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Can Bottom of The Pyramid Initiatives Alleviate Poverty in LatAm?

by Neelima

April 12, 2016

An evolved version of the idea of the Bottom of the Pyramid might help Latin American countries alleviate poverty more effectively as compared to trickle-down government initiatives.

Several Latin American countries suffer from acute income inequalities. “Overall, extreme poverty ranges from 10%-20% of the population,” says Felipe Perez, professor at INCAE Business School which is located in Nicaragua and Costa Rica. “Those people can’t buy the minimum ‘basket of goods’, they live under that [poverty] line.”

For governments, that poses a tricky question: how to lift hordes of people out of poverty? The Latin American experience shows that this is easier said than done. Well-meaning government initiatives often don’t trickle down all the way to the poorest segments of society.

Felipe Perez
Felipe Perez, Professor, INCAE Business School

Perez feels that the best way out of this is to rely on Bottom of the Pyramid (BOP) initiatives. An idea originally conceived in the early 2000s by C.K. Prahalad and Stuart Hart, BOP refers to the vast business opportunity that exists at the very bottom of the income pyramid. The original premise was that serving consumers in these markets would benefit multinational companies by giving them access to previously untapped markets and it would also help the poor by bringing them prosperity.

In this interview, Perez talks about the evolution of the idea of BOP in Latin America and how a newer version of BOP can help alleviate poverty in the region.

Excerpts:

Q. From the time that it first came about, how has the concept of Bottom of the Pyramid evolved in the Latin American context?

A. [Globally] we have 7 billion people, more or less, and out of those 7 billion, about 4.3 billion live in poverty, some in extreme poverty. In Latin America our gini coefficient is not something we can be proud of. We still have a long way to go to try to make our society a better place for all the people. There’s still an income equality coming from the origins of our countries: we were colonized for many years and it was a very stratified society since inception. We became independent and we have this legacy of income inequality, even some racial discrimination. We have made some improvements and we are moving in the right direction, but the results have been very modest.

We in Latin American have a huge informal sector. In some countries maybe 30%-34% of the population is in this sector. In Honduras, for example, it is about 60%-70%, so a huge percentage of the population is in the base of the pyramid. These people usually have informal jobs, but they will have all these negative consequences for society of having too many people tied to the informal sector. These people’s goal is survival, they have no innovations and they don’t have a social security network. Some of the population lives in very unsafe conditions and especially in central America we have earthquakes and other natural disasters. Just imagine if you have these disasters and you don’t have the healthcare and social security…. That makes us very vulnerable.

In the beginning we wanted to promote industrial and economic growth, with the idea that the economy will get bigger and better, then it will trickle down to the bottom of the society. But at the end that didn’t work. The wealth didn’t trickle down so some of us in Latin America have embraced this new thinking about base of the pyramid.

And these with some of the other new paradigms like sustainable development and corporate social responsibility open the gates for putting all this thinking in the real world. So if you take entrepreneurship in the base of the pyramid plus sustainable development and corporate social responsibility, you can try to produce something that will be worthwhile for society. Of course the government does something, like providing public health although sometimes it hasn’t been so effective. What we want to promote is first, knowledge about what’s going on in this very low income population and then try to look for some synergies with other initiatives worldwide We have been helping promoting new business models in the base of the pyramid. We are not a technologically advanced region, we rank low in innovation, but we can be very creative and innovative in business models.

And that is one thing that had been happening in the last 10 years. Maybe in the end we can create something for our reality and in the end the northern hemisphere can learn something in terms of technology and innovation. More than that, create new business models, empower and educate the population, involve this low-income population in tackling the main problems of our society like solid waste, pollution and loss of biodiversity. There are huge problems and at the same time [we are] trying to improve living conditions.

Q. When the idea of BOP first came it was mostly about what multinational companies could do. Are multinational companies today as invested in the idea as they were back then?

A. That’s a very important question because [that’s how] the idea was born. Multinational companies were best suited to do that because they are global, they have the motivation, the knowhow and the resources, and they want the consumers. The idea was perhaps there was a huge market in the aggregate. Even though the people there consume a little, the aggregate is a lot of money. This is what people called BOP 1.0. And it failed. This gave space for BOP 2.0. So people said multinationals have to play the leading role. They said the first [version of BOP] is doing business in the base of pyramid, the second is with the base of the pyramid. That evolved the original thinking a little bit. They try to do some empowerment in the local population, and maybe forge some alliances or try to find some leadership or create some leadership, and to empower these people to generate more income and start to work with multinationals but be like a middleman in this relationship.

