What have markets ever done for the poor?

The World Development Report 2000/2001, Attacking Poverty is an important milestone in the fight against poverty. In the Foreword, James Wolfensohn (President of the World Bank) states ‘…major reductions in human deprivation are indeed possible, and that the forces of global integration and technological advance can and must be harnessed to serve the interests of poor people. Whether this occurs will depend on how markets, institutions, and societies function – and on the choices for public action, globally, nationally, and locally’. The report strikes an optimistic note on how markets enable poor people to sell their labour products, finance investments and insure against risks. But it also warns that creating markets and supporting institutions cannot be accomplished overnight and market-led reforms will produce winners as well as losers.

The controversies surrounding the production of this report are well documented (Kanbur, 2001; Wade, 2001). The final text represents a compromise between those who subscribed to the Washington consensus, summarised by Rodrik (2006) as ‘stabilise, privatise, liberalise’, and those who advocated a more measured approach to development. In the post-Washington consensus era, the hierarchy of the World Bank is happy to reaffirm the importance of markets as the central mechanism for resource allocation but has adopted a cautious tone on their ability to single-handedly address development challenges (Lin, 2011).

It is in this context that we should look at the literature advocating markets as a panacea for poverty alleviation. The work of the late CK Prahalad (2006) urged us to rethink poverty in terms of untapped potentials with a base of the pyramid (BoP) brimful with budding entrepreneurs and aspiring consumers. The exhortations of Prahalad were soon followed by efforts to further quantify the size of this market (see Hammond et al., 2007) with a view to empower BoP consumers and make them an integral part of the world economy. Multinational corporations (MNCs) facing saturated markets in developed markets were urged to see themselves as part of the effort to combat poverty and to adapt their business models to cater for this burgeoning market (London and Hart, 2004; Lodge and Wilson, 2006; Prahalad and Hammond, 2002; World Economic Forum, 2009). Anderson et al. (2010) went as far as identifying niches in BoP markets such as those encompassing conflict zones, urban slums and deep rural areas, as ‘The Last Frontier’ for MNCs.

Marketing theory has been slow to recognise these developments. Efforts such as Burgess and Steenkamp (2006), whilst recognising the importance of emerging markets, were concerned with developing invariant, cross-national marketing laws. Sheth (2011) seemed equally exercised by the possible breakdown of conventional marketing tools confronted by a new and unfamiliar terrain. Whilst chastising the international marketing literature for its colonial mindset, Sheth (2011) endorsed the quest for cross-national marketing laws under the guise of a global mindset. Marketing’s focus has recently shifted to subsistence and low-income consumers (compare the two special issues, 63(6), 2010, and 65(12), 2012, of the Journal Business Research dedicated to subsistence marketplaces). The assumption is that making markets work for the poor consists in classifying and quantifying market size, in order to devise supply-side strategies adapted to the idiosyncrasies of these markets. This approach is not without its critics who have rallied against its unrealistic aims and lack of regard for poverty alleviation (Bonsu and Polsa, 2011; Karnani, 2007; Schwittay, 2011).

A common thread running through all these approaches is the need to contain and combat informality (Hammond et al., 2007; Prahalad, 2006). Informal markets are portrayed as a shady underground, populated by substandard goods and uncompetitive practices. De Sotto (2000) argued that there may have been up to US$9 trillion worth of unregistered and underleveraged assets in the global informal economy.

The International Labour Organization’s (ILO) World of Work Report (2012) estimates that 40% of non-agricultural employment, in a sample of developing countries, occurs in the informal sector. Schneider et al. (2010), using a dataset for 162 countries over the 1999–2007 period, estimate the size of the shadow economy (as a fraction of gross domestic product (GDP)) as varying between 36.7% for Sub-Saharan Africa and 13.6% for high-income Organisation for Economic Co-operation and Development (OECD) countries. Neuwirth (2011) provides a vivid portrayal of this informal economy. Rather than underground or invisible, the informal sector is ubiquitous and highly visible in developing economies. Its scope is both local (e.g. street corners) as well as densely connected to global networks of trade (e.g. importing goods from China). Members of the informal economy often have a foot in the formal sector. Formally registered businesses make use of networks of informal businesses to distribute and retail their goods. The formal and informal sectors are thus heavily intertwined and often difficult to distinguish, rather than coexisting along sharply defined borders.

As Mitchell (2007, 2009) remarked, the work of formatting what is included or excluded from the economic system is the outcome of particular forms of expert discourse such as those promoted by neoliberalist approaches to development that have prevailed over the last two decades. These discourses paint a picture of sharp differences between the inside and outside of the economy, formal and backward, informal backgrounds. But, as the reforms inspired by de Sotto’s (2000) approach to property titling in Peru and Egypt show, moving boundaries between the formal and informal sectors often have unintended and negative consequences for those they were supposed to favour. For example, the process of property titling and using property as a collateral to obtain business loans can have little effect in promoting entrepreneurship whilst making newly titled property less affordable for the poor (Mitchell, 2007).

In conclusion, fighting poverty cannot be regarded as a matter of expanding formal markets at the expense of informality. We need more imaginative theoretical and methodological approaches to understand the moving borderlands between formal and informal economies, and appreciate the role that the informal sector plays in developing economies. Furthermore, we need to engage more explicitly with current policy debates on development rather than reproduce discredited and outdated approaches. There is much to be gained by opening up the debate on expanding formal markets and their consequences for alleviating poverty to a broader range of views on what constitutes development and how it might be best pursued.