Blue Growth

Reflections on how to escape the trap of poverty and unemployment through a bottom-up scenario.

April 6, 2015

The market economy is unable to provide services to the poor, as demonstrated by persistent rates of poverty and malnutrition. Nor is it able to create jobs for everyone, as confirmed by persistent unemployment rates, particularly among young people. A far more efficient economic model is needed, one that generates value, circulates money within the local economy, and aims to provide goods and services using locally available inputs, capital, energy, and human resources. The blue economy case studies presented here analyze the real opportunities.

Given that traditional solutions such as the "trickle-down effect" have failed to overcome fundamental challenges, the local economic growth model must enable a transformation of the community from poverty to the middle class. We have witnessed how this has been achieved in regions of violence and deprivation over the years. The fundamental approach involves linking water and energy with sanitation and affordable housing; food and nutrition with health and safety; culture and education, which bring the knowledge and wisdom accumulated over generations; and mobility and energy. All these elements combined, like all the other links, will create jobs and bring innovation to emerging communities.

Case 108 added specific details on the design of the housing cluster: how a new model based on an open market and entrepreneurial business initiatives can change the quality of life in the future. The housing needs are enormous. There has been no delivery of housing over the past few decades, but politicians are not to blame.

The business model chosen to provide affordable housing is to blame for the failure to deliver. This is where The Blue Economy aims to demonstrate that other economic models are possible. Creating a local economy with double-digit growth requires a meticulous identification of all opportunities. This leads to the development of a bottom-up scenario where poverty eradication and economic growth depend on the speed at which new business models establish themselves as dominant in the market.

The objectives of economic growth

The assertion of 19th-century communist intellectuals, and today a belief shared by many, that "the rich get richer and the poor get poorer" now seems to be confirmed.

In his highly controversial book, Professor Thomas Pikkety demonstrates, based on two centuries of statistics, that the wealthy who control capital get richer, especially during times of crisis. Pikkety eloquently argues that as long as the rate of return on capital exceeds the rate of economic growth, the poor will get poorer. Capital once consisted of land, then primarily manufacturing equipment. Today, it is simply liquidity hoping to make money on money through aggressive hedge funds or speculation in cyberspace. Have we ever had anything more perverse than the notion that money makes money?

We know that stock market and monetary transactions executed in a fraction of a second by supercomputers generate billions for those who own them. We know that those who earn billions, whether individuals or corporations, exploit loopholes in tax laws, and if they pay taxes at all, it's never more than a few percent of their profits or wealth. Almost all profitable companies and wealthy individuals limit their involvement in the social economy to corporate social responsibility (CSR) programs that benefit a select few. The photos in the annual CSR report most likely capture virtually everyone who has benefited. We should ask ourselves the fundamental question: do we commit to corporate social responsibility because we have made a lot of money, or do we make money because we have successfully fulfilled our corporate social responsibilities? Furthermore, all CSR initiatives are considered tax-deductible; In other words, it is the community that pays.

How many companies truly make CSR a business strategy aligned with their products and production? We know that, under these circumstances, it is impossible for the poor to ever become wealthy, unless they cheat the system. The only option to escape the poverty trap seems to be illegal and illicit trade, ranging from drugs to endangered species. Extremely high unemployment rates close the door to any possibility of upward mobility through work. Strict immigration rules force even the most courageous immigrants to seek illegal entry.

Of course, the establishment's reaction when confronted with these facts is to debate the results, question the data, cast doubt on the sources, and ultimately do what all establishments have done throughout history when a new truth haunts them: discredit the author.

This is to be expected. When facts are finally accepted, when they are no longer the subject of heated debate, and when they have become the favorite topic of social conversation, those who voiced the harshest criticism boast that it was their original idea anyway. There has rarely been such a strong and fundamental reaction against the confirmation that "the rich get richer." The most virulent criticism of Professor Pikkety's proposed theorem comes from Anglo-Saxon economists who adhere to the "trickle-down effect," according to which, as the rich get richer, money and wealth are slowly but surely transferred to the poor.

