Creative Capitalism – Part 2

February 2, 2008

Bill Gates recent speech in Davos sure generated its share of mixed reactions. 

Larry Kudlow completely trashed him, while ivory tower economists gave him a skeptical thank you.  Every pundit worth their punch went to Bill “White Man’s Burden” Easterly for a negative comment, and Bono just ate it up with a spoon.

But maybe we can take a step back and analyze some of the fundamental questions Bill Gates was trying to address.  One way to frame his problem might be: “there are a lot of poor people in the world, so what is business going to do to make them less poor or increase their standard of living?”

The answer is, potentially quite a lot.  Can you imagine if a store were able to develop the pricing power to be able to offer a wide range of goods at low prices to hard to reach communities that previously didn’t have access to these things?  Well, it exists, and its name is Wal-Mart.  Wal-Mart has probably done more to increase the range of goods that poor people in the United States can buy than any other company.  But encouraging the spread of Wal-Marts to shanty towns, favelas, and pueblos jovenes around the world might not have been what Gates had in mind.

Another solution might be to promote the spread of micro-enterprise and social entrepreneurship the way that organizations like Kiva.org are doing.  This has the benefit of creating producer-oriented solutions to poverty alleviation.  But these are not systemic, skew benefits to the most entrepreneurial elements of a given society, and may leave out the marginal populations Gates is concerned about.

The truth is, it’s not creative capitalism that’s needed for the bottom billion, so much as it is good governance.  Capitalism requires a few basic ingredients: protection of property rights, freedom from arbitrary seizure, confiscation, and corruption, and infrastructure that allows goods and services to exchange hands.  Wars, lethal diseases, famine, dirty water, non-existent roads, schools, and hospitals, widespread corruption, and crippling transaction costs don’t help either. 

Very few companies have core competencies in navigating through all of these challenges, and while there are many companies that might like to invest in the poorest countries, they have ethical and fiduciary responsibilities not to put their employees in harm’s way and to maximize their limited resources, that they cannot ignore.

In other words, capitalism may be a necessary ingredient for helping the poorest emerging markets to develop, but it is only one piece of the puzzle.  While we all want to make a difference, let’s be realistic, and realize that the problems in question will require some political creativity and cultural changes as well.