Inspired by Julia Freeland Fisher’s recent blog that highlighted what our Education team learned in 2018, I decided to write a blog about three insights the Global Prosperity team learned in 2018.
The mission of the Global Prosperity team at the Christensen Institute is to advance the creation, dissemination, and use of good innovation theories in the practice of economic development. We hope that our work helps the millions of people working daily to bring prosperity to poor communities and countries all around the world. From the many investors and entrepreneurs to the development officials and policymakers, our hope is that, our work helps each of these stakeholders working tirelessly to make the world a better place. To that end, here are three big insights we learned in 2018.
1. The “prosperity paradox” might be limiting our ability to eradicate poverty
Every year, wealthy countries spend hundreds of billions of dollars helping low- and middle-income countries eradicate extreme poverty. While progress has been made toward this effort—more than one billion people have lifted themselves out of poverty—the reality is that, when we dig a little deeper, the progress is less robust and is confined to certain regions.
For instance, the majority of those who have escaped poverty over the past 30 years (about 800 million) are from China, a country that has received little development aid relative to other nations. The number of people living in extreme poverty has actually increased in some regions that receive significant funding for poverty reduction programs, such as sub Saharan Africa. This is the prosperity paradox.
Our research suggests prosperity is not generated through the flood of well-intentioned resources from wealthy countries to low- and middle-income countries. Instead, prosperity takes root when organizations invest in a particular type of innovation we call market-creating innovation—these are innovations that transform complicated and expensive products into products that are simple and affordable so many more people in society have access to them. It may sound counterintuitive, but true prosperity for many countries will not come from fixing poverty. It will come from investing in market-creating innovations.
In our book, The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty, we detail how market-creating innovations not only have the potential to lift people out of poverty, but also to place them on a firm path toward creating prosperity.
2. Market-creating innovations drive the development of institutions
The lack of “rule of law” and “institutions” is a plague that affects poor countries. Conventional wisdom suggests that poor countries must first fix their institutions, which often means they should adopt Western-style systems, before they can make progress toward prosperity. The thinking was also promulgated by the popular book, Why Nations Fail: The Origins of Power, Prosperity, and Poverty. If poor countries only had access to good institutions, then people could finally build and sustain businesses—or so the thinking goes. To that end, billions of dollars are invested annually by many organizations to help poor countries improve their institutions. But there is now mounting evidence that most institutional reform projects have “muted results,” or, simply put, fail, according to research by Harvard University’s Matt Andrews. As it turns out, we cannot fix problems with the law, systems, and institutions by simply adding another law, system, or institution. Market-creating innovations drive institutional development.
In a recent MIT paper co-authored by Clayton Christensen, Gabrielle Daines Gay, Philip Auerswald, and me, we explain the critical role of market-creating innovations in creating and sustaining institutions. Effective institutions are not just about rules and regulations. Ultimately, institutions are about culture—how people in a region solve problems and make progress. At its core, institutions reflect what people value. When a market-creating innovation offers access to many more people who historically didn’t have access to something, the innovation serves as a catalyst and foundation for lasting institutional development. In addition to the new jobs the innovation creates, it also serves as a source of tax revenues that can fund the development of institutions necessary to further develop societies. We saw this happen in the case of Detroit, which I wrote about here. Once market-creating innovations left Detroit, the city struggled to maintain its institutions. The concept of market-creating innovation can give hope to all those who work tirelessly to make the world a better place for the billions who struggle daily to make ends meet.
3. To capture a market, you must first create it
How does one go about capturing the vast opportunity that exists in many low- and middle-income countries? On the one hand, when you assess conventional demographics of those economies such as, GDP per capita, disposable income, access to infrastructure, level of poverty, and so on, there doesn’t seem to be any opportunity. But on the other hand, this is fertile ground for market-creating innovations. In order to capture markets in low- and middle-income economies, they first have to be created. The entrepreneur who is able to create a new market not only captures significant value, but also inadvertently engages in nation building. We explain this in depth in our Harvard Business Review article, Cracking Frontier Markets, but consider the case of Mo Ibrahim.
To the surprise of many experts and naysayers, towards the end of the 1990s, Sudanese entrepreneur, Mo Ibrahim, created a new market for mobile telephony in several African countries. Celtel—the company Ibrahim started—targeted people for whom access to cellular communication was too expensive. Celtel made it simple and affordable to access a mobile phone. As a result, the company grew to employ 5,000 people and was worth more than $3 billion in the first seven years of operation. But more importantly, today, the mobile telephony market in Africa now adds more than $200 billion worth of economic value and employs close to four million people. In order to capture the market, however, Ibrahim had to create it.
2018 was a big year for Global Prosperity at the Christensen Institute and we cannot wait to learn more in 2019. We hope you join us. Sign up for our monthly newsletter here.