Overview of Spending at the Base of the Pyramid

Too often, those in the developed world assume that the poor struggle on minimal earnings, have no consumer power, and rely on charitable handouts to meet their needs. This is false, and it is important to understand that all types of spending do occur at the Base of the Pyramid.

Food

Food is the largest expense at the BoP.(1) In Nigeria, food consumes 52% of an average budget; in Pakistan, food consumes 55% of the budget. At the nationwide scale, the fraction of food spending by the BoP remains significant. In many developing countries, the BoP has the largest share of the food market, and in 17 African and Asian countries, the bottom three BOP income segments—the poorest of the poor—account for over 50% of measured national food spending.(2)

When analyzing the data more thoroughly, an interesting pattern emerges. As household income increases, the share of the household budget for food declines. This data suggests that there is a minimum amount of the family budget needed to purchase food for survival. Consequently, social enterprises should target this minimum amount of food expenditures and use strategies to improve its value. For the social enterprise, the BoP would present a viable market. Meanwhile, those living at the BoP would get more value for the money inevitably spent on food.(3)

Some of these strategies are simple. Iodine deficiencies can lead to goiters and mental retardation, and are prevented in the developed world by the addition of iodine to salt. However, because the harsher conditions of the developing world degrade the salt, a new, economical salt has been developed that is more stable than conventional iodized salt. Worldwide, over 200 million people suffer from iodine deficiencies, meaning that this innovation could have great humanitarian and financial impacts.(4) Another strategy is to increase the nutrient value of cheap food. A company called Cuadritos is working on a technology to reprocess expired food to extract the protein into a powder. This powder can be added to various food products as a form of “nutrient recycling.”(5) 

Case Study - No Free Lunches: The Problem of Food Donation

Donations of goods can seem appealing from a moral standpoint, but they often contain a fatal flaw that undermines their efficacy: a lack of sustainability. The following example will illustrate how, even in emergency situations, donations should be carefully planned to avoid catastrophe.

The disastrous 2010 earthquake in Haiti damaged the Port-au-Prince seaport, leaving only a single pier functional. This reduced the amount of goods Haiti could import. Many humanitarian teams were mobilized to meet emergency needs, most notably, the need for food. In particular, it was imperative to distribute rice since it forms the basis of Haitian cuisine. (6)

With the seaport badly damaged, food became scarce, and humanitarian teams began donating rice to starving Haitians. Although it was widely regarded at the time to be a sensible mode of action, the availability of free rice meant that Haitians no longer purchased rice from local vendors. The local food economy became crippled. Long-term, continued donation of rice would have put a great number of local food vendors out of business, meaning that when the charitable relief ended, the food supply chain would have suffered permanent damage, plunging Haiti into a food crisis.(7) 

Fortunately, humanitarian teams realized the damage being done to the local economy before it was too late. Rather than donating free rice, the teams began donating money or vouchers to Haitians for them to purchase rice from local vendors. Although this strategy was reasonably successful, it must also be accompanied with a caveat for future interventions. Too many vouchers can spike demand and lead to skyrocketing inflation, making rice unaffordable for Haitians without food vouchers.(8)   

Healthcare

In general, there is an inverse correlation between income level and %age of healthcare expenditures. At the BoP, individuals tend to rely on self-medication, meaning that they spend more than half of their income on pharmaceuticals, far more than citizens of the developed world typically spend.(9) These pharmaceuticals are usually purchased from pharmacies as opposed to clinics or hospitals. The purchase of medication does not require a prescription.

User fees charged to the poor for medical services are debated, and are often best determined by the local healthcare providers. On the one hand, user fees are more sustainable and provide a motive (profit) to encourage innovation from industry.(10) These fees also help to ensure that the medical services are utilized and valued. Since households typically spend a large portion of income on self-medication via pharmaceuticals ($183/year is typical for a rural household in Uganda), educational initiatives can help to shift those spending dollars to medical care, diagnosis, and treatment by medical doctors. On the other hand, critics say that fees exclude the poorest of the poor.(11) As with all global health delivery programs, it is best to let the prices be determined by local medical professionals who know their communities and patient perceptions.

Additionally, national health insurance schemes are being implemented in many developing countries. In Mexico, an insurance program called Seguro Popular allows families living in poverty to pay a low premium for access to basic health services. This program has extended healthcare access to tens of millions of Mexicans who were previously without health coverage.(12) The emergence of socialized medicine in certain countries is one way in which governments can enable all of their citizens—rich and poor—to gain free access to basic health services and improve their quality of life.  

For a more complete discussion on the spending patterns of the BoP on healthcare, follow this link.

Recreation

Pulitzer Prize winning journalist Nicholas Kristof reports that in the developing world, while an average of 2% of family income is spent on education, 20% is spent on extravagances including alcohol, tobacco, festivals, junk food, and prostitutes.(13) This disparity exists despite the knowledge that education is highly correlated with future earning power,(14) and even a small change in spending patterns could result in drastically improved socioeconomic outcomes for children. Kristof explains that part of the problem is that men make disproportionately poor spending decisions and often control the household expenses. Being able to transfer some of the spending power to women makes it more likely that the money will be spent on the family rather than on entertainment. This could be achieved by educating women, consequently empowering them economically, and encouraging them to allocate more money toward their children’s education.(15)

Another potential solution is microsaving, which helps impoverished people save small sums of money. Furthermore, microsaving can help keep money within the control of women. From data collected during a study in South Africa, approximately 26% of participants’ monthly income went into savings, with most of that money invested in either informal savings clubs or formal bank accounts.(16) Nevertheless, this money is not always invested in a reliable source, nor does it usually translate into long-term saving. A detailed discussion of microsavings can be seen here.

