What can APEC do for Business: Fostering Economic Growth through the Business Development Program at the Base Of the Pyramid

By Indra Surya, Susantio

TABLE OF CONTENTS I. ABSTRACT

II. INTRODUCTION

III. UNDERSTANDING THE POOR AND THEIR NEEDS
i) How Poor are the Poor? : Current Research and Publications on the Base of the Pyramid (BOP) Issues ii) Indonesia Poverty Reduction Programs

IV. THE BASE OF PYRAMID : BUSINESS APPROACH i) Preliminary Measures for Forming the BOP Business Taskforce ii) Fair Trade Program iii) BOP Products & Service Expo iv) Duty Free BOP Outlets in major International Airports & Seaports

V. FUTURE PERSPECTIVES AND CONCLUSION

VI. REFERENCES
I. ABSTRACT

This essay attempts to emphasize the importance of the private sector’s involvement through APEC participation in fostering economic development at the Base of the Pyramid (BOP).

In December 2008, the Asian Development Bank[1] reported that poverty in the Asia Pacific region is estimated to be much larger than earlier reported. The region was also reported to be facing major hurdles in meeting its Millennium Development Goals. Following ADB reports, in January 2009, the World Economic Forum[2], in partnership with The Boston Consulting Group presented a set of new insights and design principles which can help companies tap the economic potential of BOP markets in ways that serve both commercial and societal goals.

In fact, both reports concluded that the task to reduce poverty is far too large for the public sector to handle by itself, and so the role of the private sector in poverty reduction and inclusive growth is therefore critical. They argue that the private sector can play a bigger role in improving the lives of the poor and near poor than it does now, leaving the public sector to focus on those most in need.

While many companies around the world are increasing their engagement in emerging markets, many remain focused on the high-income populations in those countries. The major reason is because the BOP approach needs an innovative concept that channels private entrepreneurship towards inclusive development. Unfortunately, most of the private sector has been familiar with traditional and regular ways of doing business, and therefore faces difficulty in changing their ways of doing business in the BOP market.

I submit this proposal for a private sector-led response with the conviction that innovative marketing approaches will provide solutions to continuous business growth in APEC members.
II. INTRODUCTION

Due to a high level of inequality, the richer groups in the Asia Pacific region, although small in number, earn a disproportionately large portion of the total income. The International Finance Corporation & the World Resources Institute[3] reported that, those annual earning above U$3,000 (Purchasing Power Parity in dollars), while constituting only 17% of the region’s population, account for 58% of its total income.

The private sector generally caters to this narrow upper portion of the population. However, the BOP market is large and potentially viable. The BOP segment represents people living on an average of U$2 per day—those earning less than U$3,000 (purchasing power parity) a year, or less than U$2.11 per day in the People’s Republic of China, U$1.56 in India and U$1.32 in Indonesia. Asia plus the Middle East has by far the largest BOP market: 2.86 billion people with an income of $3.47 trillion. This BOP market represents 83% of the region’s population and 42% of the purchasing power—a significant share of Asia’s rapidly growing consumer market.

Four broad strategies[4] are distinguished that are used by enterprises operating in BOP markets and that appear to be critical to their success : • Focusing on the BOP with unique products, unique services, or unique technologies that are appropriate to BOP needs and that require reimagining the business, often through significant investment of money and management talent. • Localizing value creation through franchising, through agent strategies that involve building local ecosystems of vendors or suppliers, or by treating the community as the customer, all of which usually involve substantial investment in capacity building and training. • Enabling access to goods or services—financially (through single use or other packaging strategies that lower purchase barriers, prepaid or other novel business models that achieve the same result, or financing approaches) or physically (through novel distribution strategies or deployment of low-cost technologies). • Unconventional partnering with governments, NGOs, or groups of multiple stakeholders to bring the necessary capabilities to the table.

The world's leaders have repeatedly promised to tackle poverty on a massive scale however they have failed to mobilise the necessary resources. And when news about poverty has been spreading widely by media, people from all around the world, including in the Asia-Pacific, have responded with great solidarity and millions of dollars have been donated to assist relief efforts. People in these regions can no longer afford to see poverty exist in generation after generation, and this `holding hand` action and goodwill makes me optimistic that people in the private sector will join together, get involved at a local level and implement sustainable solutions in order to solve the poverty issues.

