Peso power brings hope to poor

Every weekend Hilario Amador makes the short journey to the city centre of Zacatecas where he deposits 120 pesos with Patrimonio Hoy, a self-help building scheme run by Cemex, Mexico’s largest cement company.

The money is equal to about 20 per cent of his weekly wage at a local abattoir and it has allowed the 38-year-old to receive regular supplies of the materials he needs to tile the floor, repair the roof and build two extra rooms at his modest single-storey home nearby.

“I just wouldn’t have had the money to buy all the materials at one go,” says Mr Amador, who has now set his sights on buying land and building a bigger place.

The company offers credit and technical advice but this is no act of altruism. The scheme makes business sense because it allows Cemex to expand its market – and secure a reputation for reliability – among poorer customers.

Mr Amador may scarcely be aware of it, but he is in the vanguard of a new approach to tackling social exclusion, one pioneered by companies in the vast underdeveloped markets of South Asia but only now surfacing in Latin America. The notion entered the business-school mainstream courtesy of C.K. Prahalad, an Indian academic, and his book The Fortune at the Bottom of the Pyramid.

The idea is simple: empower poor people economically, through credit from companies or microfinance from lending institutions. It marks a recognition by policymakers and businesses that only if the poor are given a stake in the capitalist system can the region’s leftward drift be halted.

That task has been rendered more pressing by the success of President Hugo Chávez’s free-spending social policies and radical nationalism in Venezuela and the spread of such policies to other countries in the region. Developments such as the recent gas nationalisation by Bolivia, Mr Chávez’s strongest ally in the region, and the powerful electoral showing of Ollanta Humala, another Chávez ally, in Peru last month have heightened the urgency of infusing a stronger social element into the agenda of market liberalisation and democracy that guided the region in the 1990s.

So has the rise of leftwingers such as Andrés Manuel López Obrador, front-runner in Sunday’s Mexican presidential election, and the likelihood that elections later this year in Nicaragua and Ecuador will also see radicals in the ascendent.

Even the administration of US President George W. Bush has conceded the need for what Tom Shannon, its chief policymaker in the region, described as “sober second thoughts” about the Washington Consensus: the idea long cherished by policymakers that free-market economic reforms would prove a panacea for regional instability.

The new approach is on display at the Washington-based multilateral institutions and in particular at the Inter-American Development Bank, the region’s most important development organisation. This month Luis Alberto Moreno, a former Colombian ambassador to the US who was elected president of the bank last year with Washington’s backing, announced plans to triple the sums devoted to microfinance and to water and sewerage provision in poor areas.

The bank has pledged to popularise “bottom of the pyramid” initiatives, such as that of Cemex, that it sees as offering an attractive market-friendly alternative to a Venezuelan-style, state-centred approach.

“Social gaps have to be closed,” says Mr Moreno. “Governments have done well with certain things but three years of good economic growth doesn’t mean anything for the poor in places like Bolivia. The vast majority of people are still waiting for the promised fruits of development.”

Mexico is an important testing ground for the new approach. In part that is because the country has had some limited success at blending
market-oriented policies with social reforms. The government’s cost-effective social assistance programme, called Oportunidades, benefits about 5m families and is gaining support among Washington policymakers.

Nearly a decade of consistent fiscal and monetary policy – coupled with steadily rising inflows of capital resulting from the 1994 trade agreement with the US – has paid off. Inflation is at its lowest level since the 1960s. Last year it was even lower than that of the US.

Stability has paved the way for the development of a mortgage market. In the past two to three years, banks and housing agencies have begun to lend money for domestic mortgages. Even the less well-off are starting to reap the rewards. Mexicans who earn as little as $600 a month can now take out fixed-rate loans in pesos repayable over 25 years.

The country has also provided a predictable environment for companies that identify burgeoning opportunities to do business with the poor. Take Banco Azteca. Formed by the Elektra retail store four years ago, it focuses on those Mexicans who had been ignored by traditional banks in the belief that they neither earned much nor had
savings.

Banco Azteca now has more than 6m customer accounts and has issued 1.7m credit cards in less than a year. “For these people the difference is having a bed, a refrigerator or a washing machine,” says Luis Niño de Rivera, a director of the bank. “Imagine the changes in their lives.”

Mexico is also benefiting from another trend that policymakers at the multilaterals believe is giving greater purchasing power to the poor: money remitted by family members who have migrated to work in the US (see box). Cemex has even launched a scheme called Construmex, which allows migrants living in the US to channel remittances in the form of cement and building materials.

In any event, all this has begun to have an unmistakable sociological impact. Economic stability and the sheer volume of remittances combined with the decline in average family sizes have led to an impressive growth in the middle class. According to Ernesto Cervera, an economist at GEA, a consultancy in Mexico City, the number of families with an income of 9,000–20,000 pesos a month has doubled from 5m to 10m in the past decade.

Yet for all the potential such bottom-of-the-pyramid schemes hold, there are at least three obvious pitfalls. The first is the sheer scale of social marginalisation. Mr Cervera estimates that as many as 12m Mexicans – more than a quarter of the total workforce – make their living in the undercapitalised and unregulated informal economy. Despite the success of social programmes, 8.6m families still live in poverty, he says.

The second is to encourage the creation and development of small- and medium-sized businesses. The IADB says monopolies in strategic industrial sectors are one of the main obstacles to achieving this goal.

No sector is more restrictive than telecommunications. Many Latin America governments have not yet removed restrictions on voice-over-internet protocol telephony. As the bank’s own report puts it: “The region still lags behind many Asian and even some African countries.”

In Mexico, Carlos Slim, the telecoms magnate, has been much criticised for taking advantage of Telmex’s domination of the sector to keep prices high. Even Cemex, for all its social innovation, has been widely accused of abusing its market dominance.

Third, Mexico’s government, like many in the region, has made only limited progress in reducing the red tape that makes forming a small business so difficult. Regular reports by the International Finance Corporation, the private-sector arm of the World Bank, show Latin America to be one of the world’s worst offenders in this regard.

It would be naïve to argue that such problems will prove easy to surmount. But Mexico’s recent experience demonstrates the role bottom-of-the-pyramid initiatives can play in improving the lives of the poor.

To make a lasting difference, and change the social and political path on which much of the region appears to be set, they will have to be implemented far more widely. As Mr Moreno at the IADB says: “The biggest challenge is scale. Without that it will only be a drop in the bucket.”

SOUTH OF THE BORDER, A REMITTANCE HELPS PAY

With between 400,000 and 500,000 people leaving Mexico for the US each year and an estimated 12m Mexicans living and working across the border, the country is the biggest recipient of migrant worker remittances in the northern hemisphere.

Total remittance income is expected to reach $24bn (£13bn, €19bn) to $25bn this year, having grown from only $6bn in 2000 to $20bn in 2005.

Most of the money received by families in Mexico goes towards consumption but up to 20 per cent of remittances are being invested in education, housing and similar.

Mexican banks and finance companies have sought remittance business more actively than others in the region, helping to bring down average commission rates to about 3 per cent, the lowest in Latin America.

Mexican home-town associations formed by migrants living in the US are particularly active.

Schemes that allow Mexico’s federal, state and municipal governments to match voluntary contributions with official funding to support road building and other infrastructural improvements have been established for more than a decade.