The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty
Reviewed by Peter J. Snyder, Business, Calvin University
The Prosperity Paradox is an important new book that takes a somewhat different look at the issue of poverty. Using the lens of innovation, Clayton Christensen, Efosa Ojomo, and Karen Dillon range across, to greater and lesser extents, economics, public policy, history, sociology, and development to reframe poverty as a market innovation issue. To be clear, this is not a “free-market-cures-everything” book. It is a book about the generative power of innovation and entrepreneurial action to create enduring prosperity.
For those of you familiar with Clayton Christensen, the Kim B. Clark Professor at Harvard Business School, his use of an innovation lens to address poverty is probably not a surprise. He is perhaps the most influential writer on innovation of the past 20 years since the publication of his book, The Innovator’s Dilemma (Harvard Business Review Press, 1997). He has written on how to disrupt higher education, learning, health care, and business through innovation. Thinkers50, a respected list of global management thinkers, has him currently ranked third, and he has twice been ranked first. Unlike much of Christensen’s work, The Prosperity Paradox is not an application of disruptive innovation, which is appropriate both given the controversy about it as a theory and the broad scope and nature of the book’s topic: country development. His co-authors are Efosa Ojomo, who leads the Global Prosperity Practice at the Christensen Institute for Disruptive Innovation, and Karen Dillon, a former editor of the Harvard Business Review.
While they acknowledge that the answer to poverty is complex, the authors “believe that for many countries prosperity typically begins to take root in an economy when we invest in a particular type of innovation—market-creating innovation—which often serves as a catalyst and foundation for creating sustained economic development” (7). They argue that market-creating innovation not only creates jobs and profits, but it can also change a society’s culture.
Markets are created when they address “nonconsumption.” Just like consumers, non-consumers have needs to be met, but they face barriers to the consumption of current solutions. While wealth is an easily identifiable barrier, the skill needed to consume existing solutions (for example, the ability to operate a computer), access to solutions (for example, internet connectivity), and time to engage solutions (such as the time to travel to a clinic) can be greater causes of nonconsumption by the poor. Thus, the authors assert that nonconsumption is about struggle and not de facto about income. As a result, market-creating innovations can be useful solutions for people at all income levels. As they describe it, market-creating innovations “democratize” solutions (27).
Addressing the needs of non-consumers contrasts market-creating innovations with the other two types of innovation the book identifies: sustaining and efficiency innovation. Sustaining innovations build on current solutions to improve performance or otherwise delight existing consumers. They help firms stay competitive by allowing them to increase or maintain prices—like a new flavor of tea, or heated car seats. Efficiency innovations simply allow firms to use fewer resources due to process or other changes, which lowers business costs. The economies of many developing countries are driven by resource extraction industries—think oil, gas, diamonds—but these are often commodity industries that rely heavily on efficiency innovations to lower costs. Neither sustaining nor efficiency innovations tend to address nonconsumption, increase jobs (efficiency innovations may actually reduce jobs), or promote significant prosperity.
One of the reasons market-creating innovation often has a significant impact on country development is that it is not simply a product or service, but “is a whole system that often pulls in new infrastructures and regulations, and has the capability of creating new local jobs” (272). Mo Ibrahim’s introduction of the mobile phone in Africa was only possible with the construction and maintenance of cell towers, development and sales of prepaid calling cards, drafting and enforcement of regulations, and so on. Because the African mobile phone industry pulled in new infrastructures and fostered an ecosystem, it is projected to support over 4.5 million jobs by 2020.
The contrast between pulling in resources that are needed for country development, the result of market-creating innovation, and pushing them in is an important insight of Christensen, Ojomo, and Dillon and the one perhaps most at odds with many development practices. Push approaches attempt to foster country development by promoting resources in anticipation of future use. While they may create short-term job growth, the authors argue that such initiatives, like new infrastructure, may not have lasting positive effects if there are not markets to absorb them. Ojomo helped found a non-profit that built wells in rural Nigeria, but most no longer work as there was no market-generated infrastructure to support them. If, however, markets create demand for them, then resources are more likely to be sustained as they are part of the solution. To solve non-consumers’ needs, “Organizations do what is necessary, including building infrastructures, factories, distribution, logistics, sales, and other components of their business model. These, in turn, begin to lay down a foundation of a region’s infrastructure” (83). Tolaram, which makes Indomie instant noodles, is estimated to create over $680 million a year for the Nigerian economy. Out of necessity, it has created an electric power facility, a water and sewage treatment plant, a sea port, a logistics company, and education programs. These resources are now part of the infrastructure of Nigeria, and some are utilized by others.