III. UNDERSTANDING THE POOR AND THEIR NEEDS

i) How Poor are the Poor? : Current Research and Publications on BOP issues

According to Stephen C. Smith[5], poverty is the cruelest trap. For many of the unfortunate people who are ensnared in this painful leg hold, escape on their own can be all but impossible. Although it may look bleak, there is real hope. In fact, hundreds of millions of people have already broken free from poverty, gaining the assets and capabilities to sustainably support themselves and their families in decent living conditions. Taking the high-growth economy China as an example, poor Chinese people living in sub-urban areas can escape from the grind of extreme poverty through increasingly effective, innovative and promising programs that reliably provide the means of escape.

Poverty is hunger. Chronic hunger is measured by a daily intake of less than about 1,700 calories and a lack of access to safe and nutritious food. This is a dangerously low level of calories, making a person lethargic and susceptible to disease and death. Children are particularly vulnerable and the impact is catastrophic. Severe malnutrition will cause shorter life, lifelong disabilities and death as a result.

Poverty is powerless. The poor lack of access to economic ecosystem and real market that could offer a way out of poverty. It is the systematic exploitation, theft, and abuse not only by the rich but by government officials. The poor must pay larger bribes, as a share of their income, than the rich just to survive. C.K. Prahalad[6], who studied the poor living in Dharavi slum quarters, noted that they had to repay debt with very high interest rates, reaching 600%-1000%.

Muhammad Yunus[7], founder of the Gramen Bank mentioned that, “The poor remain in poverty not because they want to, but because of many barriers deliberately built around them by those who benefit from their poverty.” He was referring to the nexus of landlords, colluding moneylenders, corrupt officials, and others who are probably among the very few in the world who will be better off if poverty continues than if it is ended.

Those in deep poverty can now be distinguished from those in relative poverty, whose incomes are much less than ours, but enough to keep their heads above the water. Depression and anxiety are pervasive among the poor-being unsure of where your family’s next meal is coming from creates tremendous emotional stress. Many poor people are deeply ashamed with their poverty, even when it is not their fault. And they usually feel terrible that they are unable to provide adequately for their children. This inability creates chronic feelings of hopelessness and anguish.

Many questions have been raised about the ability of the poor to pull themselves out of poverty if they try hard enough. The poor are not “lazy,” but caught in poverty traps. No one wants to be poor, and poverty is not the fault of the poor. The poor work very hard, particularly when doing so offers any reasonable chance of paying off. But like many traps, escape from poverty often requires some help from the outside.

ii) Indonesia Poverty Reduction Program

Many times a community of the poor can improve its circumstances by working together on joint projects. However, this requires a leader who has time to organize, and generally the poor do not have the knowledge and resources to do this.

Indonesia, like other developing economies, has experienced several serious problems related to the poverty. Since the Asian financial crisis in 1999, the poverty rate in Indonesia has increased to more than 50% of the total population which is approximately 230 million people. The worsening social and economic conditions during the Asian financial crisis had drawn many people into criminality, a vicious circle that reinforces poverty. Thus without better policies and good governance, Indonesian people were continuously suffering from poverty which eventually leads us to a weak nation with dangers and threats.

After the Asian financial crisis, a number of poverty reduction policies and programs have been formulated and implemented, however the results are still far below the target. The conversion of policy into program and project was not yet able to touch and address the root of the problems until the government of Indonesia committed that poverty reduction will be one of the top national priorities in the National Development Program (well-known as PROPENAS), by investing heavily in building capacity and providing access to resources, especially information and communication technologies and skills.

An example of one of many innovative approaches to improving the living standards of the poor is that of a local NGO that implements the community radio program in Aceh and Nias provinces. Imam Prakoso[8], Director of the Combine Resources Institution once proposed the application of radio as a local community tool for poverty reduction. Radio has a role in providing access to resources and in building capacity; therefore local community radio could address poverty issues in two ways: (1) On-air and Off-air programs and (2) collaboration with third parties to achieve a broader impact.

