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EGYPT YOUTH ESSAY COMPETITION
YOUTH EMPLOYMENT IN EGYPT
JANUARY 17, 2017
CAN THE PRIVATE SECTOR BE THE
SOLUTION TO YOUTH UNEMPLOYMENT
AND POVERTY?
EXPLORING THE BOTTOM-OF-THE-PYRAMID PROPOSITION IN EGYPT
PRESENTED BY: MAY NAGY
Can the Private Sector be the Solution to Youth
Unemployment and Poverty?
Exploring the Bottom-of-the-Pyramid Proposition in Egypt
May Nagy
Assistant Lecturer at The British University in Egypt, Egypt.
PhD student at London Southbank University, UK.
Abstract
With high rates of youth unemployment and a rising rate of poverty, the need for solutions
that address such issues is crucial. As the state is overwhelmed with many local and regional
matters, this paper explores how the private sector, given the right conditions, can provide a
solution. It looks at Egypt’s poorest segment (called the Bottom-of-the-Pyramid, BOP) and
explores ways that this always-neglected segment can be transformed and engaged in the
formal economy. This is done by proposing a mechanism by which multinational
corporations (MNCs) start profitably serving this market segment while simultaneously
engaging them as local entrepreneurs and employees. The paper ends with a list of
recommendations for policy makers.
1.0 Introduction
Five years after the outbreak of the Arab spring, Egypt’s economic indicators still remain well
below pre-revolution levels (UN publications, 2014). The first and second goals of the famous
UN millennium development goals were to halve the proportion of people below the poverty
line and achieve full and productive employment for all (including women and young citizens).
Upon approaching the deadline in 2015, a report evaluating the progress in achieving those
goals indicated that not only has there been no decline in poverty since 2004, but that poverty
rates are double the rate targeted by the initiative (at over 26%, compared to the target of 12%),
and that there has been no progress in achieving full and productive employability since 2011
(UN publication, 2015). Additionally, according to the Labour Force Survey, a significantly
high number of those who are employed (46.3%) are working in the informal sector
(CAPMAS, 2015a).
Since January 2011, the state has become overwhelmed trying to address the numerous
political, economic and social issues that emerged both locally and regionally. Post-revolution
efforts towards reducing poverty and unemployment have become distracted with other more
pressing, ‘dangerous’ matters, such as national security, fighting terrorism, etc. Furthermore,
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the depressed economy, in addition to making the poor poorer, reduced the impact of nongovernmental organizations (NGOs) due to severe shortages in funding, since they were
heavily relying on corporate donations who were, then, suffering to just keep their businesses
alive. Within this complex context, a proposition that simultaneously tackles the problem of
poverty and youth unemployment, while requiring minimal state effort (in both financial and
non-financial terms) becomes necessary. This paper will present a proposition that encourages
the private sector to advance development, at profit.
2.0 The Argument
2.1 What is the BOP Proposition?
There has been worldwide interest by academics and practitioners on what is called the
“Bottom-of-the-Pyramid” market since the publication of C.K. Prahalad’s (2004) famous book
‘Fortune at the Bottom of the Pyramid: Eradicating poverty through profits’. The proposition
argued that there is much neglected market potential at the 4 billion consumers around the
globe that earn less than $2 per day. This is a market segment that has enormous aggregate
purchasing power, predicted at $429 billion in Africa alone (Chikweche, 2013), mostly
consumed at the exploitive, fragmented, informal economy. Prahalad argues that when multinational corporations (MNCs) convert this purchasing power to the private, organised economy
it will lead to an increase in the income of BOP consumers, reducing levels of poverty. This is
because only MNCs have the capacities and economies of scale to profitably offer products at
affordable prices to the poorest consumer segment, whereas informal merchants suffer from
high costs (due to lack of economies of scale) and tend to abuse markets since consumers have
no alternative suppliers. The BOP proposition introduces a business solution to poverty.