This argument is supported only by anecdotes and no statistics prove it. One of the reasons trickle-down economics never occurs is that the wealthy and multinational corporations don't pay a reasonable tax rate. As we've learned in recent years, all large companies excel at tax avoidance, bringing the effective rate down to perhaps 2% of profits. While a hardworking family sees up to 50% of its gross income disappear into taxes and social security contributions, large corporations are allowed to distribute virtually tax-free profits to their shareholders.

The production of wealth over the past two centuries has given Europeans the opportunity to join the middle class. The accumulation of wealth in North America presents an exceptional opportunity: a nation that has grown from 3 million to 300 million inhabitants in less than two centuries and that has appropriated all the lands and resources of the Indigenous peoples has the capacity to spread wealth and propagate the "American Dream." Even under these circumstances, the rich have consistently become richer over the past two hundred years, except during the Great Depression and World War II. (The rich got richer and the poor got poorer, especially during the last financial crisis in 2007.).

We cannot ignore the fact that, until recently, the growth in the absolute number of middle-class citizens in the United States rightly fueled the idea that the "American Dream" was possible. Unfortunately, the latest statistics suggest that never before have wealthy Americans become so much richer. Abundant evidence shows that dual-income families living in megacities like New York, Chicago, and Los Angeles are struggling to make ends meet or send their children to college. Data indicates that in 1964, 23% of all children in the United States lived in poverty. Fifty years later, despite $16 trillion invested in poverty alleviation in the world's richest nation, 22% of all American children still live in poverty.³ Children living in poverty are just one parameter; The income gap between the richest and poorest metropolitan areas in the United States reached its largest level ever recorded in 2014.4 What happened to the American dream?

The stark reality of absolute numbers diminishes the positive impression created by relative data. Statistics show that whatever argument one wishes to prove, one sometimes uses absolute numbers and sometimes percentages, and reality can be presented in a way that suits either. However, when it comes to poverty, only one number matters in our assessments: the absolute. It seems that efforts have been directed toward reducing the pain and discomfort of poor people by providing them with aid. While this is commendable, some argue that this is precisely the reason for the persistent poverty trap: aid must be transformed into empowerment. The harsh reality is that aid programs run by governments, corporations, and foundations have failed to guarantee access to the tools needed to escape this trap.

While the poor gain nothing from persistently weak economic growth rates, they have lost wealth, jobs, and income, while investors have preserved their wealth and accumulated even more. Wealth funds will not release the money they control unless the return on capital is high. With the exception of government bonds, no capital provider is satisfied with an annual return below 10%. Business plans that do not project a return on investment (ROI) of at least 20 or 30% are not considered. It is impossible to expect even rapidly expanding emerging economies to experience double-digit growth rates exceeding the rate of return on capital. Now that the numbers are out there and the rich are getting richer, what do we do after further debating the facts? (Do you earn money and then contribute to society; or do you earn money because you have contributed to the development of society?)

When I read r > g (r is the rate of return on capital, g is the growth rate of the economy), the immediate question is how this simple equation could be reversed to generate the inverse: r < g (How to move from r > g to r < g?).

It is impossible to ignore the fact that poverty is spreading in absolute numbers. Even worse than poverty, youth unemployment is rising worldwide. This metric is reaching alarming levels and indicates that the next generation has little chance of earning the minimum wage necessary to support a family. This means that poverty is not only increasing but is likely to persist. Youth unemployment is not limited to the developing world. In countries like Spain, Italy, and Greece, more than 50% of the most dynamic members of society are left unemployed. In Palestine, 98% of young people under the age of 26 are jobless. It is an unacceptable waste of human resources when a growing number of trained and enthusiastic young people are told that their willingness to work, their skills, and their passion are not needed. Governments accept these difficulties and hide behind the need to pursue austerity while simultaneously attempting the impossible task of balancing the budget. Businesses and the wealthy claim that the growth rate is too low and that consumption must first recover before low-risk, high-return initiatives can be financed.

