Reflections on How to Get Out of The Poverty and Jobless Trap through a Bottom-Up Scenario
The market economy is not capable of delivering to poor people as persistent rates of poverty and malnutrition demonstrate. The market economy is not capable of creating jobs to everyone as persistent rates of unemployment, especially youth unemployment confirm. There is a need to imagine a business model that performs much better; one that generates value, circulates money in the local economy and aims to provide products and services with inputs, capital, energy and human resources that are locally available. The cases of the Blue Economy published on www.TheBlueEconomy.org analyze the real opportunities.
Since traditional solutions like the “trickle-down effect” have not succeeded in overcoming basic challenges, the local economic growth model must allow for a transformation of the community from poverty to middle class. We have witnessed how this has been achieved in regions of violence and deprivation over the years. The core approach is to cluster water and energy tied to sanitation and affordable housing; food and nutrition related to health and safety; culture and education which bring knowledge and wisdom accumulated over generations; and mobility and energy. All of this combined, like all other linkages, will create jobs and bring innovations to the emerging communities.
Case 108 added specific details on the design of the cluster related to housing: how a new model based on an open market and entrepreneurial business initiatives can change the quality of living in the future. There is a tremendous need for housing. There has been no delivery during the past few decades, but there is no need to blame politicians.
The business model chosen to deliver affordable housing is to blame for the failure to deliver. This is where The Blue Economy intends to demonstrate that other business models are possible. The creation of local double-digit growth economy imposes a meticulous identification of all opportunities. This leads to the design of a bottom-up scenario where the eradication of poverty and the growth of the economy depends on the speed at which new business models prevail as dominant on the market.
The Objectives of Economic Growth
The claim of the communist intellectuals in the 19th century, and today a belief shared by many, that “the rich get richer and poor people get poorer” seems now confirmed.
Professor Thomas Pikkety demonstrates in his much debated book, based on two centuries of statistics, that the rich who control capital are getting richer, especially in a time of crisis. Pikkety argues eloquently that as long as the rate of return on capital is higher than the rate of growth of the economy, the poor will get poorer. The capital used to be land and then it was mainly equipment to manufacture. Today it is merely cash that expects to earn money on money through aggressive hedge funds or speculation in cyberspace. Have we ever had anything more perverse than the notion that money makes money?
We know that split-second trading through supercomputers in stocks and currencies is making billions for those who have billions. We know that those who make billions, both individuals and corporations exploit the loopholes of tax laws and if they do pay taxes, it is never more than a few percent on their profits or wealth. Nearly all profitable corporations and the wealthy limit their involvement in the social economy to Corporate Social Responsibility (CSR) programmes that reach out to a few individuals. The pictures in the annual CSR report can most likely capture almost all of those who benefited. We should ask the fundamental question of whether we undertake to have corporate social responsibility because we have made so much money, or if we make money because we successfully assumed our corporate social responsibilities. In addition, all CSR initiatives are construed as tax deductible; in other words the community pays.
How many corporations really turn CSR into a corporate strategy in line with their products and manufacturing? We know that under these circumstances it is impossible that the poor can ever get rich unless they cheat the system. The only option to get out of the poverty trap seems to be illegal and illicit trade, ranging from drugs to endangered species. Extremely high unemployment rates close the opportunity for upliftment through hard work. Strict immigration rules force the most courageous immigrants to seek illegal entry.
Of course the reaction from the establishment when it is confronted with these facts is to debate the results, question the data, cast doubt over the sources and ultimately do what all establishments have done throughout history when a new truth is haunting: discredit the author.
This is normal. When the facts are finally accepted, are no longer the subject of heated debates and have become the preferred subject of social conversations, those who formulated the harshest critique will pride themselves on claiming that it was their original idea anyway. There has seldom been such a strong and fundamental reaction against the confirmation that “the rich are getting richer”. The fiercest critique against the theorem proposed by Prof. Pikkety comes from the Anglo-Saxon economists who stand by the “trickle-down effect”, which pretends that as the rich get richer, money and wealth is slowly but steadily transferred to poor people.
