Posts Tagged ‘Bottom of the Pyramid’

I just finished Nicholas Sullivan’s account of GrameenPhone’s birth and development, a formation which revolutionized telecommunications and how developing countries use technology. “You Can Hear Me Now” is both a case study of GrameenPhone and a wider look at how technology transforms developing nations.

GrameenPhone is the brainchild of Iqbal Quadir, an American educated Bangladeshi who, while working as a venture capitalist in New York City, realized that “connectivity is productivity.” Thinking back to his home country, Quadir recognized a missing web of connectivity due to the lack of information communication technologies (ICTs). His battler to bring cell phones to Bangladesh provides fascinating insight into development and international finance.

Bangladesh, one of the poorest countries, was already home to an innovative development approach. Muhammad Yunus, who won the Nobel Prize in 2006, is widely credited with starting microfinance, the approach which gives small loans (less than a couple hundred dollars) to people without a credit history or much collateral. The amazing success (hardly any defaults and increased income) of microfinance has seen the system spread income to the historically ignored 2 billion people who live on less than $2 a day.

The typical example of Grameen Bank, Yunus’s venture, is a loan given to a rural woman to buy a cow who sells milk to pay off her debt. Quadir’s insight was that a cell phone could function as a cow. Pushing past dissenters who though cell phones were only for the rich, Quadir developed a model through which village “phone ladies” would sell minutes to others and, in turn, make a profit and provide an important service to people who otherwise had no conectivity. The phone calls are used to check market prices, connect with expatriate family or check the availability of medicine 5 miles away.

As mobile phones have spread like wildfire through developing nations, an entire ecosystem of advanced applications, many financial, have created even new opportunities. Sullivan’s book is filled with wonderful examples and statistics showing just how revolutionary the cell phone can be.

In discussing development, the author uses what he calls the “external combustion” model which relies on introducing ICTs, through native entrepreneurs, with the backing of foreign investors. The exogenous shock of this combination is what made GrameenPhone so successful (as of 2006, had more than 10 million subscribers, revenue pushing $1 billion and profits above $200 million). And, while many worried that foreign capitalists would suck out value like modern day colonialists, the opposite has been true: the mobile phone industry in Bangladesh has created $812 million in value and GrameenPhone has reinvested $1 billion in Bangladesh. When the African telecom CelTel sold for $3.4 billion, it created 50 new millionaires, many of them Africans. What Sullivan calls “inclusive capitalism” creates both external income (development) and internal profits.

Quadir is now exploring energy options for the developing world through his start-up Emergence Bio-Energy which is using adaptable engines to power villages. Energy is a big problem not only in the developed world, but in the global South where it is unreliable and halts economic growth. In Brazil, the Sun Shines for All has used solar power and microfinance to electrify the countryside. Grameen Shakti is apparently trying a similar approach. A major obstacle that Quadir points out is that, unlike telecommunications, Moore’s Law doesn’t apply to energy production.

In January, Bill Gates delivered a speech at the World Economic Forum in Davos calling upon the audience to embrace a “system innovation” to deliver the bottom billion, those poorest people, from poverty. In his reckoning, capitalism harnesses one major human motivator, self-interest, while government and philanthropy apply the other, care for others. Gates thinks a hybrid system is needed to address the dire needs of the impoverished.

“I like to call this new system creative capitalism – an approach where governments, businesses, and nonprofits work together to stretch the reach of market forces so that more people can make a profit, or gain recognition, doing work that eases the world’s inequities.”

Creative capitalism would use dual incentives to solve hunger and disease: profits and altruism. Profit-driven firms would be more accountable while focusing on traditionally under-served markets. Take the example of “a Dutch company, which holds the rights to a cholera vaccine, retains the rights in the developed world, but shares those rights with manufacturers in developing countries. The result is a cholera vaccine made in Vietnam that costs less than $1 a dose – and that includes delivery and the costs of an immunization campaign.”

In response to Gates’s call to action, a number of prominent economists and lawyers have developed an online conversation about creative capitalism’s promise and its weaknesses. Participants include Nobel laureate Gary Becker, Judge Richard Posner and aid skeptic William Easterly. Many of the essays are critical.

Easterly writes, “Mr. Gates’ speech attacks the system that has historically done the most to alleviate poverty—traditional capitalism—in favor of an untried and implausible alternative—an illusory Third Way that mixes profits and altruism.” Posner opines that creative capitalism is nothing more than traditional PR-based charity which actually fits nicely with traditional capitalism.

After browsing the critiques, I think much of the trouble comes down to Gates’s nomenclature. The examples in his speech or C.K. Prahalad’s wonderful book, “Fortune at the Bottom of the Pyramid” are not truly a new system. Prahalad demonstrates the massive profits and opportunities open to firms which are willing to understand and enter the market of the poor.

The problem comes down to capitalism’s tendency to lead to thoughtless profit pursuit. What is needed is not creative capitalism (as Greg Mankiw said “I though capitalism WAS creative.”). What is needed is conscious capitalism. Mortgage brokers, borrowers and Wall Street investment bankers got a taste of unconscious capitalism with the subprime fiasco.

Part of the problem comes down to the way corporate governance is conducted: being under pressure to out-perform the last quarter every 3 months places an insane focus on short-term thinking. Judgement Day for those corporate officers with fidicuary responsibility to shareholders comes not once a lifetime, but 4 times a year. Accountability is good, but long-term thinking often falls by the wayside.

Joi Ito, a Japanese venture capitalist and CEO of Creative Commons, noted something similar at a recent panel. Money makes people short-sighted and when coupled with the Internet’s efficiencies, he believes “fluctuation amplification occurs.” His hope is that capitalism will be injected with long-term thinking about issues like the commons.

[youtube=http://www.youtube.com/watch?v=-Ox02qM_yuc]

As it relates to the Internet, Joi worries that a rush to mobile-based connectivity will promote carriers who do not reinvest in the ecology of the Internet and who swallow profits for short-term gain.

The same could be said of Gates’s goal. The same wholistic approach which must be taken to defend the Internet’s openness is the approach which must be taken to invest in the poorest in our world. It requires awareness of the difficulties and opportunities of capitalism. By recognizing that today’s poor are next decade’s consumers, capitalism will continue to lift out of poverty millions, but only if it is done consciously.

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