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Helping the poor by building entrepreneurship
Well to start, in many cases corrupt regimes have consumed massive amounts of aid. In the past aid -- especially from America -- was often tied to political agendas and went to supporting regimes that really had no business receiving aid. More money went to feeding strategic alliances with countries that were "poorly run, or not that poor," as phrased by The Economist. Often, direct aid has not only bred corruption and the misallocation of resources away from those who need it most, but it has also fostered dependency and skewed the perceived value of goods and services. So is there a better way to help the planet's poorest people? C.K. Prahalad believes there is. In his book, The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, Prahalad argues that by regarding the world's masses, who he terms "the bottom of the pyramid," as potential customers, businesses and the poor will be better off. Prahalad suggests that the private sector may do a better job eradicating poverty, building dignity and respect, encouraging entrepreneurship, and reducing dependency than handouts under traditional aid programs. Prahalad writes,
Reaching the poor is going to require more than just offering them "an existing portfolio of products and services," writes Prahalad. "Because these product portfolios have been priced and developed for Western markets, they are often out of reach for potential customers in [bottom of the pyramid] markets. More important, the feature-function set has often been inappropriate." Multi-national corporations are going to have to thoroughly re-engineer products to reflect both the very different needs of poor consumers and economics of the market -- small unit packages, low margins, and high volume. Innovation in product development will be key and may reverse the flow of concepts, ideas, and methods to improve existing products offered in developed markets. The use of existing western products and methods will simply not cut it. Prahalad uses the example of resource usage to drive home this point:
Also crucial to creating wealth at the bottom of the pyramid is rooting out corruption and implementing the rule of law. Prahalad argues that "most developing countries do not fully recognize the real costs of corruption and its impact on private sector development and poverty alleviation. The capacity to facilitate commercial transactions though a system of laws fairly enforced is critical to the development of the private sector." He sees two major areas where developing economies can improve:
According to The Economist the MCA "takes its inspiration from a group of World Bank economists, principally Craig Burnside and David Dollar, who argued that aid only works in countries pursuing sound economic policies." The MCA uses "no fewer than 16 different indicators of a country's honesty and soundness, including its credit rating, its treatment of civil liberties, its spending on health and education, and how long it takes to start a business." Madagascar
Just four years ago, Madagascar probably would have been a long shot for aid under the MCA. The country was run by a military strongman, Didier Ratsiraka, under whose four decades of rule the economy stagnated, the quality of life plunged, and civil liberties were often trampled. Change was brought about in 2002 with the election of the capital city's mayor, Marc Ravalomanana as president, though the regime change did not come easily. Former president Ratsiraka's challenge of the election result nearly brought the country to civil war before he fled into exile. President Ravalomanana has thus far proved to be a capable reformer who grades his ministers on their performance while cracking down on corruption and courting western business interests. The United States liked the way his government was running the country and a year ago notified Ravalomanana that Madagascar could apply for a Millennium Challenge grant. Because roughly 75% of Madagascar's population lives in rural areas, initiatives for stimulating growth while alleviating poverty differ from strategies used in other parts of the world. As Emma Ralijohn, the director of the MCA effort in Madagascar, put it in an interview with The Wall Street Journal, "We can't just build factories in the cities -- there would be economic growth, but not poverty reduction." Instead, relying on feedback from the Malagasy themselves, government officials came up with a plan that will use funds from the MCA to address two of the most critical bottlenecks in achieving broad-based economic growth and poverty alleviation -- the archaic system for land ownership and the banking system. Land titles
Banking reform In banking, Madagascar has been long plagued with a system that encourages banks not to lend money to the general population. Banks can earn lucrative revenue simply by holding government bonds that pay around 18% interest and floating checks for weeks on end. With MCA funding, the government aims to make bonds available to individual investors who will then have more reason to save their earnings in bank accounts (currently only 200,000 of Madagascar's 18 million have bank accounts). Banks would need to look elsewhere for revenue, something which help pave the way towards a banking system that would enable small entrepreneurs to take out microloans to grow their businesses and stimulate the economy. In The Fortune at the Bottom of the Pyramid, Prahalad has argued that such credit facilities are key to reducing poverty through wealth creation at the bottom of the pyramid. Facing criticism While Madagascar is still a long way from seeing whether these reforms are successful or even possible, the MCA has brought the country a great deal of hope. Back in America, there is debate over whether the MCA's conditions are too strict. Critics argue that in the three years since its inception the program has granted funds only to Madagascar, totaling a mere $110 million out of the $2.6 billion budget for 2004-2005 (already scaled back from $5 billion). There is also concern that the MCA could exacerbate a phenomenon recently documented by the World Bank's Monitoring Report whereby poor countries are "dividing into 'aid orphans,' bereft of any patron, and 'aid darlings,' doted on by competing agencies. The danger is that the MCA's all-or-nothing, in-or-out criteria might make this polarization worse," according to The Economist. Poverty alleviation through profits There is little doubt that creating wealth among the world's poor is a noble endeavor that would generate immediate benefits in terms of health, the economy, and even the environment. Whether or not this is an attainable goal rests on the shoulders of many parties from local and national governments to international development organizations to private enterprises, and requires innovations in product development, marketing, and distribution. The MCA and other reformed aid programs may serve as a carrot to spur change in otherwise inept and corrupt governments. As Prahalad puts it, "The development of markets and effective business models at the BOP can transform the poverty alleviation task from one of constant struggle with subsides and aid to entrepreneurship and the generation of wealth. When the poor at the BOP are treated as consumers, they can reap the benefits of respect, choice, and self-esteem and have an opportunity to climb out of the poverty trap." References This article used information and, in some cases, quotations from the following:
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RECENT NEWS Mining and biodiversity offsets in Madagascar 
(08/30/2009) Rio Tinto's ilmenite mine in southeastern Madagascar is among the largest on the planet. At peak capacity, its owners say, it could produce as much as 2 million tons of the stuff—worth roughly $100 a ton—each year, to be shipped off and smelted abroad. What's left of it after refining—some 60 percent of the ore that arrives from Madagascar—will be sold for $2000 a ton as titanium dioxide, a pigment used in everything from white paint and tennis court lines to sunscreen and toothpaste.
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