This is only supported by anecdotes and no statistics prove this argument. One of the reasons that the trickle-down never occurs is because the rich and multinational corporations do not pay a reasonable tax rate. As we have learned over the past years, all leading enterprises excel in avoiding taxes, bringing the real rate to perhaps 2% of profits. While a hard working family will see up to 50% of their gross income evaporate in taxes and social security, large corporations get a license to distribute quasi tax free income to their shareholders.
The wealth generation over the past two centuries has offered opportunities to Europeans to join middle glass. The accumulation of wealth in North America is an exceptional opportunity: a nation that grew from 3 to 300 million inhabitants in less than two centuries and appropriated all land and resources as their own from the natives has the capacity to spread wealth and propagate the "American Dream". Even under these circumstances, the rich always got richer over two hundred years except during the Great Depression and the Second World War. (The rich get richer and the poor get poorer especially at the time of the latest financial crisis in 2007.)
It cannot be neglected that until recently, growth in the United States in absolute numbers of middle class citizens rightly fueled the notion that the “American Dream” is possible. Unfortunately, the latest statistics suggest that never before have the rich Americans become so much wealthier. Ample evidence shows that two income families living in megalopolises like New York, Chicago and Los Angeles, cannot make ends meet or put their children through college. Data indicates that in 1964, 23% of all children in the USA lived in poverty. Fifty years later, despite 16 trillion dollars of investments in poverty alleviation in the wealthiest nation of the world, 22% of all children in America still live in poverty3. Children living in poverty is only one parameter; the income gap between the US' richest and poorest metropolitan region has reached the widest on record in 2014.4 What happened to the American Dream?
The hard absolute numbers dampen the positive impression created by relative data. Statistics show that whatever argument anyone wishes to prove, sometimes you use absolute numbers and sometimes you use percentages and reality can be presented to suit either way. However, when it comes to poverty there is only one number that counts in our assessments: the absolute. It seems that efforts were directed to reduce the pain and discomfort of poor people by providing aid. While that is appreciated, some argue that this is the very reason for this persistent poverty trap: aid needs to be transformed into empowerment5. The hard reality is that aid programmes managed by governments, corporations and foundations have not been successful in securing access to the tools required to get out of that trap.
While poor people derive no benefit from the enduring low economic growth rates, they have lost wealth, jobs and income while investors have preserved their wealth and accumulated even more. Wealth funds will not release money under their control unless there is a high return on capital. Except for government bonds, no capital provider is satisfied with an annual return under 10 percent. Business plans that do not provide a minimum of 20 or 30 percent return on investments (ROI) are not considered. It is impossible to expect that even rapidly expanding emerging economies will enjoy a double-digit growth rate higher than the rate of return on capital. Now that the numbers are on the table and that the rich get richer, what do we do next beyond debating the facts any further? (Do you make money and then contribute to society; or do you make money because you contributed to the development of society?)
When I read r > g (r is the rate of return on capital, g is the growth rate of the economy) the question that should immediately be raised is how this simple equation could be inverted to generate the opposite: r < g. (How to evolve from r > g to r < g ?)
It is impossible to ignore the fact that poverty is spreading in absolute numbers. Even worse than poverty, youth unemployment is on the rise across the globe. This parameter is hitting alarming rates and indicates that the next generation has a limited opportunity to earn a minimum wage required to take care of a family. This means that poverty is not only on the rise, but it is likely to stay. Jobless youth is not limited to thedeveloping world. Countries like Spain, Italy and Greece have more than 50% of their most dynamic members of society left idle. Palestine is in a stranglehold that puts 98% of all the young people under the age of 26 out of a job. It is an unacceptable waste of human resources when an increasing number of trained and eager youth members are told that their willingness to work, their skills and passion are not needed. Governments accept this hardship and hide behind the need to pursue austerity while pursuing the impossible task to balance the budget. Corporations and the wealthy claim that the growth rate is too low and that consumption needs to pick up first before they can fund initiatives that carry a low risk and a high rate of return.
We need to ask ourselves how much more patience we are expecting from poor people? A mother whose children are going to bed hungry every night and a father who sees his teenage sons making rockets to shoot across an illegal fence cannot be satisfied with a promise that all will improve within a few decades, when corrupt governments have finally been removed and when free trade agreements have finally been agreed upon to provide access to cheap goods worldwide. Instead of embracing globalization, a system that has not succeeded in responding to the needs of all, the only option seems to empower poor people to care for themselves and design solutions with what they have. This requires a redesign of the business models that are able to respond to the basic needs, especially of poor people, while offering a reasonable return to investors. Many traditional economists consider this impossible. The Blue Economy demonstrates with one case after the other, that this approach does offer the chance to grow the economy from the bottom up.