We must ask ourselves how much more patience we expect from the poor. A mother whose children go to bed hungry every night and a father who watches his teenagers build rockets to scale an illegal fence cannot be satisfied with a promise that everything will be better in a few decades, when corrupt governments have finally been overthrown and free trade agreements have finally been concluded to allow access to cheap goods worldwide. Instead of embracing globalization, a system that has failed to meet everyone's needs, the only option seems to be to empower the poor to take charge of their own lives and devise solutions with what they have. To do this, we must rethink economic models capable of meeting basic needs, especially those of the poor, while also providing reasonable returns for investors. Many mainstream economists believe this is impossible. The blue economy demonstrates, case after case, that this approach offers the possibility of growing the economy from the ground up.

Models for empowering the bottom of the pyramid

While poverty is endemic and billions of basic needs remain unmet in areas such as water, food and nutrition, housing and community, health and care, energy, waste management and mobility, education and culture, how is it possible that some claim there is no demand? How can global free trade guarantee healthcare for newborns when the nation that supports free trade has a core group of politicians who reject any form of health insurance for the poor?

The typical response is that there is demand but no money. Professor C.K. Prahalad and Stuart Hart demonstrated, in their article first published in 2004, how 3 billion people surviving on $2.50 a day represent a staggering $2.7 trillion in cash annually.
$2.50 a day represents a staggering $2.7 trillion in cash each year. The base of the pyramid clearly represents a market ripe for integration into the formal economy. How can we tap into this vast
purchasing power with traditional business models and a financial system that has high expectations for its minimum rates of return? It is not easy for a traditional business to imagine how to transform itself.

For example, Unilever took inspiration from the "wealth at the bottom of the pyramid" and packaged shampoo in small, affordable sachets instead of the large bottle that is beyond the means of poor people. These micro-portions of shampoo are sold through network marketing and tiny neighborhood stores. These initiatives do not empower the poor, nor do they give them access to quality products at competitive prices. On the contrary, these forays into emerging markets drain money from these marginalized communities who have never used synthetic shampoos with artificial colors and fragrances, in addition to polluting their scarce water sources. This shampoo, rather, fuels the company's desire to achieve ever-greater economic scale and higher profit margins.

The strategy is to generate consumer buy-in and brand recognition, so that the local distributor can soon be asked to sell more from the same supplier, or be replaced by large retail chains.

The need to change the business model

Over the past 20 years, I have been searching for better models than any we have been able to conceive so far. This is not a new critique, but rather a search for something better. We can lift the poor out of poverty and reverse the trend of "the rich getting richer" by changing the economic model beyond simply modifying the current one. We must design something entirely new. It is surprising how few people realize that inclusive growth in a sustainable society requires significantly improved performance at every level of the business model, not just in technology. This improved performance is also within reach. However, few are willing to question the dominant business models, which aim to reduce costs, and few question the trend toward free trade and globalization, which is short-sightedly seen as the only way to ensure growth and is therefore presented by the mainstream economist as the panacea for all socio-economic problems.

I am surprised that people still believe that the "free market" in general—the free movement of capital with investments seeking high rates of return—will reverse the poverty trap and one day solve the problem of unemployment, while aid will smooth out the sharp edges and scientific breakthroughs like nanotechnology, genetic engineering, and smart grids will work the magic the market could never achieve. We must realize that everything we have attempted with the best intentions in the world makes no fundamental difference to the three billion people living in poverty and the one billion people living in abject destitution without dignity. Worse still, we seem ready to accept poverty as a fact of life. Instead, we should design, create, and implement competitive business models capable of meeting everyone's basic needs through a smart growth strategy that we call "blue growth" and others call "inclusive growth." If you don't like the color or the adjective, change the name and focus on implementing new business models. (We need to regain leadership at the corporate level. We need a significantly more efficient business model.).

We must focus primarily on the business model and aim to regain leadership at the entrepreneurial level. Macroeconomic trends are the amalgamation of decisions made and initiatives undertaken at the microeconomic level. Thus, instead of trying to steer the world primarily from the cockpit of an airplane by influencing interest rates, fiscal policies, currency flows, and trade, while unilaterally deciding to flood the market with additional liquidity through a technique known as quantitative easing, we must turn the economy on the ground, starting where the needs are most urgent—in places like the slums of Asia, the townships of Africa, the favelas of Latin America, and among the unemployed worldwide. Let's call these the "growth corridors." How can we create and implement an inclusive growth strategy where not only are basic needs met, but where we also benefit from the integration of the poor and unemployed youth into the economy and a supportive society, while creating wealth for the most disadvantaged?

