Bottom of the Pyramid or Market of the Future?

The Bottom of the Pyramid (BoP) consists of the 4 billion people who live on less than US$2 per day. These people comprise one of the largest and poorest socio-economic groups in the world, and are often poorly integrated, or completely left out of, the formal marketplace. The extent of their participation in the market has been limited to the factory floors of multinational corporations, making insubstantial wages and working in disgraceful conditions. More often than not, they are unable to afford the products they slave to produce.

In the past decade, the market has begun to make an important shift for the people at the BoP. Instead of exploiting the poor and turning them into a cheap labor-force, innovative business-people have begun to look for ways to serve the poor. This shift was motivated by two different but interrelated factors. First, as the economic recession persists, businesses are becoming desperate for new, profitable markets. They are beginning to realize that money can be made by integrating into the market the more than 50% of the world population that has previously been left out. Second, philanthropic aid is continuing to produce less than ideal results and critics of charity are raising their voices louder than ever. As a result, the strong moral values of philanthropists are combining with the profit-seeking determination of business-people and producing a market full of impact investors and social enterprises.

As described in my previous post, First Impressions, more than 1/4 of the population of Guatemala belongs to the BoP. This group of 4 million people can either been viewed as “charity-cases” or as a large un-touched economic market with a multitude of demands. Many business-people tend to shy away from emerging markets, especially those filled with entrepreneurs and consumers who lack collateral and credit history. However, the poor have proven time and time again to be creative entrepreneurs and reliable customers. In 2010, a group of four college students immersed themselves into poverty in the rural Guatemalan village of Peña Blanca to learn about the financial lives of the extreme poor. In a presentation at TEDxBuenos Aires, Zach Ingrasci and Chris Temple presented 3 Financial Secrets of the Poor:

1. “The poor are active money managers.” Money is always on their mind and they are extremely accurate at calculating and budgeting their money.

2. “They manage their money using many different tools” including borrowing from and loaning to friends, creating savings clubs, participating in micro-finance organizations, and accumulating assets for resale.

3. “Flexibility and reliability are benefits the poor are willing to pay for.”

The Living on One team has shown the world that the extreme poor are financially adept and can handle being more than just aid recipients; they are ready to become part of the “Market of the Future”. Although there are a number of obstacles to reach these people and harness and market their creative talent, it is a challenge that many social entrepreneurs and determined impact investors have already begun to successfully tackle.

First Impressions

FIRST IMPRESSIONS: INEQUALITY

I have only been in Guatemala City for 3 and a half days and I have already done about a weeks worth of activities ranging from exploring a craft market near the centro histórico, eating typical Guatemalan dishes, attending a yoga class, and riding on a chiva (party bus) around the city. During these activities the one thing I couldn’t help but noticed was the enormous inequality in Guatemala City. Development in Guatemala City appears to be centrally located with pockets of extreme wealth. I live in Zone 10 which is considered the safest and most touristy zone in the city. That being said, I have seen virtually zero tourists and have been warned not to walk more than 2 blocks alone, not to step foot outside after dark, and to avoid public transportation at all costs. However, within this zone and the nearby residential zones, there are highly developed areas of extremely concentrated wealth. For example, there is a miniature “city within a city” called Cayala. I went to dinner there and it feels like you are in the capital of a wealthy European city. It is full of upscale art gallerias, shops, restaurants, and bars. Zone 10 and the nearby residential zone 14 are full of similar but much smaller semi-enclosed shopping and eating areas. They are full of designer-clad couples texting on their iphones, enjoying expensive meals, and admiring beautiful artwork. These establishments seem somewhat out of place when mere minutes away are Asentamientos, or shanty towns. These “red zones” are controlled by extremely violent gangs and are so dangerous that local police refuse to enter. About 8 murders occur in these zones each day. (http://www.globalpost.com/dispatch/news/regions/americas/110519/crime-murder-guatemala

GUATEMALA STATISTICS

In order to get a better picture of the inequality and other struggles in Guatemala here are some statistics on the country:

  • Human Development Index (HDI) Rank: 131 out of 187 (Lowest in Latin America besides Haiti)
  • Population: 14.7 million
  • GINI Index (measure of equality of income distribution, 0 is perfect equality, 100 is perfect innequality): 53.7 = one of the most unequal in the world
  • Gross National Income (GNI) per capita: US$2,740
  • Chronic under-nutrition (children under 5): 49.8 % highest in region, 4th highest in world
  • Chronic under-nutrition (indigenous areas): 69.5%
  • Population in poverty: 53% (70% of rural, 30% of urban)
  • Population in extreme poverty (less than $1.25/day): 13.5%
  • Population living with less than $2/day: 26%
  • Illiteracy (women 15yrs+): 31% (59% in indigenous)
  • Secondary school enrollment: 58%
  • Labor force with secondary education: 14%
  • Labor force with tertiary education: 7%
  • Income spent on food: 33%+ (70% in rural)
  • GDP spent on crime and violence: 8%
  • Access to electricity: 80.5%
  • Rural population without access to water: 13%
  • Income Distribution: wealthiest 10% of population controls 45% of wealth, poorest 10% of population controls 1% of wealth

(Stats from: http://www.wfp.org/countries/Guatemala/overview, data.worldbank.org/country/guatemala)

PLENTY OF ROOM FOR IMPACT INVESTING!