Models to Empower the Bottom of the Pyramid
When there is rampant poverty and billions of unmet basic needs for water; food and nutrition; housing and community; health and healthcare; energy; waste management and mobility; education and culture; how is it possible that some claim there is no demand? How could free world trade ever ensure healthcare for newborns when the nation standing behind free trade has a hard core of politicians who reject any form of health insurance for the poor?
The typical response is that there is demand but no money. Prof. C. K. Prahalad and Stuart Hart demonstrated in their article that was first published in 2004, how 3 billion people who survive on $2.50 per day represent a staggering 2.7 trillion dollars in cash each year. The bottom of the pyramid does represent a market ready to be integrated into formal economy. How do we tap into this vast purchasing power with traditional business models and finance that has high expectations for its minimum rates of return? It is not easy for a traditional corporation to imagine how to transform themselves.
For example, Unilever was inspired by the “Fortune at the Bottom of the Pyramid” and put shampoo into small affordable sachets instead of the large bottle that is beyond the means of poor people. These micro-portions of shampoo are sold through network marketing and tiny neighbourhood stores. These initiatives do not empower poor people, nor do they provide access to quality products at competitive prices. On the contrary, the incursions into these emerging markets drain money out of these marginalized communities that have never used synthetic shampoos with artificial coloring and odors, in addition to polluting their scarce water sources. This shampoo rather fuels the enterprise’s drive to ever higher economic scales and better margins.
The strategy is to build up consumer acceptance and brand recognition so that the local distributor can soon be approached for selling more from the same vendor, or be replaced by large chains of distribution.
The Need to Change The Business Model
Over the past 20 years, I have been looking for better models than the best we have been able to imagine to date. This is not another critique but rather a search for the better. We can lift poor people out of poverty and reverse the trend of “the rich getting richer” by changing the business model beyond tweaking the present one. We need to design something completely new. It is surprising how few people are aware that inclusive growth in a sustainable society requires a dramatically better performance at all levels of the business model, not just the technology. This stronger performance is also within reach. However, so few are prepared to question the prevailing business models that aim to cut costs and few question the drive towards free trade and globalization, which is myopically considered to be the only opportunity to ensure growth and is therefore heralded by the traditional economist as the panacea for all socio-economic problems.
I am surprised that people still believe that “the free market” in general, the free flow of capital with investments in search of high rates of return, would turn the poverty trap around and one day resolve the unemployment challenge, while aid would soften the sharp corners, and scientific breakthroughs like nanotechnologies, genetic manipulation and smart grids will do magic that the market could never achieve. We have to realize that whatever we attempted with the best of our intentions is not making a fundamental difference for the three billion people living in poverty and the one billion living in complete misery without dignity. Worse still, we seem prepared to accept poverty as a fact of life. Instead, we should design, create and implement competitive business models that are capable of responding to the basic needs of all through a smart-growth strategy that we call “Blue Growth” and others call “Inclusive Growth”. If you do not like the colour or the adjective, then change the name and just focus on implementing new business models. (We need to recover leadership at the entrepreneurial level. We need a dramatically better performing business model.)
We need to place our primary focus on the business model and aim to recover the leadership at the entrepreneurial level. Macro-economic trends are the amalgamation of decisions taken and initiatives undertaken at the micro-economic level. So instead of attempting to mainly guide the world from the cockpit of a plane influencing interest rates, tax policies, currency exchanges and trade, while unilaterally deciding to flood the market with additional cash through a technique known as quantitative easing, we need to turn the economy around on the ground, starting where the needs are most urgent in places like the shanty towns in Asia, the townships in Africa, favelas in Latin America, and the unemployed everywhere. Let us call these the “Corridors of Growth”. How can we create and implement an inclusive growth strategy where not only basic needs are met, but where benefits are derived from integrating poor people and unemployed youth into the economy and a caring society, while also creating wealth for the most needy?