BOP 3.0 is still evolving. They say, “Well, we are going to do business with the base of the pyramid but for the base of the pyramid.” That’s what attracts me because you don’t rely too much on the multinational’s cooperation. I think this is an opportunity at least in Latin America for the private local sector to do something, maybe with the same mindset of the multinationals because at the end, these are not NGOs; these are for-profit companies. I don’t have anything against that. In the meantime everybody would be better off. I am getting excited because at the same time what we want to do is try to move people from the informal sector to a formal economy.

Q. So what does BOP 3.0 mean?

A. It means first of all, to learn. At the beginning, multinationals were just trying to use the same marketing strategies they were using successfully in the developed world. In the second version, this was improved: some multinationals in India sent executives to live in their communities for one month and things like that. The third one is to try to engage more local population. Unfortunately we are still thinking of multinationals because of all the knowledge they generated. Of course the multinational is going to play a role for sure but it can be more than that. I think the native private sector has a role, and they talk about creating an ecosystem, because there’s nothing but just informal transactions, barter and things like that.

So creating the ecosystem [means] trying to promote new microenterprises, develop local expertise because these people are good—they have to be good to survive with less than $1 [a day]. They have to be smart. This is what I have found working closely with these people. There are lot of smart intelligent people, they haven’t had a chance to educate themselves but they are smart, so [there’s] a lot of capacity. I believe this third version of BOP is to foster the creation of new companies, local firms, indigenous firms and try to promote some innovations at the bottom of the pyramid.

The hope is to develop small businesses. It is possible to scale the businesses and they can be providing not the multinationals or the private sector. But this can be a small business from our point of view. It could be capable of supplying basic goods and services that fulfill basic needs. It’s sort of like a local business for the local economy. It’s more fair—we got some people saying we are going to make these people slaves of multinationals—no, it’s different. Because they understand the problems and they are part of the problems and they can be part of the solutions as well. We are not idealistic, of course. They are not going to solve the problem but maybe show a way for people to say, ‘Wow, this guy was poor like me, but now he has three trucks and has hired 10 people. If he is able to do it, I can do it.’ This is growing and creating some sort of development at the very bottom of the society.

Q. So instead of imposing models from the top, develop them from the bottom-up.

A. Yes. And at the end these people can be suppliers to multinationals. We are not excluding one thing from the other. So yeah, they can work as suppliers or as partners with local private firms as well as multinationals. But it requires more patience to develop these capabilities and skills.

Q. A lot of well-meaning BOP models fail. They might have the right ingredients but they just don’t make any impact.

A. That is part of the problem. They are not the silver bullet that will create modern societies and will promote development. But they can alleviate poverty. In the past, we have been expecting that the government would solve the problem—of course, the government still plays that role in providing access to [public utilities like] clean water and sanitation. That’s fine. But I think we as part of the private sector can help promote a new mindset. We are not solving the problems but maybe we can be a factor in trying to redirect the efforts of corporate social responsibility. There is lots of PR in corporate social responsibility: it’s cosmetic. Maybe we can show the company that there’s a more effective way which you can use your money in developing this corporate social responsibility: reach and try to solve the basic needs of people in a more sustainable way, so this is part of our strategy to be more efficient in the use of corporate social responsibility.

Q. A lot of BOP models fail because they can’t scale up, especially when they are from the grassroots up. What are the possible solutions to that?

A. I would say only a minority would be capable of doing that. It’s very hard to move from a micro[enterprise] to a small enterprise. I have seen that in the real world. A guy from India once said to me, “Who says that you have to be big, or even medium sized?” There are some advantages to keeping it small. Why do we have to think along the same lines as the formal economy: people want to scale up and become a huge company?

For example, WalMart made all these mom-and-pop stores disappear in the US [but not in Latin America]. It’s a huge giant and [in the US] nobody could beat its prices. [In Latin America] they are doing well. Many people, even from lower classes, are buying from WalMart. But the people who are in the base of the pyramid still buy goods in small local Latin American grocery stores called pulperias. These people don’t even have a fridge so they are buying very small quantities three times a day. These tiny grocery stores didn’t disappear.

That’s totally different from what happened in the US. It’s a different ecosystem. First of all, we have to understand what is going on, we have to understand the ecosystem to be not too disruptive… maybe there are things that are not too bad, and maybe we can do something to try to improve them. Instead of saying: ‘You know what, what you have been doing is not good anymore, let’s do this in a new way, the way of the multinational.’ Why not be successful being a small company? Not a micro company but a small one. So I am seeing this as an evolution from micro level to the smaller.

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