Unleashing entrepreneurship

Making business work for the poor

There has been a big change in the United Nations's engagement with the private sector influenced by its stewardship of the Millennium Development Goals. It was the urgent need to enhance the contribution of the private sector in achieving the MDGs that prompted Secretary General Kofi Annan to appoint a commission to examine how the role of the private sector in this major global effort could be maximized.

The Commission on the Private Sector and Development was convened to answer two questions:

• How can the potential of the private sector and entrepreneurship be unleashed in developing countries?
• How can the existing private sector be engaged in meeting that challenge?

The Commission emphasised that the foundations for a sustainable private sector lay in a supportive global and domestic macro economic environment, adequate physical and social infrastructures and the existence of the rule of law. Such a foundation would be complemented by three additional factors: entrepreneurship - indispensable if the domestic private sector is to flourish; access to finance, knowledge and skills; and the existence of a level playing field for firms competing in the domestic market.

Social impact is greatest where commercial interests, the pursuit of profit, and development interests overlap. New business models are good examples of what is already happening in developing countries (Casas Bahia in Brazil, for example, has developed a unique business model providing efficient retail services aimed at poorer customers) but they also show the need for greater and broader action. New business models are:

• low cost - companies adapt and modify technology solutions to deliver services at a fraction of the developed country cost
• reflect a combination of international research and development and local knowledge thus ensuring relevancy and appropriateness
• market-based, justifying actual investment, delivering reasonable returns, and offering the potential for replication and scaling up, the keys to long-term sustainability
• stimulate local economic development, the driver of employment generation and equitable growth.

What is needed is an approach involving partnerships with poor people to innovate and achieve sustainable scenarios where poor people are actively engaged and the provision of products and services to them is profitable. The potential market of over four billion people living on less that $2 per day presents clear opportunities for the private sector as long as firms, governments, civil society organizations, development agencies, and poor people work together with a shared agenda.

The world's poor are also consumers living in high-cost economies. In Mumbai, slum-dwellers pay ten times more for medicine than middle class people living in a different part of the city. The quality of goods that many poor people purchase is substandard. An informal private sector often fills the gap with goods of varying quality and costing far more. Informal economies sustain most poor families in many countries, yet the advantages of economies of scale and scope are missing. In many slums, there are no health services, no public education and no infrastructure. Anywhere from 15 percent (Senegal) to 90 percent (Zimbabwe) of primary education is provided in private schools. Some 63 percent of health care expenditure in the poorest countries is private.

An innovative private sector can find ways to deliver low cost goods and services to demanding consumers across all income ranges. Innovation might arise from focusing on the poorest people which would create cost advantages from economies of scale; a firm could develop strong distribution links with consumers in villages and be in a better position to understand their needs; and firms could keep costs low through outsourcing for greater flexibility.

The private sector can alleviate poverty by contributing to economic growth and empowering poor people by providing them with services and consumer products thereby increasing choice and reducing prices. The first creates employment and income growth whilst the second improves the quality of life for poor people.

The more interaction there is between the four billion people earning less than US$1,500 a year and the private sector the more opportunities there will be for direct involvement in the market economy.

Bruce Jenks
Bureau of Resources and Strategic Partnerships, United Nations Development Programme
New York 10017
New York
USA
T +1 212 906 5764
F +1 212 9065152
bruce.jenks@undp.org or sahba.sobhani@undp.org

See also

Unleashing Entrepreneurship: Making Business Work for the Poor, Commission on the Private Sector and Development, March 2004 www.undp.org/cpsd/report/index.html

The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits, Wharton School Publishing, by C.K. Prahalad, 2004

Views expressed on these pages are not necessarily those of DFID, IDS, id21 or other contributing institutions. Copyright remains with the original authors but (unless stated otherwise) any article may be copied or quoted without restriction, provided both source (id21, insights) and authors are properly acknowledged and informed. Copyright © 2004 id21. All rights reserved.