “immoral” to me then you take your responsibility and you have to accept that I can ignore you.

    Poor are just economically and socially disadvantaged but they still have a freedom to choose to buy your stuff, to supply you, to distribute your stuff… I saw so many businesses being frustrated because the “poor” didn’t react the way it was “supposed to”… And of course it is because these poor are ignorant, lack of entrepreneurship.. And other excuses… But most of all it was because the business was just not “relevant”, “adequate”, accepted,… It was not a good business for the ones it was intended…

    I am convinced that immoral businesses, unsustainable processes, unfaire relationships… Will have a short life… And will be naturally and culturally not selected… For some people business raison d’être is to make more and more profit (growth): who decided that this is THE definition of a business? Where this intellectual dictatorship is coming from? Business is here to participate, contribute and live as long as it is relevant, useful and accepted…

    In all Eco system growth = death… Who would advice a business to go straight to its death? Very expensive consultants maybe…

    BoP economy proposes another model… Vision… Practice… And BoP economy is by far the bigger and the most resilient economy.. The financial crisis demonstrated that the big guys are fragile dinosaurs and that without public money a lot more would have disappeared… Is that a model? Is that “free market”?

    Let us go back to reality, stop playing intellectual simulations (video games) and participate to complex realities.

    Just a thought.

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