ABELLO: Trickle-up economics

Oscar Abello

An estimated 16 million South Africans lack an operating water supply at home and have to walk an average of one kilometer to fetch water. Assuming the average household is five people, that’s 3.2 million households. Picture each household making two trips daily; that’s four kilometers walked in order to obtain enough water for the day. Four multiplied by 3.2 million makes 12.8 million kilometers walked each day – the equivalent of walking to the moon and back 16 times. Give or take a busy day at the water source, it takes about an hour to make the trip. 6.4 million trips equals 6.4 million hours of fetching water, which is usually of suspect quality.

While it may appear that these millions of households play insignificant roles in the world economy, businesses are realizing the enormous purchasing power these neglected customers hold. A recent joint study, published by the World Resources Institute and the World Bank, enlightened the global community last week. The study is called “The Next 4 Billion,” and it examines the economics of base-of-pyramid populations. These are the populations defined officially by the World Bank as low-income – $3,000 per year or less, in locally adjusted dollars.

The study argues that by ensuring the market economy serves this base, the foundation of society if you will, the economic benefits will reach everyone. In fact, the better we serve the poor, the stronger the returns are to everyone. The study’s key observation is that even though one family might have little purchasing power, taken as a whole, the base of the pyramid holds massive market potential.

In Asia, 83 percent of the population lives at the base, representing 42 percent of total consumption. In Latin America, 70 percent lives at the base, representing 28 percent of total consumption. In Africa, 95 percent lives at the base of the pyramid, representing 71 percent of consumption.

These numbers reveal a serious lack of entrepreneurship from global businesses. These are massive consumer markets left untouched by the global economy, left instead to local informal markets for poor-quality goods and services. Many have to pay high opportunity costs to obtain basic goods, such as clean water. Think about those South Africans, who may also have to walk a kilometer, if not more, to school or to the nearest hospital. Those are hours that could be spent much more productively. By reaching these consumers with infrastructure and products tailored to their needs as an entire market, businesses can provide them with the opportunity to take part in the global market.

Maybe you’re skeptical, but that’s a good thing. Hopefully you don’t get carried away and turn antagonistic, because globalization does work in practice. A 2003 World Bank study said that in 1981, 40 percent of the world outside North America lived on less than $1 a day, and by 2001, only 21 percent were living on less than $1 a day. Regional gains were indicative of which nations best embraced globalization. In China, the tide of globalization lifted 390 million people over the $1-a-day living standard and continues to do so while also experiencing meteoric growth. A rising tide does lift all boats, as long as it doesn’t rise so fast that it drowns everyone first and they float to the top as corpses.

Reaching base-of-pyramid markets takes a high quality of entrepreneurship. One sector that has demonstrated the necessary quality is the cellular phone industry. In developing nations, cellular users multiplied fivefold from 2000 to 2005, now numbering over 1.4 billion. Cellular kiosks are becoming more and more popular. At these sites, entrepreneurs charge a small fee for the use of a cellular phone. Many are placed along popular walking routes such as those where water-fetchers make their daily trips.

The importance of reaching base-of-pyramid populations is that failure risks toppling the entire global system. A recent academic study of worldwide wealth distribution, the first of its kind at the global level, found that the top 10 percent of the population holds 70 percent of the wealth. If you were a shareholder with only 10 companies in your portfolio, 70 percent of your assets in just one of those companies doesn’t seem like a diversified, low-risk, long-term investment policy.


Oscar Abello is a junior economics major from Philadelphia, Pa. He can be reached at [email protected]