Community Radio can flexibly contribute to capacity building efforts and provides people with access to resources, because it directly responds to the interests and needs of the community. The problem is how then such practices could inspire other radio operators to do similar things, considering that Indonesia has a large area and the communication network among community radio is still weak. What is important is to ensure that it continues to broadcast programs and collaborate with other stakeholders locally and not become a mass national program, which could reduce the peoples’ empowerment and self-reliance. COMBINE is now continuing to provide training and education to improve community capacity in operating community radios in the villages.

In today’s complex and dynamic world, Indonesia has greatly benefited from having help from many countries in managing poverty problems. And it is extremely important to distinguish and to solve multiple crises simultaneously while the private sector, NGOs and international organizations can be brought together to focus their attention and efforts to help and contribute to the local communities.

IV. THE BASE OF THE PYRAMID : BUSINESS APPROACH

i) Preliminary Measures for Forming a BOP Business Taskforce

Any inclusive growth strategy must involve this vast BOP market in the growth process of the Base of the Pyramid market. There are several reasons why the BOP market has failed to integrate with the growing economy of Asia. The BOP population in Asia, both as consumers and producers, is mainly rural and lacks infrastructure, financial services, communications, electricity, and access to clean water, education, and basic health services. It faces difficulties in accessing new technology, and its activities are largely informal in nature, preventing proper access to resources. A large number of the BOP populations do not have title to their land, dwellings, or other property. Most do not have crucial information such as on prices, or access to markets for their labor or produce, and much of the value of what they produce gets captured by middlemen.
Lead by APEC, selected NGOs and the private sector will be involved in the preliminary organization of the project. APEC will interview and select motivated private sector participants that are currently experiencing difficulties in approaching BOP markets to form a BOP Business Taskforce. Two members from each of the NGOs and the local government will be appointed to oversee the smooth running of the project and offer feedback to the Taskforce members. The Taskforce will, however, be encourage to show initiative and manage the various stages of the ‘BOP Business’ project.
I propose that three to five local private companies within a specific area of each country be chosen to trial this project. The Taskforce will firstly examine the BOP population within the area, knowing their potential for remarketed goods and services and calculating their current income and living expenses. Then they will invite the people to visit a school or appointed meeting place and conduct a presentation in assembly time on the BOP business initiative. A `Win-Win business solution` should be sought, including assistance for education or technological training for current business practices and the business environment, market information, micro-finance loans to expand businesses and introducing bigger projects that would involve participants over the subsequent twelve months.

ii) Fair Trade Program

As mentioned earlier, the poor frequently pays a poverty penalty—paying higher prices or receiving lower quality goods and services. The BOP Business Taskforce therefore should promote a Fair Trade program to overcome these constraints by addressing fair policy and business contracts and by fostering new business models with product and process innovations in order to enable the BOP market to function more efficiently and productively on commercial lines.

The BOP Business Taskforce should implement Fair Trade policies by purchasing the products and services at market price and providing good quality goods and services in return. According to the Global Exchange Development[9], fair trade should involve the following principles: • Producers receive a fair price - a living wage. For commodities, farmers receive a stable, minimum price. • Forced labor and exploitative child labor are not allowed. Buyers and producers trade under direct long-term relationships. • Producers have access to financial and technical assistance • Sustainable production techniques are encouraged • Working conditions are healthy and safe • Equal employment opportunities are provided for all • All aspects of trade and production are open to public accountability

Based on the above fair trade principles, I envisage that the pilot project for the BOP Business Taskforce would work as follow: • The Taskforce will canvas interest among the people in the BOP area in a project, conduct a survey of the area and inform the NGOs of the number of computers and other related hardware required (at least one for each village/area) • Then they select the potential products and service, then work in conjunction with the NGOs to establish a fair trade contract. • Signs reading ‘Fair Trade & Better Life’ will be erected at the chosen locations to encourage all people to think twice about betrayal of the fair trade contract. • Micro-finance loans will be provided by government or private sectors possibly with a lower interest rate.

iii) BOP Products and Service Expo

Another major event that will be managed by the Taskforce in conjunction with the government and NGOs will be a BOP Products and Service Expo that will be held one weekend in the major city and possibly the capital. Members of the general public will be encouraged to attend by offering discounts; for example “buy two-get-one free”, “give-and-take” recycling programs, “some percentage of discount without wrapping package” and other innovative yet effective marketing strategies.

