Financial Times

The proponents of free-markets make out that the process is guided by an ‘invisible hand’ of market forces almost divine and God-like in the way it ‘directs’ the worldwide market place through the interplay of supply and demand. As production adjusts to such interplay, wealth will result: more investments, more optimum allocation and use of resources, more markets, and better standards of life. The tide of free markets will ‘raise all boats.’ While the bigger boats (the rich) will be raised higher, the smaller ones (the poor) will be raised as well.

For this Utopia to emerge governments should deregulate, privatize, cut or eliminate tariffs and generally get out of the way to let the ‘invisible hand’ do its work. Since the 1980s most governments have done just that.

There is no denying that the march of globalisation has yielded many rewards, resulted in increased trade, better technology, larger markets and higher standards of living.

But these benefits have been uneven, blemished, and blotchy. There is widening disparity within countries and between them. Globalisation has generated the greatest gains in the United States, China, Japan, Europe and Korea while Africa, Latin America, parts of South Asia and Russia lag behind.

Most significantly and generally less well known, the invisible hand of free markets has not benefited some four billion of the worlds’ six billion people. They “live on less than $2 a day,” the mark which makes them the ‘poor,’ and which places them at the ‘bottom-of-the-pyramid.’

That failure of free markets was evident in the way that the governments are voicing serious concerns about the plight of the poor. There is no assumption about the ‘invisible hand’ to do the work of ‘lifting all boats.’ Rather, there is much agonising about positive action to lift the poor out from the chasms they are in. Ironically that calls for more, not less, government action.

Some years back the New York Times reported that world leaders meeting at the World Economic Forum implored rich nations to give far more aid to the poor, warning that grinding poverty converts needy countries into incubators for terrorism and chaos. The US urged global leaders to wage war on poverty as a root cause of terrorism. The then US Secretary of State Colin Powell said, “We have to go after poverty, we have to go after despair, we have to go after hopelessness.'' Kofi Annan, the United Nation’s secretary general said, "No one in this world can feel comfortable or safe while so many are suffering and deprived," He called poverty and inequality the greatest threats to world peace. The then WTO's director, Mike Moore, called global poverty "a time bomb lodged against the heart of liberty." Guy Verhofstadt, the prime minister of Belgium, said today that "the collective selfishness of the rich world" has contributed to "the despair of hundreds of millions of people — alone, dispossessed, powerless." But fiercest of all was Fidel Castro of Cuba, "The world economy today is a huge casino," Castro said, “run by the self-appointed ‘masters of the world,’ whose traditional offers of assistance, always scant and often ridiculous, are either inadequate or unfulfilled."

A cross section of thought, all united in silently acknowledging the failure thus far of free trader and affirming the need for action to ‘go after poverty.’ The markets were no longer dependable to resolve the problem. More government action, less private initiatives to the rescue of the flagging ‘invisible hand’ ?

Ironically, there is a new twist to the tale: that task now falls on the richest of the rich, to reach the poorest of the poor- to the likes of Bill and Melinda Gates and Warren Buffet. In a part ‘admission’ of the failure of free market’s universal reach, they have banded together to bring succor to the poor in the form of Gates Foundation, pooling some $61 billion of their fortune. Paradoxically, they will bring succor to the poor in a way that free markets will not.

When the lure of profit needs to be propped up by philanthropy, one is left to wonder why the ‘bottom-of-the-pyramid’ has to be grateful to the philanthropists for succor, instead of the drive of free markets.

More recently, the UN sponsored Global Alliance for Information and Communication Technologies Development noted that "the problems and needs of the majority of humanity [should go on] the ‘radar screens’ of thinkers, business executives and government decision makers.” There is reason to suspect that the free markets failed the poor, was not because the poor was not a ‘market,’ but because of short term profit expectations, the psyche and prejudices of moguls who run most businesses. They are prone to view the ‘bottom-of-the-pyramid’ as a ‘market without profit,’ not deserving the nurture and patience needed.

Perhaps because of this, many institutions set up to serve the poor have turned away from them.

In Sri Lanka, banking institutions tasked with rural and agricultural lending – the National Development Bank and the People's Bank, defaulted from that primary business and focused on industry and urban lending. The banking sector in general was wont to consider servicing the ‘bottom-of-the-pyramid,’ was viewed not only without profit but also as ‘unbankable’: no prospect of repayment and lacking the security and the collateral to cover their loans. This was until the Grameen Bank, launched in the poor third world backwash of Bangladesh, began giving micro loans and made such a success of it with 98% loan recovery proving that the poor were even more reliable than elite borrowers.

Since then there have been many who have joined the ‘bankwagon.’ Janashakti Banking Society Scheme by the Women’s Development Federation in Hambantota had a 99% loan recovery rate. In a fine example a destitute woman whose husband had left her, given a micro loan, set up in leather-bag making with one sewing machine, expanding to such an extent that the local People's Bank took over, servicing her export business.

The accomplishment of the Hatton National Bank's 1990 Gami Pubuduwa Scheme is by far the best evidence of both the credit worthiness of the poor and the ability of a commercial bank to provide such services on a commercial basis. By 1999, it had a repayment rate of 97 percent on loans amounting to Rs 1.2 billion, covering 32,505 projects.

Still, these profit taking lessons are lost on the banking community in general. Majority of the 22 banks in the country are content with ‘safe’ area of a high-value consumer pool. The ‘lowly’ Bank of Ceylon dominates the scene, providing many facilities for the families of the ‘poor’ Middle-East employed maids to cash their remittances on the spot, in their own locality, tying up its bank network via increasing computerization, providing a massive branch network of 302 in every nook and corner of the country. Not surprisingly, the Bank of Ceylon also has the highest deposits as well as the largest value of NRFC accounts.

For decades, the Big-Brothers of consumer products had been ‘poor-blind’ as to confine print descriptions on their packs to English, while advertising them in Sinhala and Tamil and to market them in large packs beyond the reach of the deprived. They eventually realized the need to link with the poor, placing Sinhala and Tamil print on their packs, introducing small sachets for one-at-a-time use of shampoos, biscuits, aspirin, malted milk and such like, copying something which the ‘silara kade’ mudalalis were doing for ages on other products and which regular ‘polas’ or village markets had been doing for hundreds of years.

Internationally, the likes of Microsoft and Proctor and Gamble, S. C. Johnson have begun to seek out the ‘economically disadvantaged,’ offering scaled down products, cutting margins and seeking profits via volume sales. In Mexico, Cemex, a cement company delivers cement in regular, small, weekly installments for weekly payments of nominal sums to enable the poor to build homes. They have been so successful that they have expanded to neighboring countries.

Citigroup in London has set up a micro-finance division which lends to small businesses they would not have cared to let into their plush offices.

In South Africa, Vodacom, a cellular provider, has generated 50 percent of the traffic from 125 cell phones held in a pool in poor townships.

Are these examples a sign of the awakenings of corporate conscience doing good, addressing a non-existent market place?

One would think so until it is realized that the nose of the free markets to sniff out market potential had missed out a staggering $15 trillion market, patronizingly called “bottom of the market pyramid.” The initiatives seem to signal an awakening to a new possibility of profit, hitherto rejected as non-existent.

Despite the stirrings and attempts at tapping that market, there is evidence that it will not. It is too much work for too little profit to the marketing moguls to be seen targeting the sweaty, grimy, dirty, smelly poor.

This is not evidence of free market success, but its failure.

Robert Conquest’s words in Reflections of a Ravaged Century, is worthy of contemplation: “We should avoid the temptation of policies supposed to solve all problems and determine a whole future…A ship aims both to avoid rocks and keep heading towards its destination.”