Impact investors are increasingly turning to emerging markets for investment opportunities. Emerging markets around the world are home to the bottom of the pyramid (BoP) (the 2.5 billion people who live on less than $2.50/day). These people desperately demand cheap, sustainable solutions to the most basic services (healthcare, clean water, food, education, housing, etc.). With 53% of its population living in poverty, Guatemala is the perfect place for impact investing. (Source: Impact Investing in Emerging markets, Marco Arosio). In addition, the economy of Guatemala is very underdeveloped (partly a result of a 36-year civil war that lasted from 1960 until 1996) providing a market ripe for the emergence of social enterprises.

As shown in the statistics above, solutions are needed to problems such as illiteracy, under-nourishment, violence, poverty, and inequality. Since the government is plagued with corruption and international aid has been insufficient, local solutions are needed to solve these problems. Furthermore, the Guatemalan economy relies on agriculture, leaving other industries underdeveloped. As a result there is plenty of space for small and medium enterprises to develop and focus on the demand for social and environmental market solutions. There is already a visible network of social enterprises as well as a very wealthy upper-class with expendable income.

In a report published by the World Bank titled, “Doing Business”, Guatemala ranks 97 out of 183 countries in the Ease of Doing Business. This ranking indicates how easy or difficult it is for a local entrepreneur to start a small or medium-sized business. Guatemala ranks just outside the top 50% and ranks slightly lower than the regional average. Although the country ranks rather low in the category of “protecting investors” and costs are very high, it ranks very high in “getting credit”, “getting electricity” and “registering property” which are both very important aspects of conducting business. In addition it only takes 37 days to start a business in Guatemala.

It is time to begin to bridge the gap between the rich and the poor. The market is ready, the capital is available, and the ease of doing business is improving. All that is needed now are investment-ready social enterprises. It will be my job over the next few months to find these enterprises and learn as much as possible from them in order to gain the insight necessary to help the impact investing and social enterprise industry develop successfully.

Impact Investing 101: what is it and how does it work?

Development is a term that is thrown around to describe everything from the creation of new medicine, the mental capacity of a child, the construction of roads in rural areas, and the conception of new technologies. To me, development means empowering people who would otherwise be trapped in the poverty cycle. It means giving people, particularly in poor countries, the opportunity to not only become consumers in the very same economic market that drives the “developed world”, but also to play a meaningful role in that market. Muhammad Yunus proved to the world that poor people, especially women, could be very successful business-people if they are just given the opportunity. The Grameen Bank and Microfinance changed the lives of millions of impoverished people around the world.

So what does all of this have to do with impact investing? Microfinance targets the poorest of the poor and provides them with very small loans to lift them out of poverty.  Once out of life-threatening poverty, these people are able to imagine a future. Many of them become entrepreneurs and start small, community-focused businesses. If these businesses are successful, they look to expand. However, they need more money than can be provided through microfinance but either they do not have the collateral necessary to take out a loan from a traditional bank or they cannot take on the debt because their business is in such an early stage of development. That is where impact investing steps in. Impact Investing “involves making investments that generate social and environmental value as well as financial return” (monitor 2009). Impact investors target these small, growing businesses, “social enterprises” that are making a social impact. They fill the gaping “missing middle” by providing the necessary support (both financial and non-financial) so these entrepreneurs can develop, refine, and test their business models, stimulate demand, develop supply chains, build organizational capacity, and ultimately reach scale. (Monitor report).

How does impact investing work? The field of impact investing is very new and is rapidly growing and innovating. The two impact investing organizations I am most familiar with, Village Capital, and Agora Partnerships, go about it in different ways. Village Capital uses a “peer review” model in which 15 carefully selected social enterprises pay a small fee and enter into a 10-week peer review process. Each week all 15 entrepreneurs meet and work together to help each other develop their businesses. At the end of the 10 weeks, two entrepreneurs are selected by their peers to receive a $50,000 investment to start their businesses. Although the remaining 13 do not receive any money, they all leave with investment-ready business models. Agora takes a different approach to impact investing. They are an incubator, which means they find the social enterprises, work with the entrepreneurs to develop their businesses and then they match them with investors. Both Village Capital and Agora have been very successful with their methods and have become influential in the impact investing world.