The Expo aims to showcase as much as possible fresh products, creative products and innovative services, which are achievable by implementing fair trade programs. It will also allow residents to acquire information and propose innovative ways to implement fair trade and poverty reduction programs. The BOP representatives will then share their business experience and prove to the community that they are competent and committed workers.

There are several key stages that relate to the management of the Expo: • The NGOs will directly approach companies willing to make donation for the future projects and invite them to set up a stall for the Expo. • The Taskforce will also work in conjunction with the local press to attract small scale private sectors whose products/ services specifically target the needs of the BOP markets. • Local media will be approached to promote the event. • Scientific, artistic and literary coursework relating to Poverty Reduction and Fair Trade program will also be showcased during the event. • Private sector operators who benefit from this program will contribute a sum of money which will later be used to finance the ‘Rewards and Acknowledgment’ section of this Project.

This event also provides benefits to all stakeholders: • The Expo is a unique opportunity for private companies to directly advertise `their products` and promote their commitment to sustainable economic development of the country. It will also provide a platform to international/global market, particularly for local exhibitors. • Consumers will be given the opportunity to learn about the potential of the BOP market and increase their willingness to join the programs that are particularly relevant to the local area. • Throughout the continuous projects, regional cooperation will be promoted to deepen regional integration.

Interactions among APEC members that have engaged in efforts to promote this BOP program will result in dynamic development in the wider cooperation and community building in the future. These initiatives may be aimed at strengthening functional cooperation in a variety of areas, developing regional mechanisms and institutions, promoting regional economic integration, as well as establishing a better regional community.

iii) Duty Free BOP Outlets in Major International Airports and Seaports

In his book, C.K Prahalad outlines three important criteria to reach the BOP market segment through innovative ways of `Pricing, Availability and Accessibility`. He emphasizes that providing access to open markets is essential to the business growth of the BOP people. Here, I would like to propose that providing accessibility to BOP business can be started by providing selling routes and marketing channels through airports and seaports with the goal to expand BOP markets to international ones.

By providing a selling route through Duty Free BOP Outlets in major airports and seaports in every APEC member economy, BOP products and services would be given a good opportunity to be recognized on the international stage. It will encourage them to produce better quality products and services and gradually reach international standards in global competitiveness.

There are several key stages that relate to the management of opening a Duty Free BOP Outlet in the major airports and seaports of a country: • The Taskforce selects appropriate products, mostly handicrafts, apparel, on-spot shoe/bag polishing services etc. that can be legally sold at Duty Free Stores. • The Taskforce manages the outlets at major airports/seaports and provide adequate information about the BOP products and services to the customers. • Innovative marketing campaigns along with the Duty Free discount will attract customers to approach the outlet and purchase numbers of products or services. • Private sector companies that benefitted from the outlet program will contribute a sum of money which will later be used to finance on opening new outlets.

This Duty Free BOP Outlet program will also provide benefits to all stakeholders: • The outlet is a unique opportunity for BOP producers to indirectly advertise their products and promote their commitment to sustainable economic development of the economy concerned to international/ global markets. • Consumers will be given the opportunity to understand BOP producers and increase their willingness to purchase the products and services. • Through continuous business expansion, it may create bigger opportunities to export products and promote deeper regional business cooperation.

V. FUTURE PERSPECTIVE AND CONCLUSION

APEC members have combined GDP of over U$16 trillion and carry out 42% of world trade. Over the past decade, APEC has become the primary vehicle in the region to promote open trade and economic cooperation. Today, APEC`s role has grown in both depth and scope and therefore, without serious involvement from APEC, poverty in this region will remain as one of the crucial issues that embarrass humanity living in the 21st century.

