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McKinsey on Society

 

Voices Social entrepreneurs

The economics of social progress

Iqbal Z QuadirThe Legatum Center for Development and Entrepreneurship

Iqbal Z. Quadir is the founder and director of the The Legatum Center for Development and Entrepreneurship at the Massachusetts Institute of Technology (MIT) and the founder of Grameenphone in Bangladesh, which provides effective telephone access throughout the country. From 2001 to 2004, Mr. Quadir taught at the John F. Kennedy School of Government at Harvard University. He holds a BS with honors from Swarthmore College and both an MBA and an MA from the Wharton School at the University of Pennsylvania.

Working in the private sector early in my career, I gained an appreciation for commerce as a powerful force for meeting economic and social challenges and, for that reason, naturally thought in commercial terms when attempting to bring affordable mobile telephony to Bangladesh. In fact, when I conceived what is now Grameenphone, I made a conscious decision to organize it as a for-profit company. In so doing, I found I had to address the prevailing notion of the poor as being mere recipients of goods and services, rather than actors in their own economic well-being. On the one hand, I had to convince many well-intentioned people that services should not simply be given away to the poor. On the other, I also had to assure potential investors—some of whom told me that they were “not the Red Cross”—that a business could be profitable in one of the world’s poorest countries. Now with 23 million subscribers, more than 40 percent market share, and billions of dollars invested in Bangladesh, Grameenphone is meeting the scale and scope of the challenge—and unleashing widespread social benefits in the process.

Scale. Why should companies charge the poor? The simple response is that, among their many benefits, profits are necessary to achieve scale. Profitability, in a word, isscalability. A commercial approach can lead to economic empowerment for ordinary people when a product or service yields a higher value for a customer than what she spends on it. For example, when somebody spends a dime to make a phone call and earns a dollar—by saving valuable time or being able to engage commercially—she gains 90 cents. This not only enables her to purchase the very service that will make her more productive, it also fuels further economic growth. In the case of Grameenphone, investors recognized that ordinary people would pay to become more productive and as a result invested billions of dollars in infrastructure—which led to the development of more infrastructure and a higher mobile-phone-penetration rate than would have been achieved if mobile phones had been provided free of charge.

In fact, innovations and tools that make people more productive, delivered by entrepreneurs through a for-profit framework, empower the ordinary people who use them to become problem solvers. Indeed, it would be an overwhelming task for social entrepreneurs to meet the needs of the two billion people who live on less than $2 per day. But, by voting with their hard-earned money for the productivity tools and services that they need most, these two billion people become producers capable of meeting their own needs. The people become the ultimate drivers of scale.

To understand that scale, let us begin by checking the basic arithmetic: one billion people around the world make $1 per day and another billion each make $2 per day. On average, these two billion people each make $1.50 per day or a trillion dollars per year combined. If their productivity were to go up by a mere 6 percent, these individuals would generate an additional $60 billion annually in prosperity, an amount far greater than what charitable approaches could provide in funding to alleviate poverty. If the productivity of the poor could continue to grow at this annual rate of 6 percent, after only a decade the poor would earn an additional trillion dollars per year. More important, this wealth would be generated on the ground and would therefore be less vulnerable to abuse or misappropriation than if it were disbursed by other means.

Scope. Just as profit-driven ventures can address the scale of social problems both by allowing for large-scale infrastructure investment and by transforming individuals into problem solvers, these ventures likewise allow for a greater scope of innovation for tackling social challenges. Because of the competition that is inherent to the for-profit world, entrepreneurs must find cost-effective ways to expand markets and provide goods and services at lower costs. Innovations and lower-cost products naturally emerge; they must.

Because Grameenphone had to cover its costs to remain economically solvent, calls were initially priced at four Bangladeshi taka per minute, despite pressure to price calls at one taka per minute from those who placed an emphasis on social priorities. Although Grameenphone sought to provide access for as many people as possible, if calls had been priced at one taka per minute from the outset, the sheer volume of calls would have overwhelmed the initial infrastructure. As a result, Grameenphone would have been prevented from solving the telecommunications problem in Bangladesh; the project simply would not have gotten off the ground. In contrast, insisting on a higher price to start sustained the initial investment and eventually led to greater economies of scale. Furthermore, the venture’s profitability resulted in competition and innovations that caused prices to drop. Indeed, the average price of Grameenphone services today is below one taka per minute. By not insisting on a strict social agenda, the scope of problem solving was expanded.