Since then, this proposition has been tested, reviewed and criticised in the literature creating a
new emerging research stream. Part of the criticisms of the original proposition was that MNCs,
with their Western management styles will struggle to address the complex, fragmented BOP
market (Polak & Warwick, 2014 and Schuster & Holtbrugge, 2014). Another criticism was that
tackling the BOP market solely as consumers is not enough to alleviate their poverty (Karnani,
2007; Davidson, 2009 and Walsh et al 2005). Based on those criticisms, a new generation of
BOP scholarship emerged. This new generation focused on the concepts of co-creation between
MNCs and local markets, arguing that to effectively and profitably alleviate poverty, MNCs
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need to engage with local efforts of BOP markets by perceiving the BOP as producers,
entrepreneurs and potential employees, in addition to serving them as consumers.
2.2 Does the BOP Proposition work?
There is empirical evidence that the “updated” BOP proposition works in developing markets.
A famous example is HP’s e-Inclusion programme, which, although has been prematurely
terminated, had some interesting results. The project involved introducing IT to the BOP
market not by selling to the BOP as consumers but by joining efforts with young, local
entrepreneurs helping them create new sources of income using HP technology (Schwittay,
2012). Schwittay (2012) explains that this ‘formation of electronic entrepreneurs’ has led to
the inclusion of poor, local entrepreneurs to the corporate and governmental domains. The role
of BOP consumers as entrepreneurs has been found to be critical as those young entrepreneurs
have access to widen the impact of BOP projects through distribution and promotion (Hall et
al, 2014).
Some have argued that young local entrepreneurs, on their own, are better positioned to execute
effective BOP projects. The argument rests on the fact that bureaucratic MNCs have the
tendency to stretch their existing business practices and products to foreign markets, rather than
radically innovate; whereas young, entrepreneurs are able to design from scratch and work
from the ground-up (Polak & Warwick, 2014). Part of this argument is valid, regarding that
MNCs are often stiff and tend to rely on their existing practices that have proven to “work”
elsewhere. Polak & Warwick (2014) suggest that young entrepreneurs are better suited to take
this initiative on their own, even though they explain in their article that “products and
processes must be designed not merely to reduce prices by, say, 30% below developed world
prices, which might be achieved by removing features; success requires prices close to 90%
less”. From a cost-analysis perspective, only MNCs have the capabilities and economies of
scale to reduce production costs (and hence, prices) to that extent. Additionally, profit margins
in BOP markets are extremely thin, and products must be sold on significant scale to achieve
substantial return. This is explained by Simanis (2012)
“cost structures in low-income markets are daunting: Operational
expenses, such as distribution, are frequently much higher than those that
companies face in developed markets. In addition, customer acquisition
and retention for new products often demand unusually intense—and
costly—levels of high-touch engagement. To cover those high costs, much
greater volumes are needed for break-even.”
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For those reasons, MNCs, although they often lack the flexibility, have the resources. Young
entrepreneurs on the other hand, have the flexibility and market awareness, but lack the
capabilities. That is one reason why a partnership between both sounds ideal.
2.3 Will the BOP Proposition work in Egypt?
Egypt provides excellent soil to apply the BOP proposition for a number of reasons. First, the
characteristics of the Egyptian BOP market are ideal. The Egyptian BOP market is huge
constituting of approximately 17.5 million (19.7%) individuals (CAPMAS, 2015b). A
significant fraction of those at the BOP market are young, accounting for 25.7% in 2014, with
the BOP market predicted to grow most sharply between 2015-2030 (Euromonitor country
briefing, 2016). Such characteristics provide attractive motivations for MNCs to start
establishing markets in Egypt’s BOP. The Egyptian BOP is huge, young, seeking employment
and predicted to grow at a rate faster than any other segment of the Egyptian market.
Second, both the literature on how brands grow, coupled with forecasts on the Egyptian
economy indicate that now is the time that businesses should establish markets in Egypt.
Forecasts for 2015-2030 show that capacity of discretionary spending is expected to increase,
growth is expected in household income and total consumer expenditure, young consumers
will be driving growth, with the wealthiest consumers being those in their forties (Euromonitor
country briefing, 2016). Egypt is an emerging, growing market, and only corporate market
shares established now will grow with it. The US Department of Commerce predicts that over
75% of growth in world trade in the next 20 years will take place in developing countries
(Cateora et al, 2014). While consumption in developed markets is slowing down facing
saturation, emerging nations are witnessing a consumption revolution. Big emerging markets
are witnessing rising market power and are estimated to supersede the current top 10 economies
in the next 50 years (Waheeduzzaman, 2011). Forecasts show that Egypt is going in this
direction. Establishing that Egypt is a growing market with potential is important because this
is what will attract MNCs to the BOP market. It should be reminded that the BOP proposition
rests on the assumption that MNCs will serve and collaborate with the BOP market at profit,
not out of social responsibility, or any other non-financial motive.
