Globalization

Bottom Feeding

By, 02/16/2007

Somewhere in the neighborhood of four billion people live on less than $2 per day.

The question of how to raise those people's standards of living and integrate them fully into the world economy is a weighty and hotly debated question. We've spent the better part of this week touting the boon of globalization (see our past commentary: "It's Catching On"), and in the past we've touted the Nobel Prize-winning idea of micro financing and other free-market forms of philanthropy (see our past commentary "Free To Give").

While globalization moves on and economies (both developed and emerging) continue to thrive in 2007…what about those four billion people?

For decades the popular solution has been redistribution of wealth, government intervention and funding, and of course, socialization. The problem with all that stuff is it basically never works.

A few brave souls have intoned the radical idea that…gulp…capitalism could be the cure. Such blasphemy to the social doctrine! (At this point a number of superlatives are usually hurled at these unruly rogues and the suggestion is made that perhaps they could benefit from a full frontal lobotomy.)

We'd counter such confounded, nonplussed naysayers with this excellent recap of the power of capitalism:

A Portrait of the Economy
By Brian S. Wesbury, The Wall Street Journal
http://online.wsj.com/article/SB117142605260108183.html?mod=todays_us_opinion

"Free-market capitalism is not perfect. But it remains the single most efficient and powerful system for creating wealth, reducing poverty and developing less wasteful ways of organizing output and consuming resources."

The point is that we've got to stop thinking about those four billion as welfare recipients, and start thinking about them as people who want to be empowered to make their way in the world and raise themselves up. That is, we should think about them as consumers. At first this seems counter-intuitive if not impossible to comprehend. How can they be consumers if they've only got two bucks a day?

Well, free-market enterprise finds a way—a much better way than any government or system of elites ever could. This is characterized best by the economic idea: The Bottom of the Pyramid (or, BOP for short).

The BOP is the largest, but poorest socio-economic group. The phrase is often used by those developing new models of doing business that deliberately target that market. Several books and articles have been penned about the potential of this market and how to capture it. Probably the most notable is The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits by C. K. Prahalad, Harvey C. Fruehauf.

The BOP isn't a "theory" insomuch as it is an observation. It happened right here in the US. Immigrants and settlers of generations past are today's middle and upper class. Time and freedom and a market-based economy raised the US up to what it is today, not a society dependent on its government.

The BOP idea is simply to allow businesses with a profit motive access to these potential customers. Then, right on queue, the familiar guffaw comes: "But why would any big corporation spend all that effort on so little potential profit?"

Such a view lacks imagination, if not coherency. The reason BOP is called (literally) the BOTTOM of the pyramid is because the bottom is the biggest…not just the most people, but, when aggregated, also representative of truly vast wealth. And companies are just dying for the ability to innovate and reach all those people.

If you don't believe that's true, then you must also believe Google is some sort of fiction (or maybe you just think it's the numeral "1" with a lot of zeros at the end). Google is perhaps the finest example of deriving vast wealth from the very small. Its "AdSense" program is a way to take the smallest web sites (by the way, most experts at the time believed it was impossible to make money with these sites) and aggregate them into a vast network where selling advertisements for pennies adds up to billions of dollars in revenue.

To understand the BOP, it's worth understanding Google AdSense: https://www.google.com/adsense/

Other examples are Intel's $100 laptop, which will be offered this year to developing nations, and telecom companies' incredible innovation of offering much of Africa cell phone service for the very poor. But it's not just technology. Basic consumer staples like shampoo are being offered in innovative ways. Shampoo makers realized that someone with two dollars a day can't very well buy a big five dollar bottle of shampoo. So, they make one-use five cent packets to be bought on a daily basis. These are beginning to sell in gigantic volume—the simple innovation of a single use packet instead of a big bottle opened up a giant sales opportunity—and at the same time incrementally raised standards of living.

The possibilities for further breakthroughs are almost limitless. As globalization continues, the BOP will rev up and fuel economic growth for years and decades to come. In the meantime, our duty is to keep borders open for trade, keep obtrusive governments out of the way, and give the global corporations a chance to supply the global consumer.

For more on the BOP, check out http://www.nextbillion.net/.

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Sources:
Book: The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, by C. K. Prahalad, Harvey C. Fruehauf. Harvard University Press.
http://www.nextbillion.net/
http://en.wikipedia.org/wiki/Bottom_of_the_pyramid

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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