The Prosperity Paradox: how Innovation Can Lift Nations Out of Poverty by Clayton M. Christensen has been one of my favourite books I’ve read this year so far. It tackles the question of what can be done to pull countries and communities out of poverty in a sustainable way.
The book begins by discussing the conventional approach through a case study that involves a non-profit organisation. The orgnisation focused on constructing water wells in Africa as access to clean water is a major challenge for those in poverty. However 6 months later, the wells become broken and trying to find an efficient way to organise the ongoing maintenance of the wells turns out to be a more of a challenge than building them in the first place. In fact, other foreign aid teams have tried this previously and another broken well sit a few hundred meters from theirs.
It proved difficult to find skilled well repairers who would be available and willing to maintain the wells in local communities. The example demonstrates the relative ineffectiveness of “pushing” solutions which lacks consideration for long term requirements to ensure a successful outcome.
Since 1960, we have spent more than $4.3 trillion in official development assistance trying to help poorer countries. Unfortunately, many of our interventions have not had the impact in poor countries that we’d hoped they would. In fact, many of the world’s poorest countries in 1960 are still poor today.
Different Types of Innovations
To start off Christensen outlines the categories of innovations.
1. Sustaining Innovations
Improvements to existing solutions on the market and are typically targeted at customers who require better performance/variety from a product or service aka “SKUs for news”. Examples include:
- New flavours of the classic Tim Tam
- Same model of a car, but different model year which have different features sets.
They are often more expensive and return a higher margin, whilst selling to a relatively known market of customers, with the aim at retaining existing customers.
2. Efficient Innovations
As the name suggests, these allow companies to do more with less and are production process related. Examples include:
- The resource extract industries such as oil and gold
- Manufacturing where manual tasks are being automated by machines
These innovations, free up cash flow through the reduction of jobs, that allow companies to remain competitive in a crowded market.
3. Market Creating Innovations
Create new markets, and turn non-consumers into consumers where the products/services were previously a combination of:
- Too expensive
- Too complicated
- Weren’t available
- Required too much time
Through the creation of new markets, global and more importantly local jobs are created. Of which a higher proportion of profits remain locally and where the culture of entrepreneurship and self reliance begins to sprout.
An example is the Tolaram Group (parent company that produces the beloved Indomie) that created the instant-noodle market in Nigeria. Instant noodles are not among the traditional foods for Nigerians, but are now a staple in most Nigerian families. In doing so the company had to create its only supply chain from delivery of the product to the infrastructure in creating the product such as electricity and sewerage and water treatment facilities.
Market-creating innovations can ignite the economic engine of a country… they create jobs… they create profits… they have the potential to change the culture of entire societies
The paradox lies in the fact that we now have the ability to end extreme poverty but it will not happen if we continue focusing on ending poverty, instead we should draw our attention in market creating innovation. The crux is that it democratizes prosperity so that many people can reap it’s benefits locally. Unlike, efficient innovation which create global jobs which funnel profits out of the economy i.e. outsourcing.
So if we know that market creating innovations can lift societies out of poverty, why isn’t it done more often?
There’s a few reasons:
- Innovating for a market that does not yet exist is perceived as a high risk activity for companies.
- Conventional metrics of success are designed for the consumption economy i.e. having a known market and planning around the targeting and segmentation of consumers is much easier as there is readily available data to estimate Return on Investment (ROI)
- Often market creating innovations are not competing with another product/service, but apathy which leads to non-consumption
One of the major deterrents of investment is the prevalence of corruption within the economy, as it can add significant cost in effectively deploying capital.
One brilliant observation is that “corruption is an instrument of economy, not of morality”. If we think about corruption as a “service” that is hired, people hire corruption when it is easier to reach their goals by corruption compared to getting it done by regular process. More effective than institutional control of corruption would be to make the system work better without corruption, than it works with corruption.
As the nations develop, the culture moves from overt and unpredictable corruption towards covert and predictable corruption, towards transparency. The culture develops as people attempt to solve the problems in the context, and chose the best available solutions and improve on them.
This stands in stark contrast to common belief that simply investing in strict anti-corruption initiatives or electing governments that promise to end corruption will in fact end that corruption.
There’s a lot of food for thought in this books, and the case studies had me wanting to read more. The biggest takeaway from reading this, is my perspective on the government role in investment of infrastructure, i.e. the “push”, on a society to help in developing the economy. Without the demand for the infrastructure it becomes ineffectual.
Just look at all the abandon stadiums and housing left behind from the Olympics and Football World Cups, where the cost of maintaining all the infrastructure was too high without it being used.
The flaw I see against this idea is that given the anecdotal evidence, the thesis is marred in survivorship bias. So without any statistical analysis, we have to consider there may be other factors that have led to countries escaping poverty.