Taking a market-based approach to poverty reduction

Analysis of BOP markets can help businesses and governments think more creatively about new products and services that meet BOP needs and about opportunities for market-based solutions to achieve them. For businesses, it is an important first step toward identifying business opportunities, considering business models, developing products, and expanding investment in BOP markets. For governments, it can help focus attention on reforms needed in the business environment to allow a larger role for the private sector.

BOP market analysis, and the market-based approach to poverty reduction on which it is based, are equally important for the development community. This approach can help frame the debate on poverty reduction more in terms of enabling opportunity and less in terms of aid. A successful market-based approach would bring significant new private sector resources into play, allowing development assistance to be more targeted to the segments and sectors for which no viable market solutions can presently be found.

There are distinct differences between a market-based approach to poverty reduction and more traditional approaches. Traditional approaches often focus on the very poor, proceeding from the assumption that they are unable to help themselves and thus need charity or public assistance. A market-based approach starts from the recognition that being poor does not eliminate commerce and market processes: virtually all poor households trade cash or labor to meet much of their basic needs. A market-based approach thus focuses on people as consumers and producers and on solutions that can make markets more efficient, competitive, and inclusive—so that the BOP can benefit from them.

Traditional approaches tend to address unmet needs for health care, clean water, or other basic necessities by setting targets for meeting those needs through direct public investments, subsidies, or other handouts. The goals may be worthy, but the results have not been strikingly successful. A market-based approach recognizes that it is not just the very poor who have unmet needs—and asks about willingness to pay across market segments. It looks for solutions in the form of new products and new business models that can provide goods and services at affordable prices.

Those solutions may involve market development efforts with elements similar to traditional development tools—hybrid business strategies that incorporate consumer education; microloans, consumer finance, or cross-subsidies among different income groups; franchise or retail agent strategies that create jobs and raise incomes; partnerships with the public sector or with nongovernmental organizations (NGOs). Yet the solutions are ultimately market oriented and demand driven—and many successful companies are adopting such strategies.

Perhaps most important, traditional approaches do not point toward sustainable solutions—while a market-oriented approach recognizes that only sustainable solutions can scale to meet the needs of 4 billion people.