A couple of friends of mine have already asked me "So what if a couple of banks go bankrupt? Who cares about bad mortgages? What is all the big deal about?" It is hard to explain in few words why the financial sector is so vital in modern economies, when countries are as strongly connected by trade ties as it is currently the case.

Probably the best way to explain its importance is by thinking of the economy as a machine and the financial sector as a lubricant. The financial sector's role is to efficiently allocate capital from savers to investors.  Financial markets lubricate the rest of the economy's productive activities.  Thanks to this lubrication, the economy is able to "work harder" and make fuller use of all the cogs in its machinery. If financial markets stop functioning, then the machine would not be able to work as efficiently as before, because it would lack the lubrication needed to keep full speed. This is in a nutshell why Washington has bailed out the financial sector, without even thinking about it, but appears much less willing to help the collapsing US automobile manufactures.

A second important aspect to take into account of financial markets is that banks are strongly connected to each other. If GM closes down tomorrow, other surviving businesses, such as Toyota, will probably benefit. However, in financial markets, if one financial agent, for example a bank, suffers, due to the interdependencies in the system, many other banks will suffer too. If one bank fails, other banks will tend to fail as well. This domino effect is something characteristic of industries with businesses which are tightly connected with each other and strongly dependent of each other's actions.

As financial markets have grown increasingly global, the allocation of capital from savers to investors has become global. As a consequence of the US financial crisis, BoP markets will probably suffer in the coming year.

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Aneel Karnani, a Professor at the University of Michigan and a Managing Director at FSG Social Impact Advisors, is a long-time critic of market-based approaches to poverty alleviation and the "base of the pyramid" concept in general.

His latest article, Romanticizing the Poor, appears in the Winter 2009 issue of the Stanford Social Innovation Review.  A brief excerpt:

Market solutions to poverty are very much in vogue. These solutions, which include services and products targeting consumers at the "bottom of the pyramid," portray poor people as creative entrepreneurs and discerning consumers. Yet this rosy view of poverty-stricken people is not only wrong, but also harmful. It allows corporations, governments, and nonprofits to deny this vulnerable population the protections it needs. Romanticizing the poor also hobbles realistic interventions for alleviating poverty.

This article came across my desk last week, and I've been thinking about it since.  A formal response is in the works - to which I will invite Professor Karnani to respond here on NextBillion - but I wanted to make sure that everyone reading the site knew about the article and had the chance to read it themselves in the meantime.

Comments are open below if you have immediate thoughts; should this spark an interest, here are some of Professor Karnani's other critiques of the BoP concept:

• The Mirage of Marketing to the Bottom of the Pyramid
• Microfinance Misses its Mark
• Doing Well by Doing Good Case Study: Fair and Lovely Whitening Cream
• Help, Don't Romanticize, the Poor
  

Update 12/15/08: Aneel Karnani is not a Managing Director with FSG Social Impact Advisors, as I reported Friday.  The erroneous material was sourced from the Stanford Social Innovation Review web site; even so, I should have cross-checked it.  My apologies.

The initial $100 price tag of the XO Laptop from Nicholas Negroponte's One Laptop Per Child (OLPC) created quite a furor when it was first announced three years ago. At the time, the cheapest laptops were hovering around $400 to $500.

This subject has been rehashed many times in the press and the blogosphere, but reading a recent report on Total Cost of Ownership (TCO) for computers deployed in schools in India prompted me to write about the pricing debate and what can be learned from it. A longer version of the report can be found here.

The report was prepared by VitalWave Consulting, a firm specializing in consulting and research for technology companies growing businesses in emerging markets. They performed a study in India, funded by Microsoft, on the TCO of computers deployed in schools. They built a model that took various factors into consideration when estimating the total cost of owning a computer over a period of time.

Purchase cost, maintenance, support, training, replacement cycle, and electricity cost are just a few of the elements they factored in. They looked at desktops, laptops, and ultra low-cost laptops like the XO and Intel's Classmate PC. The report also compares the differences between TCO in India and TCO in a "global" model.

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The base of the pyramid conversation often involves talking about the size and composition of BoP markets (which, in fact, was the topic of my previous post) and how to create business models that sustainably create wealth for the people in those communities and the firms involved.

I recently came across a very interesting paper from the World Bank that sheds light on something we have not touched upon that much (if at all): the changes in expenditure patterns of BoP consumers as new products enter the market. The paper is entitled "So You Want to Quit Smoking: Have You Tried a Mobile Phone?", and authored by Julien Labonne and Robert S.Chase.

The basic idea is very simple: how do the spending patterns of BoP consumers change as they gain access to more products?

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Most estimates of the size of the BoP population sit between 3 and 4 billion people. The original population figure of 4 billion by CK Prahalad in his "Fortune at the Bottom of the Pyramid" has been criticized as an over estimation. It is true that, for scientific analysis, exactness is something we should always aim for.

However, from the point of view of the colossal opportunity that BoP markets represent for the private sector, the exactness of our measurements of the BoP population is not crucial. That is why, in the past few years, the lessons taught in his book have been taken to heart and developed by BoP entrepreneurs, investors and researchers alike.

According to WRI and IFC's publication, "The Next 4 Billion", the number of people at the BoP is estimated at 4 billion, representing a market size of $5 trillion, in purchasing power parity (about the GDP of the UK and Germany together). If the actual population of the BoP was 3 billion people we would estimate the actual size of this market to be between $4 trillion (slightly less than Japan's GDP) and $3 trillion (more than India's GDP).

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