The Bottom of the Pyramid: The Entrepreneurs We Do Not See
C K Prahalad coined the term “Bottom of the Pyramid” to describe the lowest deciles of income distribution, who are generally not factored into any discussion in business circles, presumably because of the perception that they have little economic value having little purchasing power. Prahalad went on to show powerfully with anecdotal evidence and with data that this is, in fact, a serious error, and that this section actually represents huge business potential for imaginative and innovative companies.
This point was well brought out in a talk I saw recently on YouTube that described the functioning of enterprises in the ‘informal’ sector (including agriculture) which covers more than 95 per cent of the total number of enterprises in the country, 93 per cent of the total employment in the country, and possibly more than 50 per cent of the total GDP! I am aware that these figures could become the basis for an interesting (and pointless) discussion, but feel that the basic point I will make will remain valid even if the figures change. This massive sector that is engaged in myriad tasks that we all take for granted, and accounts for such a huge share of domestic output and value and employment, is dismissively referred to as the ‘informal’ sector.
One definition of the informal economy useful for the present discussion is: the part of the economy that is neither taxed nor monitored by any form of government. Activities of the informal economy are not included in a country’s GDP. More importantly, for the present discussion, this sector does not figure in the discourse, policy formulation or programmes related to economic development.
The informal sector has certain distinct features which have important implications for policy makers. First, there are no entry barriers, which means that anyone can join and find work that will result in cash earning. Second, there are no stable employer-employee relationships, which make it attractive for business. Third, the small scale of operations make enterprises viable, and the cost of both entry and exit is minimal, adding further to the allure for business. The skills needed can usually be gained outside formal education, and this makes it attractive in poor countries and regions with poor school systems. The balance sheet in terms of externalities of this sector is heavily skewed in favour of the positive versus the negative.
An important dimension of the informal sector is that, in developing countries, the largest part of informal work is classified as self-employed. The majority of informal economy workers are women. Policies and developments affecting the informal economy thus have a ‘gendered effect’. Workers in this sector earn lower incomes, their incomes are unstable, and have no access to social security and other services. The working poor, especially the women, are mostly in the informal economy, and most low income households rely on the sector to provide for them. While enabling such families to escape extreme poverty by earning an income enough for survival, the informal sector lacks the potential for growth, trapping people in menial jobs indefinitely.
Taking into account the features of the informal economy outlined here, we can see whether there are ways for us to enable participants in this economy to escape the iron circle of poverty and get into the orbit that enables them to grow and prosper. A street hawker needs finance to buy an inventory of newspapers or straw hats or packets of peanuts, and this is today available only at extortionate rates that simply do not allow her to generate any meaningful surplus. There are many examples of micro-credit schemes based on self-help groups helping such hawkers to procure inventory at reasonable cost, and make enough money to pay back the loan, and have something left. This can unleash a virtuous cycle of business growth. Such schemes should be expanded using all existing avenues, so that credit at reasonable terms flows to this huge section of people. The results in terms of growth in incomes, savings and economic activity will be significant. The return on investment for such small sums will be huge, much greater than anything that we can expect from the ‘formal’ sector.
The informal sector consists of hundreds of thousands of people moving goods, providing services, selling products, making products, all the quotidian tasks that go on every day in any economy, enabling goods and services to flow from producers to consumers, across the length and breadth of a huge, complex and diverse country. They are entrepreneurs who should be supported and enabled to do their tasks better. They are today not supported by any programme of the government, do not have access to credit at reasonable rates, have no security of employment or income, and have no health benefits. Their children struggle to get an education, and are often condemned to occupations similar to that of their parents, and do not share the benefits accruing to those of their countrymen who are better off economically.
But people in the informal sector do not meet the definition of entrepreneur or startup as mandated by the many schemes of the Centre and the States. A startup here appears to mean a technology-based venture that attempts to bring to market an innovation. Such startups are supported generously with funding on easy terms, housed in futuristic premises and pampered with other facilities and inducements. The assumption here is that at least a few of these startups will go on to become ‘unicorns’ like Amazon, Google or Facebook and scale up to global levels, in a way justifying the large number that will fail. There are many troubling aspects to these programmes, not least of them being that the experience of incubators worldwide does not reassure one about the prospects of success of the model. Technical innovation cannot be expected to spontaneously arise at a technology park provided with excellent infrastructure, subsidies and schemes. It happens in places where the ecosystem in terms of high quality scientific and engineering institutes, research facilities, presence of risk capital providing entities like PE and VC investors, and a supportive social value system that prizes risk taking ability and is tolerant to failure is present.
If we take the example of Kerala, which has made impressive progress in setting up a startup ecosystem, the experience of the past 5-10 years is not reassuring. Large sums of scarce resources have been spent on creating incubators and accelerators, as well as supporting startups through various funding schemes. Several hundred startups have probably benefited. A few of them have gone on to scale to the next stage, and some have started making money. Several hundred young people who would otherwise have joined the thousands of hopefuls graduating from engineering and other colleges, have found gainful work in these startups, while their peers have gone on to find work in IT companies or other fast growing sectors. Similar resources could have been directed to the informal sector to promote ventures of the kind that thrive in such a sector, with immediate benefit to the entrepreneur and her family, and at little risk of default in repayment.
I propose that micro-credit enterprises be created by investors, aimed at SHGs operating in the informal sector, and following the best practices that have evolved in the micro-credit sector over the past couple of decades. Its impact on household incomes among the lowest income groups would be substantial and visible. The cost would be low, as this sector is characterized by low default rates, high growth and growing demand for credit. This should not be treated by the government as a welfare measure, but brought under the Industries Department and run out of the presently grossly underutilised District Industries Centres. These are fully provided with staff, vehicles, offices and budgets, and should have little difficulty carrying out their task.
These entrepreneurs of the informal sector are there not out of choice, but out of necessity. They and their families will otherwise starve. Every day, their lives are fraught with risk, and the income they make each day is what puts food on the table. They practice and manage market research, supply chains, inventory, customer relationships, quality, service delivery, and all the many aspects of running a business without having even been to school. Everything that will help them carry out their little tasks and businesses should be done. Nothing that hinders them in this task should be allowed to happen, because that is a crime. While credit on reasonable terms, and an enabling public service infrastructure should be provided buy the state, anti-social acts like hartals and bandhs should be seen for the anti-social acts they are, and not permitted.
The poor don’t need our charity. More than any other section of society, all they need is a level playing field, and some support. Every day we learn from the media about the egregious acts of default of large borrowers, their grinning faces reflecting their contempt for society. Spare a thought for those who borrow at extortionate rates and repay every rupee, while eking out a meager livelihood.