Saturday, March 15, 2008

Hand Up and Handout?

An article in the Boston Globe last year has kicked off a fair amount of "discussion" in the intenational development community. Christopher Shea's "A Handout, not a Hand Up" cites research by two groups of researchers, as well as the opinions of Jeffrey Sachs and Arata Kochi (head of the WHO's global malaria program), which suggest that getting the poor to pay for bed nets, condoms or deworming meds "doesn't work." Business Week also reported on the controversy.

"In public health, many aid groups have embraced a strategy of stimulating demand for goods such as condoms, anti-malaria bed nets, and water-purification systems through education and advertising, and then selling them at very low prices through health clinics, kiosks, and itinerant vendors. One goal of this strategy, called "social marketing," is to create homegrown distribution networks that wouldn't exist if the products were simply given away. But another has been to persuade people to value products that are good for them, and for several decades it's been the conventional wisdom that unless people spend money on something they will be unlikely to value it - or use it. Give things away and they will be taken for granted, it's thought."
Shea then cites work by Miguel & Kremer and Cohen & Dupas indicating that free distribution of dewormers and mosquito nets has a greater impact than social marketing approaches. Charging $.75 for bed nets reduced their distribution by 75% and "there was no evidence that women who got free nets were any less likely to use them."

This isn't actually surprising. Basic economics tells us that demand decreases as price increases (usually). Of course, economists like to assume market have good information. These products- nets, condoms, water purifiers- require education, or in development-speak, "market development." People don't generally want something they don't understand. And short term needs (hunger) logically outweigh long term needs (possibility of future sickness). For either the "charitable" or "social marketing" approach, there is a significant, long term educational component that may increase demand for, and usage of, these products.

The bigger problem with the "debate" is that these critics of social marketing haven’t dealt with the sustainability issue that caused social marketing/social entrepreneurship to emerge in the first place. Some charity works, but where it works is limited in amount and scope. It certainly has not been able to cure poverty, even after trillions have been spent. As Easterly and others have pointed out, charitable programs are limited by distribution problems (the Harry Potter vs malaria medicine challenge). In addition, where there is an overlap of charity and enterprise, another problem can arise where the charitable program crowds out the entrepreneur, but then leaves the community. The community is then worse off (depending on the measurement period). This has happened in BOP markets with microfinance, bed nets, and wheelchairs, to name a few. This "love 'em and leave 'em" approach has distorted markets and reduced trust, and will likely continue. A profit motivated venture has incentives to stay to recoup investments. Marketing costs can decline as customers become educated, repeat business occurs, and economies of scale help reduce costs. A donor driven program has fewer incentives to stay, once the initial intervention has been made. Too many donor funded models rely on "crisis" generated funding, not a long term commitment to addressing chronic problems. Who will give someone a new net in three years?

Sachs, the UN, and WHO are driven by (and dependent on!) a vision of massive developed country government funded programs… and I just don’t see those happening at the levels they want. One can rail against this failure to fund (and it will get you published in Time Magazine), but some of this failure is driven by donors wanting to see results. So far, they aren’t encouraging enough to justify big donor grants. Note that Gates Foundation is conspicuously absent from any direct funding of Millennium Villages (and you can be sure they have been asked). Just as PSI can be criticized (or Envirofit, Acumen, Grameen, etc.), so can the Millennium Development Goal projects of the big orgs such as UN. Achievment of the MDG’s is not just threatened by the failure of donor governments to fund at the levels Sachs suggests, but also by the failure of the implementation side. The Millennium Villages project has not yet established a record of sustainable improvements with the amounts Sachs claims are needed.

My take is that there is a need for a both approaches. For the very base of the pyramid (the 1+ billion living below $1/day), I think that charitable business models (perhaps using subsidized pricing to extend impact and provide some pricing signal) make the most sense. This is already the case with emergency aid- we don’t expect people to pay for food relief in a famine or polio vaccines. And the work of PSI and International Development Enterprises in these markets demonstrate there can be a role for business models where donor money is used for market development/education, while customers pay for some significant cost of the items they purchase.

Moving up the pyramid, market based models are likely to work better. As “Next Four Billion” and “Economic Lives of the Poor” show, the poor do have money and do make spending decisions. It may frustrate policy makers that people would prefer to spend money on cigarettes, or a burial ceremony, instead of a bed net in Africa. Just as it may frustrate policy makers that people buy cigarettes or a new TV, instead of health insurance in the USA. But that does not necessarily mean everyone should get free bed nets or health insurance. I have seen little evidence that those advocating market based mechanisms don’t also understand that these BOP markets are far from perfect. But market imperfections still seem to be better fixed by entrepreneurs than governments. And, in my opinion and experience, the relationship of merchant and customer seems to be more inherently balanced and long term (service, parts) than that of donor and aid recipient.

Shea's article cites Christian Lengeler, of the Swiss Tropical Institute, who found in Kenya that "10 percent of malaria nets currently deployed there were bought in traditional stores, 41 percent were provided 'through clinics via social marketing,' and 44 percent were handed out during the mass distribution of 2006, largely financed by the Global Fund to Fight AIDS, Tuberculosis and Malaria." Lengeler concludes: "clearly the time has come to see differing strategies as complementary rather than as competing alternatives." That seems wise- that we combine strategies, rather than argue that the one that contributed 41% of the nets "doesn't work."

I have yet to meet a social entrepreneur (or BOPreneur) that doesn’t believe there is a significant need for public goods and charity in some segments of the BOP. The most saddening thing is that in so many regions, people don't get any nets, condoms or dewormers, from the government, charities or entrepreneurs. To declare that social marketing "doesn't work," when it is clear that the basic needs of billions go largely unserved, seems disingenuous and divisive. Both approaches, and probably others that haven't been tried yet, deserve consideration in efforts to improve the lives of the poor.

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