The current economic system: Incapable of meeting the needs of the poor

It is essential to look at today's reality: the market economy is incapable of meeting the needs of the poor. If the market is incapable, it is because current economic models are not. The result of this incapacity is that poverty and unemployment are the norm and must be accepted; this is difficult to accept. Major economic players have adopted the logic of economies of scale, seeking ever-lower marginal costs while balancing quality and price to boost sales and achieve higher profits, thus delivering a better return on investment.
Since the absolute priority is always to deliver higher returns and lower costs, the economic system has transformed into a harsh one where laying off people in the name of productivity is the norm.

In order to create ever-greater economies of scale for standardized products, it is necessary to eliminate trade barriers. Free trade has been the name of the game, allowing the free movement of goods, services, and capital. At the same time, there is no free movement of people. Borders have never been so difficult to cross, and obtaining a visa has become a business in itself. When goods, services, and capital are supposed to circulate freely across borders, the challenge then becomes ensuring that people within this "globalized" economy are paid sufficiently so that they can escape the poverty trap and lose the desire to emigrate at any cost. Those who see no way out, knowing that their parents and grandparents found none either, will find an escape as refugees in high-risk migrations, violence, drugs, fundamentalism, and terrorism.

The globalized economy claims to balance supply and demand by setting a market price. The modern economy has subjected everything to "price fixing," including something as essential to life as water. This resource was once a common good, freely provided by nature and society; today, it has a price. Therefore, there will always be millions of people who will never have access to basic goods and services. If we agree that the global model for delivering goods and services is incapable of reaching the poor (otherwise, they wouldn't be poor and wouldn't live in abject poverty), we must ensure that people in these "poverty corridors" can meet their own needs with what they have. This is not a challenge to the globalized economy, but rather a response to the current globalized economy's failure to be inclusive. If this delivery process fails by design, the only option we have is to change the model and implement a more efficient market economy.

(Since the market economy is unable to meet the needs of the poor, poverty and unemployment are the norm.) The immediate reaction to this straightforward conclusion is that "it's not possible." The explanation is that if it were possible, it would have been implemented long ago and scaled up to reach everyone. However, if the new business models are fundamentally different, then what has been done before? Therefore, they are unlikely to be accepted worldwide at first glance. It took more than a century for the free-trade economists Adam Smith, author of "The Wealth of Nations," and David Ricardo, the originator of the theory of comparative advantage, to see their theory established as the dominant economic logic. Neither of these economists had access to statistics or empirical data. Why is it now necessary to immediately provide proof of concept on a global scale? This is why The Blue Economy is committed to developing microeconomic case studies before drawing macroeconomic conclusions.

Meeting basic needs and circulating money locally

Business models that address people's basic needs with locally available resources could improve livelihoods. However, the money earned cannot be drained out of the community, as is currently the case. Instead, hard-earned funds must continue to circulate within communities. If people have earned one hundred dollars, that money is used to meet their most urgent needs. Money must be spent locally, and basic needs must also be met locally; this creates a catalytic effect in the local growth cycle.

The double-digit growth model :

(1) Meet basic needs
(2) With local products and services, and
(3) Circulate money in the local economy.

With money circulating more rapidly, the portfolio of locally produced goods and services becomes more diversified, so that additional money circulates more quickly and more money remains in the local community as capital. This is a possible model for double-digit growth. If money does not circulate internally, the money brought back from work will leave the community, which will hinder growth.

Of course, one can ask how many human resources, capital, materials, and energy are available to ensure these transformations continue at such a rapid pace. Will this proposal for double-digit growth lead to shortages, price increases, or even imports? Certainly, there are limits and there will be challenges, but the current model of standardization and globalization, based on a relentless drive to reduce costs, keeps the poor in poverty because all the money spent on basic consumption
leaves the community. Are we aware that in South Africa, 34% of the purchasing power of the poor who survive on less than $2,500 a year is spent on food; those who survive on $600 a year spend 47% of their purchasing power on food; and everything that is eaten is supplied from outside the community?