The Present Economic System: Incapable of Delivering to Poor People
It is critical to look at the reality today: the market economy is not capable of delivering to poor people. If the market is not capable, it is because the present business models are not capable. The result of the incapacity to deliver is that poverty and unemployment are the rule and must be accepted; that is hard to accept. The key economic players have adopted the logic of the economies of scale, searching for ever lower marginal costs while balancing quality with price to stimulate sales and obtaining higher profits, thus offering a better return on capital. Since the top priority is to always offer higher returns and lower costs, the economic system has turned into a harsh one where laying off people for the sake of productivity is the norm.
In order to create ever higher economies of scale for standardized products, there is a need to eliminate trade barriers. Free trade has been the name of the game, providing for free movement of goods, services and capital. At the same time, there is no free movement of people. Boundaries have never been more difficult to cross and issuing a visa has turned into a business of its own. When goods, services and capital are expected to move freely across boundaries, then the challenge is to remunerate people sufficiently within that “globalized” economy, so that they can overcome their poverty trap and lose the desire to emigrate at whatever cost. Those who see no exit, knowing that their parents and grandparents did not find any either, will find an exit as refugees in high-risk emigrations, violence, drugs, fundamentalism and terrorism.
The globalized economy claims to balance demand and supply through setting a market price. The modern economy has subjected everything to “a price setting” including something as necessary for life as water. This resource used to be a commons that was provided for free by nature and society; now it carries a price. Thus there will always be millions of people who will never be able to access basic goods and services. If we agree that the global model of product and service delivery is incapable of reaching poor people (otherwise they would not be poor and living in misery), then we need to ensure that people in those “corridors of poverty” can respond to their own needs with what they have. This is not in defiance of the globalized economy, but it is rather a response to the incapacity of the present globalized economy to be inclusive. If this delivery process fails by design, the only option we have is to change the model and implement a market economy that performs better.
(Since the market economy is not capable of delivering to poor people, poverty and unemployment are the rule.) The immediate reaction to this straightforward conclusion is that “this is not possible”. The explanation is that if this were possible, then it would have been done a long time ago and would have been scaled up to reach everyone. However, if new business models are fundamentally different, then what was ever practiced before? It is therefore unlikely to have a global acceptance at first sight. It took the free trade economists Adam Smith, the author of “The Wealth of Nations”7, and David Ricardo, the inspiration for the theory of comparative advantages8, over a century to see their theory prevail as a dominant economic logic. Neither of these two economists had access to statistics or empirical data. Why is it now necessary to deliver proof of concept at a worldwide scale immediately? This is why The Blue Economy is committed to building up microeconomic case studies before we derive macro-economic conclusions.
Respond to Basic Needs and Circulate Cash Locally
Business models that respond to people’s basic needs with what is locally available could improve livelihoods. However, the money earned cannot be drained out of the community, as is the case now. Rather, the hard-earned funds should continue to circulate within the communities. If people have earned one hundred dollars, then this cash is used to alleviate their most urgent needs . The money must be spent locally and the most very basic needs should b e sourced locally as well; this creates a catalytic effect in the local growth cycle.
The Double Digit Growth Model:
(1) Respond to basic needs
(2) With local products and services, and
(3) Circulate the cash in the local economy
As more money circulates faster, the locally produced portfolio of products and services diversify further so that added money moves faster and more is kept in the local community as capital. This is a possible double-digit growth model. If the money is not circulating within, then cash brought back from work will flow out of the community, in turn stunting growth.
Of course, one wonders how much human resources, capital, materials and energy are locally available to ensure these transformations can be pursued at a rapid rate. Will this proposed double-digit growth lead to shortages, price increases and even imports? Of course there are limitations and there will be challenges, but the present model of standardization and globalization based on an unending drive to cut costs keeps poor people poor since all of their cash spent on basic consumption is flowing out of the community. Do we realize that in South Africa, 34% of the purchasing power of poor people who survive on less than $2,500 dollars per year is reserved for food; those who survive on $600 per year spend 47% on food; and whatever is eaten is supplied from outside of the community?
While many questions arise, the main purpose of The Blue Economy is to develop this inclusive growth concept in more detail and apply it to the creation of new communities in an increasingly urbanized world. We therefore need to present the conceptual development of a real development project in detail, offering insights on how the intention can be converted into a reality. While each of the programmes and initiatives mentioned have been implemented somewhere in the world, the scale of the investment and the magnitude of impact is ready for a large-scale implementation.
