With development pushed back 30 years, these innovations are critical for recovery

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May 14, 2020

As wealthy nations begin to open up their economies and lift shelter-in-place orders, the stark contrast with how COVID-19 has affected different corners of the globe becomes even more evident.

Although virtually everyone on the planet has been impacted, the virus has disproportionately affected low- and middle-income countries, and threatens to plunge half a billion people into poverty. As the UK’s international development secretary Anne-Marie Trevelyan told Members of Parliament, “We have before us a health crisis, a humanitarian crisis and an economic crisis which threaten to undo 30 years of international development work.” 

Immediate interventions are the natural, and perhaps appropriate response in the short-term, but they’ll do little to help poor countries move past the economic fallout caused by the virus. That’s because long-term growth and prosperity aren’t generated through the flood of well-intentioned resources from wealthy countries to poor countries–in fact doing so is inherently unsustainable and creates dependence. Instead, a more holistic solution is needed to create the structural change that’s necessary for prosperity to take root. In our research, we’ve discovered that investments in market-creating innovation are an incredibly strong anchor to a comprehensive, sustainable development strategy

Market-creating innovations transform complex and expensive products into simple and affordable ones, enabling more people to benefit from them. But these innovations are much more than products or services; they are systems that unleash a domino effect of sustainable economic development, lifting thousands, if not millions, out of poverty in the process. 

Market-creating innovations pack a serious punch for five reasons:

1. They create jobs. Market-creating innovations target nonconsumers who have previously been unable to afford or access existing products on the market, and they’re typically the majority in poorer societies. To reach this enormous segment of the population, innovators must hire many people to make, distribute, sell, and service their products. With a global recession upon us and millions who have already lost their jobs, this couldn’t be more important.

2. They lead to sustainable investments infrastructure. Infrastructure is vital to the operation of any society, but as Danish economist Bent Flyvbjerg notes, many projects under-deliver on their promise of economic development. The reality is that it’s incredibly expensive to develop and maintain. That’s where market-creating innovations come in.

Because infrastructure is often lacking in low- and middle-income countries, market-creating innovators have no choice but to fill in the gaps by investing in it themselves. Unlike government-sponsored projects, these investments are far more sustainable because they are tied to a market that addresses an unmet need.

Tolaram Industries, for instance, which created a market for instant noodles in Nigeria, built its own power plants so it wouldn’t have to depend on unpredictable power supply from the grid. In doing so, it lifted and developed the regions where it operated.

3. They strengthen institutions. Successful market-creation has the result of “pulling in” the necessary institutions such as legal systems, more contextual regulations, and even more relevant schools when they become essential to sustaining and growing that market.

For instance, before IguanaFix created a new market for home improvement services in Argentina, most contractors worked in the informal economy. All of this changed when IguanaFix changed the incentives by making it simple and affordable to join the formal market. Service providers are able to access corporate customers, access health and work insurance, and open their first bank account. In turn they’ve become tax-paying, law-abiding citizens—thus enabling the existing institutions to function the way they are meant to.

4. They bring consumers into the formal economy, generating more tax revenue for the government. Market-creating innovations can generate significant revenue for governments by bringing millions of new consumers and workers, who’ve previously been part of the informal economy, into the formal and tax paying economy. With more tax revenue at their disposal, governments are able to reinvest these funds into communities, strengthen their institutions, and provide better social services.

5. They’re a powerful antidote to crime and corruption. Because poorer countries typically rank lower on anti corruption indices, there’s often a big push for institutional and good governance reform. Unfortunately many reform programs fail.

In our research we’ve found that crime and corruption are often workarounds—a way to make progress when few better options exist. For instance, many low-paid bureaucrats are unable to support their families on their salaries alone, creating a huge incentive for corruption. Market-creating innovations have the ability to change this incentive structure by creating wealth and strengthening the legal and law enforcement institutions that fight corruption. Corruption becomes far less attractive when there are better ways to make progress, and higher chances of being punished for the crime. 

COVID-19 isn’t the first crisis to devastate low- and middle-income countries, and it certainly won’t be the last. But history has shown us that it’s possible to come out on the other side even stronger than before. For instance, after the Korean War, South Korea was in tatters, but by fostering a culture of market-creating innovations with the help of companies like Samsung, Kia, and Hyundai, the country was able to become the prosperous one we know today. The same can be said of Japan and countless others that were impacted by war and economic recessions, but became prosperous thanks to investments in market-creating innovations.

When it comes to economic development, market-creating innovations ignite the fire, but governments and development organizations fan the flame by encouraging their proliferation.

Efosa Ojomo is a senior research fellow at the Christensen Institute, and co-author of The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty. Efosa researches, writes, and speaks about ways in which innovation can transform organizations and create inclusive prosperity for many in emerging markets.