It began slowly, with the dawning recognition that traditional development projects were not sufficient to accomplish the Millennium Development Goals and with a UN commision report citing the essential role of the private sector 1. Still, in 2005, there were only a handful of major companies putting serious money behind developing low-income markets. The Year of Microfinance celebrations focused on achieving 100 million clients of an estimated 500 million potential and the growing involvement of banks and other major financial institutions in scaling up, but overlooked the almost complete lack of “mesofinance” investment capital to enable small and medium companies to expand. At the same time, many countries experienced the hollowing out of development strategies tied to export-led growth, as they began to lose jobs to China’s emerging dominance as a manufacturing platform. But the potential of domestic low-income markets—the base of the economic pyramid—as a more sustainable driver of growth was not widely recognized.
The transformation, when it came, had three separate drivers: 1_ a coordinated, deliberate effort by a consortium of multinational companies to create private-sector-led development strategies in, at first, a small number of countries; 2_ a more bottomup mesofinance campaign that included mentoring and other enterprise development efforts for small and medium businesses, designed to harness entrepreneurial energy in BOP markets and fund expansion that could create jobs and service delivery; and 3_ a sustained policy-reform effort by a growing number of countries to improve the business environment for large and small business alike to qualify for development funds and attract private investment. A fourth, indirect driver was the growing emergence of innovative solutions and sophisticated technology specifically designed to meet the needs of BOP markets. These together led in 2010 to a tipping point in the perceptions of public officials and development experts, after which the scale of these activities grew very rapidly. We explore each of these drivers and their impact on these recent events in some detail.
THE WORLD DEVELOPMENT CONSORTIUM
It was initially European companies that saw the need and felt the obligation to play a larger role in development—both for the larger social ends and as part of creating additional markets and supply chains. By banding together in a consortium, they were able to lower risk and gain real synergies, as well as gain commitments from national governments and development agencies and withstand local power brokers opposed to change. The focus of the investments was on projects that could become commercially sustainable, even though they might require some initial donor help. For example, investment designed to strengthen farmers and link them to markets was buttressed by rural energy and connectivity infrastructure, which in turn enhanced productivity and living standards and increased the market for both financial services and consumer goods. The consortium also worked closely with UN agencies and sought NGO involvement to ensure that the package of goods and services—and hence the industrial capabilities brought to bear—met community needs. For the companies, the benefits of the consortium approach were increased legitimacy and lowered risk, an advantage in attracting talented staff, development of new markets, and eventually profit. The combined investment of a consortium project—and the status they came to have—was also a powerful incentive for a national government to undertake reforms and provide incentives. In addition, the projects also brought access to international markets, to credit, and to advanced technologies for farmers and local businesses.
The first projects were still modest in scale, and some stumbled. But more succeeded, and the projects grew in scale and in numbers of corporate participants, gradually bringing in U.S. and Japanese companies that had initially been more skeptical of such partnerships. Despite initial controversies and critiques of a “new colonialism,” the effectiveness of private-sector management of large development projects that were largely funded with the companies’ own money—and the healthy profits they eventually returned—brought widespread acceptance of the approach.
MESOFINANCE AND JOB CREATION
To the extent that government-led economic-development policy in the later part of the twentieth century touched the business community, it was at the level of large-scale projects: harbors, dams, highways, railroads, telecommunications infrastructure. Call it megafinance. It didn’t make noticeable impacts on poverty. At the other end of the spectrum, development assistance and philanthropic activity focused on the poor, perhaps most successfully via the microfinance revolution of the 1990s forward.
Mesofinance was until recently the “missing middle” in this picture. Yet among academics and businessmen, small and medium-scale enterprise (SME) development was always known to be the bedrock of economic development. Small enterprises have been the dominant job-creation engine in virtually every economy, advanced or developing, and entrepreneurship has been the path to wealth-creation, at the individual and nation-state levels alike. But it was only in the twenty-first century that development aid and private-sector investment finally began to converge on boosting SMEs in developing countries. Through a combination of capacity-building, mentoring, and other enterprise ecosystem development efforts, deep market research into the “new” markets at the BOP, and the creation of large and efficient SME capital funding mechanisms across the developing world, the promise of SMEs began to be realized. By focusing on SMEs that had the capacity to scale, job creation began to take off. By focusing on SMEs that could efficiently cater to BOP communities, service delivery and quality of life improved. And through policy reforms that made it easier and funding mechanisms that provided an incentive to run legal businesses, more of this activity was brought into the formal economic sector.
TRANSFORMING THE BUSINESS ENVIRONMENT
The movement for change began with Hernando de Soto, a noted Peruvian social scientist, who in several widely read and influential books 2, chronicled the almost insurmountable barriers confronting entrepreneurs in the developing world. Early in the twenty-first century, the World Bank took up the task of measuring and reporting on barriers to “doing business” across the developing and developed countries. In time, the pressures for increased private-sector investment and the business-world truism that “you can only manage what you measure” began to work; countries actually started to compete to improve their business climates – through policy changes, reduction of corruption, streamlining, and rationalizing business regulation. Increased external investment and indigenous entrepreneurial activity both increased. The markets closest at hand – including the BOP – benefited the most. New products and services, many locally produced, designed specifically for low-income community markets, appeared. The successful products and services heeded C.K. Prahalad’s injunction to “create the capacity to consume”3 by being of high quality and affordably priced.
INNOVATION
A growing number of innovations aimed directly at BOP problems have also been acknowledged by many experts as crucial, even if harder to link directly to poverty outcomes. Many were targeted at health issues—new filters that let any household purify its own water supply cheaply and simply, new vaccines arising in part from the Gates Foundation initiative and delivered as part of local food supplies or via timerelease smart pills, new ways to disrupt vector-driven disease cycles. The gains in human welfare from significant progress against AIDS, malaria, and water-borne disease alone have been significant. Add to that the continuing extension of the communications revolution into rural areas, the now rapid growth in off-grid renewable energy solutions (although many communities remain without electricity), and the growing productivity of many small farmers because of improved access to markets, advanced seeds, and small-scale irrigation.
A SUMMARY PERSPECTIVE
Innovation and reforms, coupled with increased multinational company investments and the SME explosion, had an impressive impact. Living standards improved rapidly in the newly emerging giants of the developing world – China, India, Brazil, Indonesia, Mexico, and South Africa. Even more impressive, however, was tangible improvements even in smaller, poorer countries, from Tanzania to Bolivia to Vietnam. Hundreds of millions of people escaped poverty.
Additional information:
MESOFINANCE
Here is the term used in context from this blog by Al Hammond on www.nextbillion.net:
“While microfinance is increasingly well provided for (although there is still huge unmet demand), loans top out at around a few thousand dollars. Above that is a vast gap— between a few thousand and $500,000—where financing options are almost nonexistent. And it is precisely in this range—mesofinance?—that successful small and medium-sized businesses in developing countries, seeking to expand, need investment capital, equipment financing, or loans. The gap is important because it is these businesses that provide most of the jobs and generate most of the new employment in every economy.”
Footnotes:
- Unleashing Entrepreneurship: Making Business Work for the Poor, report to the secretary-general of the United Nations, commission on the Private Sector and Development (New York, 2004)
- The Other Path: Invisible Revolution in the Third World (1989), translation from the Spanish original El Otro Sendero (1986); The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (2000); The Other Path: The Economic Answer to Terrorism (2002); The Road to Capitalism and the Spontaneous Generation of Law (2004).
- The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits (2004)
Value is the only commonality in an increasingly complex, challenging and interdependent world.