Rethinking Poverty and the Role of Business and Government: An Interview with Aneel Karnani

In his new book, Fighting Poverty Together: Rethinking Strategies for Business, Governments, and Civil Society to Reduce Poverty, Aneel Karnani challenges conventional thinking about poverty. A professor of strategy at the University of Michigan with a doctorate from Harvard University, Karnani studies poverty reduction and examines how society can strike the right balance between private profits and public welfare in tackling major societal problems.

What is the central argument in your new book, Fighting Poverty Together?

Poverty is a major challenge for the world, and the world is not making enough progress on poverty. So what should we do about it? The central argument in my book is that business and government need to play appropriate roles in fighting poverty. Neither one will solve the problem alone. They must each play a role.

You believe job creation is the antidote to poverty and that governments should provide only the legal framework, climate, and infrastructure to make it happen. Why might that approach make sense?

The central issue in reducing poverty is creating jobs. If you ask a poor person, what do you wish for? They say, get me a job. So all our efforts have to focus on creating jobs. The primary engine of job creation is business. There is no magic answer to create jobs, but the starting point is to focus on doing that. Government must create an environment that allows business to thrive—by not having onerous regulation, providing the right infrastructure, the right procedures for getting permits, et cetera. In many countries, government stifles business rather than fosters it.

In my book, I describe ways to foster job creation. In particular, government must support small- and medium-size businesses. If you look at the United States or Europe, the bulk of job creation is in small and midsize companies—that’s about 60 percent. In poor countries, that’s not the case. This is the so-called missing middle. For example, in Africa, you can borrow $100 or $1 million. But if you want to borrow $10,000, it’s not so easy. So government needs to foster the small- and medium-size businesses.

The second emphasis in my book is on job creation that focuses on youth. Unemployment among young people is typically the highest among any age bracket. But if you don’t put a young man on the path to employment at age 20, with the right experiences, he may never get a job.

The third point is that government needs to provide basic public services to the poor: public health, education, drinking water, sanitation, security, lack of gender discrimination—things we take for granted. We need a renewed emphasis on providing these basic services.

Give us a short history of how the West has fought poverty over the last 60 years and why these efforts haven’t been as effective as they should be.

In the last 60 years the Western world has tried to reduce poverty. From 1950 to 1980 the emphasis was on government-led poverty reduction efforts and on big projects that were top-down and involved IMF and World Bank support. We came to realize the government was not doing a good job, and in the 1980s the pendulum swung to free markets, and the “Washington consensus” was to deregulate, liberalize, and globalize and let the free markets do it all—but that hasn’t worked either.

In the last decade, the emphasis has shifted to free markets on a small level, such as microcredit, led by Grameen Bank in Bangladesh. This idea has spread now, and yet the evidence is that microcredit doesn’t seem to work. So I argue we should stop if it’s not working. The reason it doesn’t work is that microcredit assumes the poor want to be entrepreneurs. Well, the poor are not so different from the rich. In the United States, 90 percent of the workforce chooses to be salaried rather than entrepreneurs. So why would we think all the poor in Africa want to be entrepreneurs? If given a choice, most would prefer to have a salaried job.

In the last ten years, a “bottom of the pyramid” strategy has become popularized, which says a company can sell to the poor and make a profit and simultaneously reduce poverty. It’s too naïve. Selling to the poor doesn’t make much money, and that doesn’t make them less poor—they need to produce more, not consume more. This emphasis on selling to the poor has sometimes made them worse off because the poor are typically less educated and ill-informed, and they end up spending a high amount of their budget on alcohol, tobacco, and food that is not nutritious. “Bottom of the pyramid” was a seductive proposition, but it hasn’t worked.

Hasn’t the widening of access to products and services helped the poor at all?

One exception is mobile telephones. They are good for the poor and help them keep in touch and improve productivity. A farmer can get information on using fertilizer, or a carpenter can utilize his time better by keeping in touch with his customers. And mobile phones are cheap.

Unfortunately, it’s difficult to profitably sell useful products that the poor can afford. Technology will not dramatically reduce the cost for most products like it has for mobile phones. So for most products we need a price/quality trade-off. We need to say, here’s a product that is not as good, but it will work and it’s cheap. There are 500 million people in the world with poor eyesight but who don’t get eyeglasses. The major cost of eyeglasses is not the glasses themselves, it’s the cost of customizing them. I think we should not customize eyeglasses for the poor and just say, take the one that is approximately right for you. We already do that in the United States for reading glasses—you can get them at any supermarket in the states. We should do something similar for all eyeglasses targeted at the poor. We should find solutions that are good enough. Perfection is the enemy of the good.

What other strategies work in reducing poverty?

We also need to make the poor more employable through education, training programs, and job-matching programs. What you see in developing countries is that there is a job available in the city and a poor rural person would like to get that job, but he/she doesn’t know about that job, or how to apply for it, or how to move to the city. There is an innovative government program in Andhra Pradesh, India, to match young people in villages to jobs in the city.

What is a job-creation program?

Companies create jobs, but government and civil society can encourage this. Mozambique used to be a large exporter of cashew nuts, and a lot of rich people in rich countries want to eat them. But the civil war came in the ’80s and ’90s, and the trees were destroyed, and the factories were destroyed, and management deteriorated, and the industry died. In 2000, a Washington, DC, NGO called Technoserve entered the picture. They went to Mozambique and said, we can help revitalize the cashew industry. They got in touch with local entrepreneurs and said, we can help you grow in the business. They would find entrepreneurs who were “stuck” and they would “unstick” them and help them to grow. They would emphasize small and midsize companies and work with government to implement appropriate regulation, and within five to six years the industry was revitalized and had created thousands of jobs and helped farmers. And now it has become a thriving industry. Technoserve has stopped subsidizing and charges a fee for its service. So it’s job creation at its best. It’s private sector doing it, but it’s government and NGOs helping.

Is the microfinance industry all a waste of time, in your opinion, or is there room for it among antipoverty programs?

We should stop putting so many resources into it. If it were smaller and actually just targeted the people who wanted to be entrepreneurs, it would work. The poor person who wants to be an entrepreneur needs not just money but also training in other business skills, such as accounting and marketing. We need to give them these skills, not just money. I would also like to see the industry shift emphasis from just microcredit to microsavings. The poor need not just loans but also to save money. But they have no mechanism to save money. They have so little, no bank wants to help them. If they keep the money at home, there’s the temptation to spend it, or they worry it will be stolen.

Also useful is microinsurance, for health, accidents, unemployment, or a bad crop. But providing microinsurance is not economically feasible with current technology and business models. I would find ways for microfinance to shift emphasis to microsavings and microinsurance.

What role does civil society play in all of this?

Civil society is not a substitute for government or business, but it can be a catalyst, a watchdog, and an advocate to ensure that both business and government do their jobs properly. If a business is exploiting the poor, civil society should agitate to end this. Or, for example, in India or Africa, if a government is not doing a good job in education, an NGO might start one or two schools—but that wouldn’t help India when it needs hundreds of thousands of schools, not just two. Civil society should agitate and tell government, why are you not doing your job? Or, civil society can be a catalyst and find a better way to provide schooling and then get business or government to adopt that approach on a large scale.