Shadow. Often, unintended—yet far-reaching—social benefits emerge in the shadows of successful commercial ventures. Grameenphone has directly improved the lives of ordinary people in Bangladesh by providing widespread connectivity and entrepreneurial opportunities. The for-profit nature of the venture has also led to a number of lesser-known benefits for employees and customers. Since the company invested millions of dollars in purchasing equipment, its profit motive compelled it to spend still millions more in training employees, in order to get the best return on the equipment investment. Likewise, as Grameenphone proved itself a profitable venture, competition from other telecom companies emerged. Now competing for employees, they had a vested interest in treating employees well and raised their salaries. As Grameenphone sought to hire those employees best able to serve customers to increase profitability, meritocracy prevailed over the common practice of nepotism. In addition, pressure for employees to sell telephone services to maximize profits meant that employees could not extort money from potential customers—as had sometimes happened in the absence of competition—before granting them a phone. In this way, the competition among firms that characterizes a for-profit climate also led to greater accountability.

Source. Grameenphone is only one contemporary example of for-profit enterprises that create social good by enhancing the productivity of ordinary people and engaging them in commerce. While the aggregate effect of present-day ventures may not be visible for some time, history teaches that commercial forces have indeed been the source of a great deal of social progress. It is commerce that dispersed economic resources and flattened hierarchies in medieval Europe—giving rise to state accountability and self-governance, while remedying the sclerotic concentrations of power impeding social progress. Viewing widespread social progress as possible without first achieving commercial progress is akin to putting the cart before the horse.

State accountability. A number of historical examples illustrate that the economic power of citizens engenders state accountability. In medieval Europe, commerce and the consequent economic strength of citizens allowed them to demand better governance. The British parliament began as a tax-legitimizing body for monarchs who sought a share of the income from the burgeoning commercial sector. Members of Parliament, knowing that the monarch required their approval to levy taxes, succeeded in extracting various liberties and the king’s power devolved. Similarly, the Magna Carta, which planted the seeds of state accountability, originated from an economic tussle between the English monarch and wealthy barons. While it initially applied only to these two parties, subsequent skillful interpretation allowed rights to expand to ordinary people as they gained economic clout. In the same way, as productivity tools and innovations allow ordinary people in low-income countries to gain economic clout today, these individuals will be increasingly able to hold their governments accountable.

Self-governance. Nearly 300 years ago, Voltaire argued that commerce provided the motivation and means through which people from diverse backgrounds could cooperate. More than 200 years ago, Adam Smith asserted that competitive commerce made people more prudent, restrained, accountable, and understanding as merchants invariably had to think about the needs of their customers. As people specialized and exchanged, they became mutually dependent, allowing them to hold one another accountable. While many Enlightenment thinkers such as Jean-Jacques Rousseau lamented the materialism that emerged from commerce and its seeming emphasis on means instead of higher purposes, subsequent thinkers like Georg Simmel believed that focusing on means had a positive social effect. According to Simmel, even if people could not agree on higher purposes they could cooperate on lower pursuits related to material wealth. These lower purposes would have the benefit of encouraging cooperation, which paves the way for people to come together for the common good. In other words, commerce can contribute to harmonious self-governance. Today, by [mobilizing] people through commercial pursuits, productivity-enhancing innovations likewise lead to increased cooperation toward the larger economic good.

Sclerosis. Indeed, historical precedents and contemporary examples illustrate that economic progress and good governance emerge as a consequence—an often unintended one—of commerce and innovation driven by entrepreneurs. Commerce and innovation have been the antidote to the sclerotic hierarchies impeding social progress, an antidote that could be effective against the sclerosis that exists today.

In the absence of vigorous and dispersed commercial opportunities in low-income countries today, many governments remain unaccountable to economically weak citizens. Furthermore, with power concentrated in the hands of a few, governments can prevent competitive commerce—and its ensuing benefits—from taking hold. At the same time, certain global forces bolster existing local vested interests, consequently hardening hierarchical structures. For instance, while devolution of authority would be desirable, many governments have been empowered by mineral wealth or aid from rich countries, generally provided for geopolitical reasons. At the same time, local producers often face trade barriers, either through tariffs levied against their exports or through subsidies granted to competing producers from rich countries. Empowerment of the elite and the hindrance of potential dispersive forces maintain the hierarchies that prolong social malaise. These bottlenecks to social progress are real and will not disappear with the mere treatment of their symptoms.

Solution. While many people pursuing purely social ventures are doing admirable work, for-profit ventures have the necessary scale and scope to remedy the underlying causes of social problems. As history has shown, social progress depends on the economic empowerment of ordinary people. When entrepreneurs deliver productivity tools, the resulting commercial opportunities become a decidedly social force. Promoting for-profit entrepreneurship is key to the economics of social progress.

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