While many questions remain, the main objective of The Blue Economy is to further develop this concept of inclusive growth and apply it to the creation of new communities in an increasingly urbanized world. We therefore need to present in detail the conceptual development of a real development project, offering insight into how intention can be translated into reality. While each of the programs and initiatives mentioned has been implemented somewhere in the world, the scale of the investment and the significance of the impact are ripe for large-scale implementation.

The dozens of case studies published here on our site offer a glimpse into the science, entrepreneurs, and patience that have enabled us to transform hundreds of ideas into business realities worldwide. It is an honor and a privilege to have had the opportunity to play a part. The question now is how we can accelerate the process and amplify its impact.

THE DESIGN OF THE ASCENDANT SCENARIO

Ascending scenario

This is why we are undertaking "the blue economy 2.0." Our goal is to steer society toward sustainability while strengthening the capacity to meet basic needs with locally available resources. In 2005, the ZERI Foundation launched a research program in cooperation with the Biomimicry Institute called "Nature's 100 Best." Inspired by the pragmatic solutions developed by thousands of species, we embarked on a quest to identify which technology, based on which research, demonstrates a path toward sustainability. Benyus and his team studied the scientific details behind each species, which became the basis of the renowned website " AskNature.org " with thousands of academic articles. Gunter Pauli and the ZERI teams focused on ecosystems instead of uncovering the scientific details of isolated species and derived new business models from them. The two organizations separated, and ZERI continued to focus on entrepreneurship, innovation, job creation, and meeting basic needs with available resources. This approach led to new perspectives on economic development known as "The Blue Economy," a report to the Club of Rome that was first presented in Amsterdam in November 2009. This report has been translated into more than 30 languages.

How the Quest is organized

The ZERI network of organizations, known as "Think Tanks," and the emerging Blue Economy network, known as the "Do Tank," have followed up on the initial 100 cases. Through an intensive program of monitoring emerging science and business, dialogues with academics and practitioners, interactions between committed individuals and institutions worldwide, and exchanges of experience, isolated technologies, pioneering scientists, and bold entrepreneurs have evolved from inspiring isolated cases into academic networks and business clusters. As these clusters of local economic growth were systematically documented, a transparent world of interconnected innovations and successful fundraising, combined with intelligent adaptations to local conditions, demonstrated that a new economy was emerging. These newly documented cluster cases are published here at www.TheBlueEconomy.org.

The transition from old to new business models

Economic growth has been elevated to the status of a primary life goal, and achieving growth is equated with improvements in productivity and efficiency. The much-vaunted free trade and the elimination of tariff and non-tariff barriers guarantee the free movement of goods, energy, and services (but not people!). The objective is to reduce costs and prices based on the widely accepted theory that lower prices improve purchasing power and increase people's wealth. While this model has certainly led to wealth creation, it has also resulted in persistent unemployment, particularly among young people.

Furthermore, a wealth of evidence has been gathered to demonstrate that "the rich get richer and the poor get poorer." While this claim has been widely challenged by academics and policymakers, the stark reality of statistics indicates that, although improvements in wealth creation can be highlighted, billions of people lack access to basic services. Even worse, the dominant economic growth model fails to reach the poor in general, and young people in particular.

The blue economy proposal suggests a different approach, one that still pursues a growth strategy, but starts with locally available resources and leverages the purchasing power of individuals, particularly those living on less than a dollar a day, as well as governments. The pursuit of development shifts from improving productivity to reducing costs to improving productivity by generating more value from existing materials, nutrients, and energy. Resource and energy efficiency leads to cost reductions. The driving force is the millions of small expenditures that meet immediate basic needs. Locally produced water, food, healthcare, and housing create local jobs, increase incomes, decrease the need for transportation, and channel local purchasing power into the local economy.

The faster circulation of money, bypassing banks through local currencies or digital currencies stored on mobile phones, accelerates the flow of cash, thus triggering new economic growth. The ability to provide urgently needed goods and services lifts people out of poverty while allowing them to compete with global corporations. Poverty and unemployment confirm that the global economy is failing to reach this segment of society and that there is no local economy to compensate for this lack of primary, secondary, and tertiary sector activities. If we want to eliminate slums, we must therefore create a local economy and redirect the existing one, which drains all liquidity from the community, toward one that circulates money within the community and creates jobs.

