Eradicating Poverty Takes Private Enterprise

About 40 percent of the world's 6 billion inhabitants earn $2 a day or less. Typically we have tried to wipe away poverty through initiatives by government, non-governmental organizations and philanthropists. Despite their efforts poverty remains widespread.

What more can be done? Harvard Business School senior lecturer Michael Chu believes the real key to solving this problem is private enterprise, motivated by potential profit in serving a vast market opportunity of billions of people.

Why private enterprise? Writing in the Wall Street Journal, Chu argues forcefully that any solution to this problem must have four characteristics:

Massive scale. Wiping out poverty, after all, means reaching billions of people.

Permanence. There is no quick fix; the solution will span generations of families.

Continuous improvement. The model must become progressively more effective.

Progressively cheaper. The model needs to achieve continuous efficiency.

If you accept Chu's premise, it's difficult to argue against his conclusion that private enterprise needs to play a big role in fixing poverty. Government may be able to provide scale and permanence, but the track record argues against government solutions embracing ever-improving effectiveness or efficiency. Private organizations are good at creating effective solutions, but usually not on a global scale or by employing business best practices.

Private enterprise, it turns out, has demonstrated success in all four areas. Writes Chu:

"What's required is the creation of industries, where open competition brings forth scale, permanence, continuous efficacy and efficiency. And there's only one way to create an industry: by developing economic activity and superior financial returns."
He points to the success of microfinance programs in helping poor families and small businesses build sustainable futures. Look at Compartamos Banco, the largest microfinance bank in Latin America. Chu says the bank's average loan size is only $500. But the program is so successful, with 1.1 million clients, that Compartamos Banco was valued at $1.5 billion at IPO time.

So while business and capitalism are under fire in some circles, also recognize they might be the best answers we have to solving intractable world problems such as poverty.

For more on microfinance, read this interview with Chu, Microfinance: A Way Out for the Poor.