Growing Inclusive Markets: A Permanent Way out of Poverty?
Ron Mendoza, Namsuk Kim and Nina Thelen UNDP Office of Development Studies
Roughly a little under half of the world’s population is mired in poverty, most in the developing world, and many of them trapped in the base of the economic pyramid. The poor and nearpoor represent a vast and largely untapped market for goods and services, as well as a potential source of entrepreneurial initiative and productive capacity. Despite the promise of this possible shared gain between business and development, there is growing evidence that the vast majority of the world’s poor remain marginalized even as markets continue to expand within countries as well as become more integrated across borders. In some extreme cases, the poor even face a poverty penalty—they end up paying more for the same goods and services compared to the rest of the population. Thus the twin challenges faced by both business and development practitioners is to get at the root causes of why markets are not inclusive for the poor, and to formulate possible solutions when and where warranted and feasible.
How do more inclusive markets contribute to human development?
Clearly, not all of the challenges related with poverty are best addressed through markets. Governments can and should continue to play a key role, especially in helping to make markets function in more inclusive ways. A significant body of literature now shows how lack of access to markets, such as those for credit and insurance, could reinforce low asset levels and poverty traps which many of the poor face. Lower access to credit markets and insurance could limit the poor's capacity to smooth consumption and investments (e.g. education, healthcare, etc.) which might ultimately reinforce their poverty. Market access is a critical aspect of the economic lives of many of the poor and near-poor, and successful participation in markets is, perhaps, sine qua non in permanently exiting poverty. In certain areas where the public sector has been deficient or even absent, markets (notably informal markets) are in fact the de facto recourse of the poor.
Broader access by the poor to markets for goods and services comprising basic needs (e.g. housing, water, sanitation) and those potentially enhancing their economic empowerment (e.g. finance, insurance, money transfer services), could not only contribute to human development, poverty reduction and achievement of the Millennium Development Goals (MDGs)—it could also comprise business opportunities and serve to spur more robust private sector development and perhaps even over-all economic growth.
Furthermore, development can be seen as the process of enlarging and expanding people’s choices and freedom. Drawing on this definition, there are several markets for which the poor’s participation is expected to have a large and positive impact on human development, thus comprising the focus of our recent work:
Markets are therefore inclusive if they provide the poor more affordable access to key goods and services; and if they function in ways that are not exploitative and truly begin to open up opportunities for the poor to pursue economic empowerment and enhance human development.
Innovations to make markets more inclusive for the poor
Market failures, government failures and some of the characteristics of both the poor and business actors, as well as their environment, could act as barriers preventing the poor from more actively participating in markets, both as consumers and as producers. To help make markets more inclusive for the poor, one avenue of response could focus on removing some of these barriers, in an effort to change the environment itself. This line of action might involve, for example, institution-building and extending legal empowerment to the poor, and perhaps even a significant part of the non-poor but still low-income population. However, these types of investments may take time to bear fruit, and in the meantime, a possible alternative might be to work within the present environment. Private actors—including for profit and not-for-profit entities and often in partnership with the public sector—have been able to mitigate some of these constraints through innovations that have helped to make markets more inclusive for the poor, enabling them not just to gain access, but to participate in ways that enhance their economic empowerment and human development.
Some of the innovations, for instance, in the areas of financial services and ICTs include:
In addition to these, innovations in insurance instruments, notably with the creation of indexbased risk transfer products (IBRTPs) could prove useful in overcoming some of the challenges linked to traditional insurance, such as information problems. The payouts of IBRTPs are based on an underlying index (e.g. the amount of rainfall or the total livestock mortality rates), and they differ from traditional insurance products which pay indemnities when realized losses exceed a given threshold. Instead, IBRTPs make payments when the realized value of the underlying index either exceeds or falls short of a given threshold. This design allows it to sidestep the asymmetric information problems of traditional insurance products as policy-holders will not be able to influence the index outcome. And because farm level expected yields or losses need not be undertaken anymore, this also lowers transactions costs and thus enables the product to be offered at a much more affordable price. Examples of these innovations include:
Are all these initiatives going to be successful in achieving financial viability, or even perhaps achieve competitive rates of return? Is there a trade-off between financial viability and penetrating deeper into low-income markets? Will the positive development impact be significant and sustainable? Is the majority of the poor—for instance, those living on less than $2 a day—going to be reached? And perhaps most important, are these strategies and innovations reflective of an emerging trend? For the most part, we find that the answers to these questions are still largely based on inference rather than on conclusive empirical evidence. Though there are a number of impressive success stories, most of what we find are still preliminary. Nevertheless, change seems to be underfoot—the direction and scope of how private actors and their innovations are reshaping the low-income market landscape is clearly a fertile area for continued research.
Some general sources:
This issue of HD Insights draws on research undertaken by the Office of Development Studies in the context of the Growing Inclusive Markets Initiative, a multi-stakeholder effort led by UNDP exploring opportunities for business and human development advancement (www.growinginclusivemarkets.org)
1. Acosta, Pablo, Illana Melzer, Ronald U. Mendoza, Namsuk Kim and Nina Thelen (2008). “Are Markets Inclusive for the Poor? Developing Market Heat Maps.” Working Paper. Office of Development Studies, United Nations Development Programme, New York.
Note: HD Insights are network members' contributions and do not necessarily represent the views of UNDP.
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