A new social capital

Change of scenery

These new business models depart from what is taught in business schools and differ fundamentally from the economic growth models promoted by traditional economists. Indeed, instead of a core activity based on a specific skill, these blue economy cases have multiple cash flows generated by the cascade of materials, nutrients, and energy, providing multiple benefits to society. Businesses make money by meeting the basic needs of communities, unlike companies that profit by selling their products and services without regard for their importance and value to society, and then contribute to society after making a profit by setting aside a portion of it. The focus is not on cost reduction or economies of scale, but on creating value by utilizing available resources. The result of this bottom-up approach is that there is less need to operate and compete on a global scale, and that the impact on society can be measured by the accumulation of social capital, food and water security, reduced greenhouse gas emissions, and job creation, all while maintaining competitiveness and strengthening resilience. One of the key parameters for success is improved purchasing power, particularly for people living in poverty.

Celebrating clusters of innovation

An internal review by the Think Tank and Do Tank concluded that it was timely to summarize the developments of the past six years. This led to the design of a program to write and publish the next 100 grouped case studies of the blue economy. Instead of celebrating an individual with a unique science and a startup, cases 101 through 200 tell the story of how it all began and who inspired each case, celebrate the think tank researchers who helped strengthen the science, and highlight the groups of entrepreneurs who are transforming this know-how and wisdom into successful growth companies that raise funds, hire staff, and bring new products to market. Once the first seven cases were written and mapped across the globe, the green squares (science) and blue dots (entrepreneur) quickly filled the space on every continent.

We can highlight successful initiatives, and what makes them so different from the traditional development model.

Thousands of researchers and thousands of start-ups

Now that the next 100 cases are in production, we can move quickly to the end of 2016 and the beginning of 2017, where over a thousand researchers are identified by name, institution, and research topic, along with thousands of companies pursuing this clustered approach. This map, which we call the bottom-up steering of companies toward sustainability, demonstrates that the blue economy has evolved from an interesting collection of anecdotes to a visible trend with common denominators. It is within this context and this pioneering work that the ZERI network, in cooperation with the Club of Rome, wishes to undertake the next step: deepening the clusters with more detailed information on social impact, technologies, the environment (including biodiversity and ecosystem services), job creation and skills development, educational transformation, and resource efficiency. We need to strengthen participation, and we have contacted cross-sectoral research organizations that could meet this need.

From a broad wave to a profound understanding

The goal is to expand the briefing that ZERI provides to each group (starting at 101) to approximately 100 pages, covering in detail the elements necessary to seize the opportunity to impact local realities in terms of livelihoods, as well as global sustainability and resilience. This "deep dive" is only possible through cooperation with leading research institutions that have expressed interest in participating, including the Club of Rome, Development Alternatives (India), the Monterrey Institute of Technology (Mexico), the Wuppertal Institute (Germany), the Stockholm Resilience Centre (Sweden), MISTRA (South Africa), and the Chinese Academy of Sciences (for illustrative purposes only).

From a detailed map to an interactive mathematical model

The results will provide, over a two-year period, a detailed map, scientific data, business figures, and social and environmental statistics. This data will then be translated into a mathematical model based on well-established systems dynamics, allowing us to map the impact of these groups of small initiatives based on fundamental changes in business models that steer companies towards sustainability. This model then poses the following questions: what are the policy options for local and national governments, multilateral institutions, financial organizations, and research networks to accelerate the emerging transformation? It is anticipated that approximately two years will be needed to refine this model, which will allow us to present it in late 2017 or early 2018 as "The Bottom-Up Scenario.".

The upward scenario

The bottom-up scenario differs fundamentally from the traditional Club of Rome approach. Instead of working with macro-data on a global scale, we work with thousands of local facts, business model shifts that are like embryos. However, the concrete facts and the pragmatic measurement of impact allow us to adopt a new approach to global challenges, building on the pillars of science and entrepreneurship (risk). This would lead to a series of scenarios offering the immediate possibility of moving from scientific discovery and policy measures to applied research and inspiring entrepreneurs, as happened with our project to transform coffee waste into mushrooms, which now includes at least 2,000 companies worldwide.