As part of this “pulling in,” the authors argue that market-creating innovation pulls in institutions, by which they mean such innovation can affect the political, economic, and social cultures of a country and their corresponding systems and structures. Institutions reflect how people solve their problems and what they value. Pushing in institutions from the outside tends not to work well, as they reflect outsiders’ values and may not effectively address the problems people are trying to solve. To illustrate this point, the book spends a chapter discussing corruption. From the authors’ vantage point, corruption is not a problem to be solved, but rather a solution to struggles. People will continue to use it as a solution until a significant number of people are able to earn a better income without it and the public clamors for anti-corruption measures. The authors thus argue that money is better spent on creating new markets rather than on anti-corruption efforts if the country is not ready for them.
The Prosperity Paradox provides a multitude of examples from around the world and across time, with particular focus on Africa, Asia, and the United States over the past 150 years. The examples highlight how market-creating innovation can create jobs and profits while creating a societal culture of innovation and anti-corruption. One chapter is dedicated to the period in America after the Civil War to the early twentieth century. At that time, children as young as eleven worked instead of going to school, employment conditions were often dangerous, businesses used private militias to control workers with sometimes fatal results, political corruption was well established, and time zones were numerous and seemingly arbitrary. America was a developing nation that benefitted from several market-creating innovations. One such innovation was the Singer sewing machine and its ecosystem, which allowed unskilled workers to out-produce skilled seamstresses, dramatically increasing productivity. Critical for its success was making the machines accessible to the masses through innovations in credit sales, training, and distribution. In 1863, Ebenezer Butterick’s company joined the ecosystem by producing and selling standard-sized dress patterns, which attracted even more non-consumers. Singer went from selling three thousand machines in 1858 to producing seven thousand machines a week in its largest factory by 1873. Singer’s market-creating innovation created numerous other businesses, such as small sewing shops that subcontracted to large manufacturers and makers of wardrobes, and allowed the clothing industry to grow a hundred percent between 1860 and 1870 and top a billion dollars by 1890. The market-creating innovation also created demand for raw materials like steel, wood, and cotton. Globally, Singer built infrastructure like railways, power stations, and foundries. Singer, Ford, the railroads, Kodak, the Bank of Italy (precursor of the Bank of America), and other market-creating innovators shaped the infrastructure and culture of a developing America affecting housing, standardized time, transportation, urban planning, savings, credit, loans, and much more. In their wake would be pulled in governmental agencies such as Labor, Health and Human Services, Energy, Housing and Urban Development, Transportation, and Education.
There is much to commend in this book. It is well written and researched and the authors are convincing that nonconsumption by people who struggle with a problem can be the source of market-creating innovation that can lead to development and prosperity. Such innovation certainly does not replace the need for relief agencies and other NGOs or social ventures. However, the book does provide important insights into the power of markets without slipping into a simplistic free-markets-are-the-answer mantra.
The issue of the book, common to many, is its limited view of prosperity, which can lead to distortions of what should be. Although the authors state otherwise, prosperity is mostly limited to economic wealth. This, however, is a narrow view of human flourishing. For example, Indomie Noodles are high in sodium, carbohydrates, sugars, and fat; contain MSG; and have limited nutritional value. While it may be good for economic development, Indomie is not healthy. Andy Crouch has argued that Christians are called to redemptively change culture and that this is done by creating culture.1 As the famous economist Joseph Schumpeter argued, innovation and entrepreneurship bring about adaptive change in socio-economic systems, and I would argue that innovation that creates markets creates culture. A view of prosperity limited to wealth creation is not sufficient. As co-creators with God, Christians must discern the will of God and work to create culture that is closer to the city described in the book of Revelation. With a more robust understanding of prosperity than envisioned by the authors, perhaps market-creating innovations can offer opportunities for human flourishing that address the sufferings caused by poverty and other struggles.