Funerals and Microinsurance

The specter of death is a common aspect of life in the developing world. In recent years, HIV/AIDS has exacerbated the threat of death, especially in Sub-Saharan Africa. In many countries in this region, paying for funerals is a considerable expense, costing upwards of 7 months’ worth of income, or approximately US $1500.(17) One study found that 81% of South Africans over a period of a year had contributed financially to at least one funeral.(18)  

Funerals are estimated to cost South Africans over US$770 million annually(19). Approximately 10 million people spend 3% of their incomes on funeral insurance. However, overall, 61% are underinsured for the full price of a funeral.(20)(21) Much of the difference is paid by other villagers. In South Africa, there are estimated to be 80,000 to 100,000 burial societies, which are informal plans organized through mutual acquaintances that collectively contribute to the funerals of the members. These sorts of plans are common and take up a significant fraction of household income—many members give as much as 15% of their monthly income to someone outside the household.(22)

Another complicating factor is that HIV/AIDS often kills individuals in the prime of their working careers.(23) In South Africa, 80% of households are mostly or completely dependent on a single wage earner. If the highest income recipient dies, the family could lose over half of their monthly income.(24)  Worse still, only 3% of low-income individuals living in the one hundred poorest countries have life insurance, leaving two billion people uninsured(25)

Given the high rates of mortality, the high cost of funerals, and the widespread lack of insurance, more should be done to educate villagers about microinsurance, an emerging program in the microfinance world. Microinsurance is especially relevant for women, as they typically make less money and have less property than men, and are also at a higher risk of violence.(26) Furthermore, because women are more likely to protect the interests of the family, microinsurance provides them with an important way to manage risk. Without insurance, personal savings are rapidly depleted in emergencies, which are virtually inevitable in the developing world. These emergencies sap the ability of women to pay for their businesses or for their children’s education.

Unfortunately, a number of challenges exist in developing microinsurance programs for women. For instance, most health insurance firms refuse to cover pregnancy, because they believe that they will not be profitable if only high-risk women choose to purchase their insurance, and pregnancy can be extremely risky in developing countries. One solution in West Africa has been to collect a US $0.40 annual mandatory fee from all members of a village, and use those funds to cover the pregnant women of the village. Such an approach is effective, and covered approximately 1,000 women in Guinea one year after being introduced.(27)

Footnotes

(1) Hammond, A.L., et al. “Chapter 8: The Food Market.“ The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid. p. 88-95. Accessed June 25, 2010.

(2) Ibid.

(3) Ibid.

(4) Ibid.

(5) Ibid.

(6)Davidson, A. “The Problem With Giving Free Food To Hungry People.” National Public Radio Planet Money. [video clip]. 2010.

(7) Ibid.

(9) Ibid.

(9) Hammond, A.L., Kramer, W.J., Katz, R.S., Tran, J.T. and Walker, C. “Chapter 2: The Health Market.“ The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid. p. 39. 2007. Baltimore, MD: World Resources Institute and International Finance Corporation. Accessed July 2, 2010.

(10) Gilson, L. “The Lessons of User Fee Experience in Africa.” Health Policy and Planning. 12.4 (1997): 274-285.

(11) Sachs, J. “The Coming Revolution in Global Public Health.” Unite For Sight Global Health and Innovation Conference. 2009. New Haven, CT, Yale University. 

(12) Frenk, J., Gonzalez-Pier, E., Gomez-Dantes, O., Lezana, M.A. and Knaul, F.M. “Comprehensive Reform to Improve Health Performance in Mexico.” Lancet.  268 (2006): 1524-1534. Accessed July 2, 2010.

(13) Kristof, K.D. and Orr, M (Producer). “Books Over Beer.” [video clip]. 2010.

(14) Kristof, K.D. “The Challenges of Development and Making Aid Work.” Unite For Sight Global Health and Innovation Conference. 2009. New Haven, CT, Yale University.

(15) Kristof, K.D. “Moonshine or the Kids?” 22 May 2010. The New York Times. Accessed July 7, 2010.

(16)Collins, D.L. and Morduch, J. “Banking Low-Income Populations: Perspectives from South Africa.” Access, Assets and Poverty Conference. Barr, M. and Blank, R. (Eds.) 2007. Georgetown University, Washington, DC. p. 1-31. Accessed June 28, 2010.

(17) Collins, D.L. and Leibbrandt, M. “The Financial Impact of HIV/AIDS on Poor Households in South Africa.” AIDS. 21.s7 (2007): S76-S81. Accessed June 27, 2010.

(18) Collins, D.L. and Morduch, J. “Banking Low-Income Populations: Perspectives from South Africa.” Access, Assets and Poverty Conference. Barr, M. and Blank, R. (Eds.) 2007. Georgetown University, Washington, DC. p. 1-31. Accessed June 28, 2010.

(19) Collions, D.L. and Leibbrandt, M., 2010.

(20) Collins, D.L. and Morduch, J., 2007.

(21) Collions, D.L. and Leibbrandt, M., 2010.

(22) Ibid.

(23) Ibid.

(24) Ibid.

(25) Gray, A. “Small Premiums, Long Term Benefits: Why Poor Women Need Microinsurance.” NextBillion. 2010. Accessed July 7, 2010.

(26) Gray, A., 2010.

(27) Ibid.