Capitalism to the rescue!

What’s the best way to fight poverty in the developing world? Treat people like producers and consumers, argues Bangladeshi entrepreneur Iqbal Quadir.

Marco Visscher | April/May 2010 issue

Iqbal Quadir has nothing against low salaries. “That’s not a bad thing,” he says calmly, though his eyes are piercing. “That’s how [businesses] make more profits and, as a result, society has more capital. Then other businesses are created that need to hire people, and competition emerges. The long-term effect is a rise in wages and a rise in purchasing power.”
Views like this tend to puzzle some and infuriate others. After all, the economic meltdown and subsequent recession have put a huge dent in the conviction that capitalism as we know it can genuinely serve society. Plus, Quadir is from Bangladesh, a country known more for being exploited by—rather than benefitting from—big business. But for Quadir, founder and director of the Legatum Center for Development & Entrepreneurship at the Massachusetts Institute of Technology (MIT), capitalism is not the problem but part of the solution to poverty in the developing world.
“History has shown that the effect of capitalism is actually positive,” he says, seated in his sober office in Cambridge, Massachusetts. “Ultimately, more opportunities are created for society to prosper. There is a general notion that business means ripping off customers and social interest means trying to do some good. I don’t think that is necessarily true. Countries have been lifted up—and a large number of people have gained opportunities—through competitive commerce.”
These are not just theoretical reflections delivered from the comfort of an academic ivory tower. In the 1990s, Quadir set up Grameenphone, Bangladesh’s leading mobile phone company thanks in part to its unique cooperation with Grameen Bank, the renowned microcredit institution. As a result of this partnership, female clients can take out microloans from Grameen Bank and buy cell phones. They repay the loans from the money they earn renting the phones to fellow villagers. When he sold his shares in Grameenphone in 2004, Quadir founded Emergence BioEnergy, which aims to make electricity available to the majority of Bangladeshis who do not have access to the power grid.
Quadir says the success of Grameenphone, and other entrepreneurial initiatives in the developing world that he hopes to inspire through the Legatum Center, demonstrates the positive power of business. The problem is not with companies, he argues. Instead, “The real problem is concentration of power. When power is concentrated—whether in the government or in a business or your relationship—unhealthy inequality will be created. Power corrupts.”
Quadir cites slavery as the perfect case in point. “If rich people own slaves, there is a downward pressure on the wages of workers who are not enslaved,” he says. “Because of this pressure on [free] artisans, they never made enough money to buy or develop tools to advance their activities. As a result, innovation was stunted.” Slavery is thus not only morally reprehensible, it is economically catastrophic. And it’s not surprising, Quadir suggests, that the abolition of slavery in the 19th century was followed by a wave of innovation and economic growth.
What’s needed, according to him, are mechanisms like capitalism and democracy that disperse power. For some, the word “capitalism” has only negative connotations. But in Quadir’s mind, capitalism is essentially “a democratic process in which the power of business can be mitigated through competition. Once power gets more dispersed, nobody can control the rise of capitalism, which gives freedom and opportunities to others. Nobody intended to implement capitalism. Capitalism arose because nobody succeeded in preventing it. There were a lot of enemies of capitalism. Still, it came as citizens steadily gained power from a narrow elite.”
More capitalism also leads directly to more democracy, Quadir believes. In countries like Bangladesh, for example, politicians pay people to demonstrate for them on the streets. As a result, politicians are routinely greeted by hundreds of enthusiastic “supporters” at political events, each of whom is paid for this service. The same kind of thing happens in Afghanistan, where many Taliban fighters are not fanatics but unemployed young men looking for a way to make a living.
By providing opportunities for people to make money, businesses can help remove cash from the political equation. “As a politician, I can easily bribe you if you don’t make a lot of money,” Quadir says. “But if you and others aren’t so desperate for money, it will soon become too expensive for me to bribe a truckload of people to come and shout for me. And if people cannot be bribed anymore, I will have to become a more reasonable politician.”
The net result: Better business equals better governance. “If you start a business in your own self-interest,” Quadir says, “society gets products, services, employment opportunities, competitive pressure on businesses—dispersion of power. That’s why entrepreneurship disperses power and leads to better politics.”
Quadir gives the example of Botswana, which has achieved annual growth rates of 9 percent since independence in 1966. The reason, according to Quadir, is the country’s poor soil and low rainfall, which result in minimal agricultural surpluses. This forces individual and national interests to align around the need to ensure sufficient food production, thus fostering cooperation and accountability. In Transparency International’s rankings of the perceived absence of public-sector corruption in 180 countries, Botswana holds a respectable 37th place, above South Korea and Italy.