The dozens of cases that are published on www.TheBlueEconomy.org offer a glimpse of the science, the entrepreneurs and the patience that enabled us to implement hundreds of ideas into business realities around the globe. It is an honor and a privilege to have gotten this chance to play a role. The question is now, how can we speed up the process and strengthen its impact.
THE DESIGN OF THE BOTTOM-UP SCENARIO
That is why we undertake the "Blue Economy 2.0". Our goal is to steer society towards sustainability, while enhancing the capacity to respond to basic needs with locally available resources. In 2005 the ZERI Foundation initiated a research program in cooperation with the Biomimicry Institute entitled "Nature's 100 Best". Inspired by pragmatic solutions developed by thousands of species, we opened the quest to identify which technology, based on which research demonstrates a pathway towards sustainability. Janine Benyus and her team studied the details of the science behind the individual species which became the basis of the acclaimed website "AskNature.org" with thousands of academic papers. Gunter Pauli and the ZERI teams focused on the ecosystems instead of finding out the scientific details of isolated species and derived from it new business models. The two organizations parted, and ZERI maintained a strong focus on entrepreneurship, innovations, job generation and meeting basic needs with available resources. This focus offered fresh insights in economic development known as "The Blue Economy", a Report to the Club of Rome that was first presented in Amsterdam in November 2009. This report has been translated in +30 languages.
How the Quest is organized
The ZERI network of organizations, known as the "Think Tanks" and the emerging Blue Economy network recognized as the "Do Tank" tracked the original one hundred cases. Through an intensive program of monitoring emerging science and businesses, dialogues with academia and practitioners, interactions amongst committed individuals and institutions from around the world as well as exchanges of experiences, the isolated technologies, the pioneering scientist and the daring entrepreneurs evolved from inspiring stand-alone cases into networks of academia and clusters of businesses. As these clusters of local economic growth were documented systematically, a transparent world of interconnected innovations and successful capital raising combined with smart adaptations to local conditions demonstrated that a new economy is emerging. These newly documented cluster cases are posted on www.TheBlueEconomy.org.
The Shift from Old to New Business Models
Growth in the economy has been elevated as the prime target of life, and attaining growth is equated with improvements in productivity and efficiency. The much heralded free trade and the elimination of tariff and non-tariff obstacles secure the unrestricted flow of product, energy and services (but not people!). The goal is to cut costs and reduce prices under the generally accepted theory that lower prices improve the buying power and increase the wealth of people. This model has certainly led to the creation of wealth, but it also has led to a persistent unemployment, especially amongst the young.
Furthermore, ample evidence has been gathered to demonstrates that "the rich are getting richer and the poor are getting poorer". While this statement has been widely contested by academia and policy makers, the hard reality of the statistics indicate that while improvements in wealth creation can be pointed to billions cannot access basic services. Worse, the dominant economic growth model does not reach poor people in general and the young in particular.
The economic proposal of the Blue Economy suggests a different approach, which still pursues a growth strategy but starting with locally available resources and leveraging the buying power of people, especially those who survive on one dollar per day, as well as governments The quest for development evolves from improving productivity to reduce costs, to improve productivity by generating more value from existing materials, nutrients, and energy. Resource and energy efficiency leads to reduced costs. The driving force are the millions of minute expenses that respond to immediate basic needs. Locally produced water, food, health and housing requirements generate local jobs, increase revenues, decrease the need for transport and channels local purchasing power into the local economy.
The faster circulation of money, bypassing banks through local currencies or digital monies stored on cell phones speeds up the flow of money, triggering further economic growth. The capacity to deliver urgently needed products and services lifts people out of poverty while competing against global companies. Poverty and unemployment are a confirmation that the global economy does not reach that segment of society, and that there is no local economy to substitute that lack of primary, secondary and tertiary activities. So if we wish to eliminate the shanty towns, then we have to create the local economy, and redirect the existing one that drains all cash out of the community, to one that circulates money in the community and creates
New social capital
Changing the Framework
These new business models part ways with what is taught in business schools, and fundamentally differ from the economic growth models promoted by traditional economists. Indeed instead of a core business based on a core competence, these Blue Economy cases have multiple cash flows generated by cascading matter, nutrients and energy offering multiple benefits to society. Companies make money, because they respond to the basic needs in the communities, as opposed to companies that make money by selling their products and services irrespective of the importance and the value to society, and then contribute to society once they made a profit reserving a part of their profits. The focus is not on cutting costs, or economies of scale, rather it is on generating value using available resources. The result of this bottom-up approach is that there is less need to operate and compete on a global scale, and that the impact on society can be measured in the accumulation of social capital, food and water security, decrease of greenhouse gas emissions, the creation of jobs, while being competitive and building up resilience. One of the key parameters of success is the improvement of purchasing power, especially amongst poor people.