Third, a closer look at Egypt’s BOP as consumers and as potential entrepreneurs shows
attractive potential. A consumer panel studying 3265 Egyptian households’ consumption over
62 weeks starting from January 2015, shows that BOP consumers are, surprisingly, quite heavy
consumers (relative to their very little income), who demand a variety of products across a
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variety of categories. Unfortunately, currently, their purchase power is almost exclusively
directed toward the inefficient, informal sector, which are mostly from the same BOP market.
It would be ideal if such merchants can become part of the formal economy by engaging efforts
with MNCs. Such a collaboration will allow MNCs to, cheaply, outsource some of its activities
(e.g., promotion and distribution) to young entrepreneurs that are well-connected to their local
communities acting as gateways to the complex, fragmented BOP market. It will also act as a
source of stable business income for young entrepreneurs. In addition to working with current
local entrepreneurs to formalize the informal sector, BOP projects can generate job
opportunities as MNCs reach out to Egypt’s cheap and young labour market to become part of
their production, promotion and distribution activities as employees.
3.0 List of recommendations
The BOP proposition rests its efforts in the private sector, not on the state. This is important
for Egypt today as the state is overwhelmed with many urging matters. However, a number of
policies introduced by the state can provide ideal soil for BOP projects. Some of which are
discussed below:
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Policies need to focus on promoting Egypt to foreign investors, specifically to MNCs
looking to expand. Policies need to promote Egypt as, both, a significant consumer
market with huge aggregate purchase power and demand, and as a source of affordable
labour with a high entrepreneurial drive.
-
Investment in infrastructure: With most of Egypt’s BOP reside in poor rural areas, they
could be included into the formal economy if they became accessible. A similar case is
found in most African countries, where huge markets with high aggregate demand and
supply exist, but remain excluded because they are unreachable.
-
Policies need to change how they address the informal economy. Many sectors of the
informal economy can be included in the modern economy by matching them with the
private sector. State efforts should focus on building a platform to allow this bridge,
rather than trying to directly engage with the informal sector.
-
Policies need to be introduced that encourage MNCs to outsource their activities (such
as distribution and promotion) to local entrepreneurs. This can be through the
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promotion of young local entrepreneurs to new business entrants or through tax
reductions.
-
Policies need to eliminate hurdles facing young BOP entrepreneurs, whether working
on their own or with MNCs.
-
Policies need to support SMEs and micro-businesses. The state has previously promised
the allocation of 200 billion Egyptian pounds to support small and medium enterprises,
out of which only one billion has been actually spent (Al-Ahram, 2016). Financial
support is important, but non-financial support is also essential, such as training and
follow-up. This does not require direct efforts by the state. Egypt has witnessed a
revolution over the past few years in terms of initiatives and platforms that work to
support young entrepreneurial ideas (e.g., Statrup weekend and Riseup summit). Such
initiatives have witnessed significant success, but unfortunately are limited in reach.
They hardly reach out to calibres in rural Egypt (although there has been instances
where young calibres have travelled long distances to reach out to them!). State efforts
can be through supporting and endorsing such initiatives, which are usually headed by
some of the finest experts in the field of entrepreneurship.
4.0 Conclusion
As our country faces difficult times, it is time we think of unorthodox solutions to address
critical issues such as youth unemployment and poverty. This paper has outlined how and why
the private sector can act as a potential solution to both matters. In addition to what was
discussed above, investments by MNCs today are in much need as Egypt faces a foreign
currency deficit. The managing director of IMF, Christine Lagarde (2016), stated that correct
reform programmes will unleash the huge buried potential of the Egyptian economy. Our
economic reforms are in line with Egypt’s 2030 Sustainable Development Goals, and the BOP
proposition contributes to such initiatives in terms of inclusive growth and fair employment
opportunities. BOP projects have been experimented in a number of emerging markets, such
as India, Brazil and Mexico, with some very good results. Perhaps, it is time to direct our
attention to this much neglected, huge, market, with hopes for sustainable growth in the near
future.
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