Quadir’s flair for entrepreneurship and unconventional thinking developed early. As a teenager, he started making plans to emigrate. His father had died young, which Quadir says meant he could accomplish little in a society in which the ability to get ahead is strongly linked to your father’s influence with others. On his 18th birthday, Quadir left for Waldorf College in Forest City, Iowa, where he had been awarded a scholarship.
In the mid-1980s, after studying at Swarthmore College and the Wharton School of the University of Pennsylvania, he went to work at the World Bank. “My family was so proud,” Quadir remembers. “For Bangladeshis, getting a job at the World Bank was like you had arrived.”
But Quadir became disillusioned. He didn’t see the point of lending money to authoritarian governments that made no effort to help citizens. However, while at the World Bank he did learn how finance could contribute to society, which inspired him to earn an MBA at Wharton. In the 1990s, when he found an investor willing to support his idea to develop what later became Grameenphone, he took the leap.
In a 2005 Ode cover story about Grameenphone (which you can read at ), Tawfiq-e-Elahi Chowdhury, the former energy minister of Bangladesh and an acquaintance of Quadir’s, expressed what many people felt at the time. “Has this man gone crazy?” Chowdhury said. “This is Bangladesh. People don’t have enough to eat. What would they do with mobile telephones?!”
Quadir laughs at the statement now. It is, he feels, symptomatic of thinking in poor countries: Because there is no money, nothing is possible. “They never saw that if we bring phones to people, then they will get richer,” Quadir says.
And that’s exactly what has happened, in Bangladesh and elsewhere in the developing world. Thanks to the introduction of cell phones in the southern Indian state of Kerala, for example, the price of fish fell 4 percent while profits for the fishermen rose 8 percent because improved communication allowed fishermen to meet demand quickly and accurately. According to Leonard Waverman of the London Business School, the introduction of 10 mobile phones for every 100 residents of a developing country leads to a 0.6 percentage point increase in per capita GDP. Jeffrey Sachs, the celebrated development economist, has even called the mobile phone “the single most transformative tool for development.”
Quadir was quick to see the economic potential of mobile phones. And he has not been shy about expressing contrarian views since. For example, he once suggested in the Harvard Business Review that the World Bank should stop giving financial assistance to poor countries and instead give it to America in exchange for discontinuing agriculture subsidies.
He recently wrote on The Huffington Post that sending 10,000 fewer American soldiers to Afghanistan would save $2.5 billion a year, which could be used to provide $300 microloans to 5 million Afghans and purchase Afghan products like carpets and pottery. “Trade and commerce could bring democracy and harmony from the bottom up,” Quadir wrote. According to American foreign policy expert Joseph Nye, Quadir “develops new ideas and has the capacity to implement them. He’s a true entrepreneur.”
Quadir was also quick to recognize that companies can combat poverty. In the 2004 book The Fortune at the Bottom of the Pyramid, Indian management consultant C.K. Prahalad popularized the idea by arguing that poverty can be more effectively tackled by regarding the poor as potential customers rather than charity cases. Back in the 1990s, that view was considered eccentric. At the time, development aid was considered the only way to help low-income countries prosper.
“Don’t get me started,” Quadir says at the mention of development aid, laughing. The problem, as he sees it, is once again concentration of power. Because the vast majority of aid goes to governments, the power of that money is concentrated in the hands of the few, stifling the innovative drive of the many. Charity may lessen the effects of poverty, he believes, but does not achieve what is arguably much more important: the creation of prosperity.
Although Quadir recognizes the value of non-governmental organizations (NGOs)—“They may not necessarily create a lot of economic value and efficiency,” he says, “but they address humanitarian needs”—he questions their lasting effects. “NGOs do not face a real test of whether they’re providing a useful service,” Quadir says. A better way to help, he suggests, would be to treat the poor as consumers. “Then your eyes and ears are checking out that you are providing something they really need, and so you make sure you provide a service that makes them happy.”
Good intentions are not enough, Quadir stresses. “Some organizations are doing their work in the name of fighting poverty,” he says. “But doing anything ‘in the name of’ something can be dangerous. ‘In the name of God’ or ‘in the name of patriotism,’ a lot of bad things have happened. That is another reason why economics is a good thing. A businessman cannot do anything ‘in the name of’ whatever. He’s only trying to make a profit. As soon as a businessman is not efficiently providing something that’s needed, somebody else will displace him. He’s not secured by God or by the government, by race, by color or by any other excuse. In that sense, the businessman is actually more pure than the do-gooder. He is more honest.”
While he acknowledges that the challenges facing the developing world are vast, Quadir says he is convinced that the ability of ordinary people to innovate is even vaster—and that this intrinsic entrepreneurship will provide the necessary solutions.
“Fortunately, there is no end to innovation,” he says. “As soon as someone invents something, it gives rise to other inventions. So new opportunities arise. Innovation is unpredictable, its effects are cumulative and its impact exponential.”
Marco Visscher is Ode’s managing editor.

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