Celebrating Clusters of Innovations
An internal review by the "Think Tank and the Do Tank" came to the conclusion that it is timely to summarize the developments of the past 6 years. This led to the design of a program to write and publish the next 100 cluster cases of the Blue Economy. Instead of celebrating an individual with a unique science and a start-up, the Cases 101 to 200 tell the story of how it all started and who inspired each case, celebrates the researchers from the Think Tank who contributed to the strengthening of the science, and points to the groups of entrepreneurs who are converting this know-how and wisdom into growth companies that successfully raise money, employ staff and bring new products to the market. When the first seven cases were written and mapped on the globe, the green squares (science) and the blue dots (entrepreneur) quickly filled space on all continents.
We can highlight which initiatives are successful, and what makes them so different from the traditional development model.
Thousands of Researchers and Thousands of Start-ups
Now that the next 100 cases are in production, we can fast forward to the end of 2016 and the beginning of 2017 where more than a thousand researchers are identified by name, institution and subject of research, as well as thousands of companies that are pursuing this clustered approach. This map, which we call the bottoms-up steering of societies towards sustainability, demonstrates that the Blue Economy has moved from an interesting set of anecdotes to a visible trend, with common denominators. It is against this background and pioneering work that the ZERI network in cooperation with the Club of Rome, wishes to undertake the next step: deepen the clusters with more detailed information on the social impact, the technologies, the environment including biodiversity and ecosystem services, the job generation and the shift in skills, the educational transformation, the resource efficiency. We have to strengthen the participation and have reached out to transversal research organizations that could bridge this need.
From a broad wave to a deep understanding
The objective is that the briefing that ZERI supplies per cluster (101 and onwards) is expanded to perhaps 100 pages covering in detail the elements that are required to grasp in detail the opportunity to impact both the local realities in terms of livelihoods, as well as the global sustainability and resilience. This "deep dive" is only possible in cooperation with the leading research institutions which have signaled an interest to participate including The Club of Rome, Development Alternatives (India), Monterrey Institute of Technology (Mexico), Wuppertal Institute (Germany), Stockholm Resilience Center (Sweden), MISTRA (South Africa), and the Chinese Academy of Sciences (e.g. only).
From a detailed map to an interactive mathematical model
The findings will offer over a period of 2 years a detailed map, science data, business numbers, social and environmental statistics. This will then be translated into a mathematical model based on the well established systems dynamics that allows the charting of the impact of these clusters of small initiatives based on fundamental shifts in business models that steer societies towards sustainability. This model then asks the questions: what are the policy options for local and national governments, multilateral institutions, financial organizations, research networks in order to speed up the transformation that is emerging. It is expected that approximately 2 years will be required to fine-tune this model, permitting us to present it by the end of 2017, early 2018 "The Bottom-Up Scenario".
The Bottom-up Scenario
The Bottom-Up Scenario differs fundamentally from the traditional Club of Rome approach. Instead of working through macro-data at a global scale, we work through thousands of local facts, shifts in business models that are like embryos. However the hard facts, and the pragmatic measurement of impact, allows us to take a fresh approach to the world challenges standing on the pillars of science and entrepreneurship (risk). This would lead to a series of scenarios that provide the immediate opportunity to move from scientific discovery and policy measures, to applied research and the inspiration of entrepreneurs like it has happened with our coffee waste to mushrooms project which now accounts for at least 2,000 enterprises across the world.
The aim of this blog is to present a fresh look at realities around us. Whereas I do not pretend to present the truth nor a definite position, I do wish to push the reader to think beyond the obvious. After all, time has come to dramatically improve the plight of millions, and that requires more than the predictable. Sometimes it forces us into spheres of discomfort.