Saturday, November 28, 2009

Is it Right to Have the Poor Pay?

As someone involved in companies that are based on the idea of attacking global problems of pollution and health, I am deeply interested in the issue of whether it is "right" to have the poor pay for products. And I have spent much time trying to find innovative business models that create societal value and allocate it between customers, communities, investors and employees in a way that makes impactful solutions scaleable and sustainable.

In addition to my teaching, I have been quite involved in two companies that are based on the principle that the best way to achieve social good is through market based approaches. Envirofit, which designs, manufactures and sells cook stoves to poor people in India is a non-profit company, dedicated to developing environmentally friendly products so that poor people can lead healthier and more productive lives. Inviragen is a for-profit biotech company developing vaccinces for developing world infectious diseases in markets that traditional pharmaceutical company R&D has ignored. Is this the "right" approach to tackling these global challenges?

Some people have objected that it isn't "right" to have the poor pay for products and services on ethical grounds. They argue that for those who are wealthy to charge someone who is poor violates an ethical norm. That humans should provide charity for religous or altruistic reasons.

More recently, people have started to argue that having the poor pay isn't "right" because it violates rules of economic incentives. That, as Rachel Glennerster of MIT's Jameel Poverty Action Lab (J-PAL)* states in this month's Fast Company: "Charging small amounts is the exact wrong thing to do" to tackle issues facing the poor.

The data are several years old, as is the debate (I first blogged on it in March 2008). But with J-PAL now being featured in Fast Company, and one of its members, Esther Duflo recently being awarded a MacArthur "genius" grant, I am concerned about the ramifications of these catchy sound bites.

J-PAL studies are useful for what they show, but my concern is that their findings are now being applied with too broad a brush. Glennerster's comment is such an example. Perhaps she added caveats to her statement that didn't make it past the Fast Company editor's desk. Both examples are in the field of public health, an area where the societal and community effects are compelling for broad measures. But standing alone, the statement is dangerously overbroad.

As one J-PAL researcher put it in the Fast Company article, "it's more satisfying to answer small questions well than big questions badly." Yet statements such as Glennerster's seem to indicate a willingness to answer the bigger questions with limited data. While most of J-PAL's studies seem to be on government funded aid programs (see Duflo's suggested "Best Buys" to achieve UN Millennium Development Goals), their broader policy prescriptions don't seem to have boundaries. To apply this "pricing model" to the many social enterprises working today in Base of Pyramid markets would be foolish. Not only is it OK to have the poor pay for goods and services, it may often be necessary in order to have these goods and services exist.

To me, Glennerster's comment speaks to only one side of the equation, that of demand. Yes, people will use more mosquito nets if they are free, or get more infants vaccinated if they receive lentils. But that assumes that someone is willing to supply the nets for free, or buy the lentils to accompany the vaccines. In a small trial, this charity work can be done. The sponsor can buy a few kilos of lentils along with the vaccines. But at the massive scale required to really solve some of these problems, I am skeptical. Even the Gates Foundation with its billions cannot buy all the nets, vaccines, cook stoves, treadle pumps and school fees required to lift the world from poverty. With or without lentils. To use the fashionable term these days- charity doesn't "scale." What does scale is markets (and economists know this, don't they?). That is what has made the 4 C's ubiquitous in our world: Coke, condoms, cigarettes and cell phones. While I don't view markets as a panacea for every global challenge, I do think they are indispensable in development.

As my regular readers know, my argument is more nuanced. In some areas, where the problems are of a crisis nature, and governments are weak, charity is the most workable business model. Where problems are more chronic, such as vaccinations or education, but governments are weak and therefore unable or unwilling to provide such public goods, then enterprising, market based approaches offer a more sustainable business model. And these are typically driven by customers paying for their goods and services. Sometimes, the business model is purely commercial. Sometimes, as with Envirofit or International Development Entrprises, it is a hybrid, where donations are used to subsidize product or market development. Other enterprises which have the poor pay include Vision Spring, Grameen Bank, and Kickstart. Even A-Z Textiles, a mosquito net manufacturer. When J-PAL argues that incentives work for the poor, they also need to remember that incentives work for producers. Yet they are curiously silent on who will make the free or subsidized goods and services to support the policies they propose.

To be sure, the actions of A-Z, Vision Spring, or even Grameen Bank are still small. I don't claim that there is any one path to reducing poverty and improving public health, education and the environment. Charity and "free" products will be required in some instances, but so will having the poor pay.

While I am pleased that J-PAL is bringing new approaches and insights to the field of international development, I encourage them to remember that the field has humbled many with big new ideas. Most tools are useful only in specific situations, even economic tools (like randomized trials). To dispel myths is important work, but broad statements of general application begin to build new myths that may be just as mistaken.

The title to this post is purposely provocative. My answer would be "much of the time, but not always." Not a very good sound bite for a reporter. But it sounds "right" to me.

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*NOTE: I have recommended J-PAL's work to BOPreneurs. And I found one of their recent studies on the impacts of microfinance to be useful for some of my work in that field.

Update 11-30: NextBillion's Francisco Noguera posted on the Fast Company article and this post. Thank you to those who have commented on this post and for providing more examples. Also, William Easterly recently blogged on another aspect of randomized controlled trials, noting they will "only EVER be available for a small sample of aid projects."

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