Moreover, the underlying purpose of APEC is to bring regional economies together to recognize and act on common interests. APEC economies, however, have different approaches to Free Trade Agreements (FTAs). FTAs have attractive elements, particularly if they can be an avenue towards global free trade. There are certainly risks to doing nothing or completely ignoring poverty as one of the economic gaps or barriers among the APEC members in favor of trade liberalization. The Bogor vision of free trade and investment in the region, although not clearly defined, remains highly relevant[10]. Trade liberalization and facilitation are an essential part of the APEC community-building process; and therefore I strongly urge the APEC Leaders to extend the APEC agenda into new areas, such as fair trade and poverty reduction, which are of mutual concern and where APEC co-operation can make a significant difference in the region.

The BOP approach will need strong public-private partnerships initially to succeed. At present, knowledge about ways to develop the BOP market is insufficient and the BOP approach does not figure prominently in strategies for development. More knowledge is needed about better ways to engage the private sector in the BOP approach.[11] While studies have shown the size and potential of this market globally, they need to be followed up at the regional level to demonstrate BOP opportunities for the private sector and to enable economies to adopt appropriate strategies, policies, and institutions to encourage development in the BOP sector.

Perhaps poverty reduction and living standard improvement should also be seen as the war between romance and reality as we can no longer afford to see poverty in generation after generation. What is required, though, is not only APEC leadership that will keep the economies of this region stabile and safe, but also leadership that can communicate to the people of this region that prosperity and safety matters to APEC as an international organization.

It is essential to encourage APEC members to engage in good governance and understand that investing in poverty reduction program is not a charity. It is a smart national policy to rebuild the regions through innovative solutions, not lectures. Political leaders and business executives should have higher ambitions than being popular, and this is a moment of opportunity today for our political and international organization Leaders to strike-off on a big idea to balance a wiser and good policy with the desire to overcome the poverty problem. It is not too late to begin now.

VI. REFERENCES

Books & Hardcover Publications:
1. Asian Development Bank : Project Number : 41258-01; Technical Assistance Report, December 2008.
2. World Economic Forum : The Next Billions : Unleashing Business Potential in Untapped Markets, January 2009 (prepared in collaboration with The Boston Consulting Group).
3. IFC & WRI : The Next 4 Billion: Market Size and Business Strategy at the Base of thePyramid; 2007.
4. Stephen C. Smith : Ending Global Poverty : A Guide to What Works; 2005.
5. C.K. Prahalad : The Fortune at the Bottom of the Pyramid : Eradicating Poverty Through Profits ; 2006.
6. Muhammad Yunus : Banker To The Poor: Micro-Lending and the Battle Against World Poverty; 2008
7. Charles E. Morrison and Eduardo Pedrosa : An APEC Trade Agenda? The Political Economy of a Free Trade Area of the Asia-Pacific.

Articles :
1. Imam Prakoso : Community Radio and Poverty Reduction: Indonesian Cases; 2007
2. What is APEC and What Can It Do For Business?

Internet :
1. Global Exchange's Development 2. The World Bank : Public Expenditure in Indonesia -----------------------
[1] Asian Development Bank : Project Number : 41258-01; Technical Assistance Report, December 2008.
[2] World Economic Forum : The Next Billions : Unleashing Business Potential in Untapped Markets, January 2009 (prepared in collaboration with The Boston Consulting Group).
[3] IFC & WRI : The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid; 2007.
[4] IFC & WRI : The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid, 2007 : Business Strategies. page 30-31
[5] Stephen C. Smith : Ending Global Poverty : A Guide to What Works; 2005.
[6] C.K. Prahalad : The Fortune at the Bottom of the Pyramid : Eradicating Poverty Through Profits ; 2006.
[7] Muhammad Yunus : Banker To The Poor: Micro-Lending and the Battle Against World Poverty; 2008
[8] Imam Prakoso : Community Radio and Poverty Reduction: Indonesian Cases; 2007

[9] Global Exchange's Development
[10] Charles E. Morrison and Eduardo Pedrosa : An APEC Trade Agenda? The Political Economy of a Free Trade Area of the Asia-Pacific, page 11
[11] Asian Development Bank : Project Number : 41258-01; Technical Assistance Report, December 2008 page 2