Among the most complex contributors to poverty in developing nations are lack of access to savings and credit by individuals, poor management practices in industry, operational inefficiencies among entrepreneurs, and bribery throughout supply chains. But can small, strategic research interventions make a difference? And can they point the way to more comprehensive efforts that governments, agencies, and corporations may make to improve the economic lives of millions, or even billions of people worldwide?
Evidence from Kenya and India suggest that the answer is yes, according to researchers who presented results of field demonstration projects from these countries at a March forum on “Entrepreneurship for Poverty Alleviation in Developing Economies.” Hosted by the Stanford Institute for Innovation in Developing Economies (SEED) at the business school, the forum was intended to build exchanges of information and ideas among researchers at Stanford and elsewhere. The Kenyan and Indian studies that were discussed resulted in modest to significant gains in productivity and income for many of the individuals and firms involved when provided with managerial consulting, greater access to capital and banking services, and other incentives.
One such success story was in Kenya, where less than 20% of the population uses banks. In one study, Pascaline Dupas, an assistant professor at Stanford’s Department of Economics, together with Jonathan Robinson from the University of California-Santa Cruz, set up roughly 125 self-employed individuals with savings accounts, waived the prohibitive $6 opening fee, and followed them for four months. The most marked result was seen among women who sold produce at markets: Those who used the account were able to increase their inventory by almost 100%, suggesting to the investigators that such entrepreneurs would garner increased sales and income. Dupas says such a result points to directions that African governments and banks may pursue to provide financial products that can help people to save and address their business needs.
In India, where one-third of the world’s poor live, textile plants, which are among the largest employers in the organized sector, are relatively disorganized, inefficient, and wasteful by modern management standards such as those pioneered and popularized by the Japanese auto industry. Aprajit Mahajan, an assistant professor of economics at Stanford, presented a field study in Mumbai in which Indian consultants helped various factories update core management practices in operations, quality control, and human resources management.
The intervention significantly improved fabric quality, inventory levels, and productivity. As a result, the CEOs involved in the study were able to spend their time on other activities, which included opening additional plants with an attendant increase in employment. “The policy implications are that India may want to invest in disseminating higher quality business education and encourage a more vibrant local consulting industry, among other things,” Mahajan said.
Another study in India addressed the pervasive issue of bribery and corruption. Rohini Pande, a professor at Harvard’s Kennedy School of Government, presented work suggesting that improving the regulatory framework in India could also help the economic landscape while providing a win for the physical environment as well. A project in Gujarat examined the third-party audits that are increasingly being used to assess industry’s environmental standards. The current policy requires factory managers to pay auditors directly for their services, which has resulted in a corrupt system of handouts and the falsification of compliance records.
In the study, certain plants were selected to have payments go through a centralized authority. As a result, reports of plant compliance declined, and firms responded by reducing emissions and increasing compliance with the regulatory norm. Without the opportunity to receive handouts, auditors were incentivized to tell the truth — and making the needed changes to reduce pollution was actually cheaper for firms than paying bribes, Pande explained. The results suggest that regulatory innovation could lead to greater compliance at what amounts to a cost savings to firms.
Results of field research in one project in Ghana, by contrast, were somewhat more sobering. As Dean Karlan, a professor at Yale’s department of economics, reported, such studies do not always hit the mark — and, in fact, can create more harm than good.
In one study, consultants provided local tailors with instruction on how to improve record keeping, customer relations, and product quality. They also gave the small business owners a cash grant to make investments in their enterprise. While a similar project in Mexico among store and factory owners resulted in a 100% increase in profits, a 70% increase in sales, and a 25% increase in productivity, in Ghana the project had the opposite effect. Profits of tailors’ businesses actually went down.
Karlan explained that attempting to improve their operations actually took these small business owners from their work, making them far less productive in the end. Moreover, he suggested, even in the best-case scenario the competitive climate was probably saturated and not supportive of business growth in this sector. “So training in management is not the automatic solution to poverty alleviation,” he remarked.
Thus, taken together, the studies at the Stanford research forum suggest that business research interventions can help address poverty in modest ways that may inform much more comprehensive solutions. But, like all well-meaning efforts, researchers must take into account the specific needs of local realities and strive for nuanced solutions involving both the private and public sectors.
