The Prosperity Paradox

How Innovation Can Lift Nations Out of Poverty

Clayton M. Christensen, Efosa Ojomo, Karen Dillon

• Publisher: Harper Business
• Year: 2019
• ISBN:
  9780062851833
• Topic: Economics
• Subtopic: Development Economics

Clayton M. Christensen, the author of such business classics as The Innovator's Dilemma and the New York Times bestseller How Will You Measure Your Life, and co-authors Efosa Ojomo and Karen Dillon reveal why so many investments in economic development fail to generate sustainable prosperity, and offers a groundbreaking solution for true and lasting change. Global poverty is one of the world's most vexing problems. For decades, we've assumed smart, well-intentioned people will eventually be able to change the economic trajectory of poor countries. From education to healthcare, infrastructure to eradicating corruption, too many solutions rely on trial and error. Essentially, the plan is often to identify areas that need help, flood them with resources, and hope to see change over time.

But hope is not an effective strategy.

Clayton M. Christensen and his co-authors reveal a paradox at the heart of our approach to solving poverty. While noble, our current solutions are not producing consistent results, and in some cases, have exacerbated the problem. At least twenty countries that have received billions of dollars' worth of aid are poorer now.

Applying the rigorous and theory-driven analysis he is known for, Christensen suggests a better way. The right kind of innovation not only builds companies—but also builds countries. The Prosperity Paradox identifies the limits of common economic development models, which tend to be top-down efforts, and offers a new framework for economic growth based on entrepreneurship and market-creating innovation. Christensen, Ojomo, and Dillon use successful examples from America's own economic development, including Ford, Eastman Kodak, and Singer Sewing Machines, and shows how similar models have worked in other regions such as Japan, South Korea, Nigeria, Rwanda, India, Argentina, and Mexico.

The ideas in this book will help companies desperate for real, long-term growth see actual, sustainable progress where they've failed before. But The Prosperity Paradox is more than a business book; it is a call to action for anyone who wants a fresh take for making the world a better and more prosperous place.

Section 1

The Power of Market-Creating Innovations

Chapter 1

An Introduction to the Prosperity Paradox

It’s not an easy thing to be laughed at by serious people. And serious people laughed at me when I told them I wanted to build a telecommunications network in Africa twenty years ago. They told me all the reasons the project would never succeed. Somehow I just kept thinking, I know there are challenges but why can’t they see the opportunity?

—MO IBRAHIM

The Idea in Brief

Starving children on street corners. Slums without adequate clean water and sanitation. Hopeless prospects for employment amid a growing youth population. Most of us are moved by the painful signs of poverty we see in poor countries all around the world. According to the World Bank, more than 750 million people still live in extreme poverty, surviving on less than $1.90 a day. We all want to help. But what might seem to be the most obvious solution to these problems—directly assisting poor countries by investing to fix these visible signs of poverty—has not been as successful as many of us would like. You only have to look at the billions of dollars that have been channeled to these problems over the years with relatively slow progress to conclude that something is not quite right. With these efforts, we may be temporarily easing poverty for some—but we’re not moving the needle enough.

What if we considered this problem through a different lens? What if, instead of trying to fix the visible signs of poverty, we focused on creating lasting prosperity? This may require a counterintuitive approach, but one that will cause you to see opportunities where you might least expect them.

* * *

In the late 1990s, when Mo Ibrahim first conceived of setting up a mobile phone company in Africa, people said he was, well, nuts. “Everybody said Africa is a basket case,” he recalls now. “It’s a dangerous place, it’s full of dictators, it’s full of crazy people. . . . who are all corrupt.” In fact, people laughed when he shared his idea.

Ibrahim, the former technical director for British Telecom, who was running his own successful consulting firm, planned to develop, from scratch, a mobile communications network in sub-Saharan Africa—where most people had never used a phone, let alone owned one. The African continent, which ranges from the bazaars of Morocco to the big business complexes of Johannesburg, is home to fifty-four countries. The total population of more than one billion is spread over 11.7 million square miles—more than three times the size of the United States. The vast majority of this territory had no existing infrastructure for old landline telephones, let alone the cell towers necessary for a mobile phone company to function. At the time, mobile phones were seen as an expensive toy for the rich, a luxury that the poor could not afford, and, more important, did not need. When many, including Ibrahim’s clients and former colleagues at the major telecommunication companies, assessed the opportunity in Africa, they noted the level of poverty, lack of infrastructure, fragility of governments, and even lack of access to water, health care, and education. They saw pervasive and palpable poverty permeating every aspect of society, not fertile territory for new business.

But Ibrahim, to his credit, saw things differently. Instead of seeing just poverty, he saw opportunity. “If you live far away from the village where your mother lives and you want to talk to her, you might have to make a seven-day journey,” Ibrahim recalls now. “If you could just pick up a device and speak to her instantly, what would be the value of that? How much money would you save? How much time?” Notice that Ibrahim did not say How will millions of Africans, for whom three meals a day is often a luxury, afford a mobile phone? or How can you justify the investments in infrastructure for a market that does not exist? He focused on the struggle to accomplish something important for which there were few good solutions. For Ibrahim, struggle represented enormous potential.

This struggle often presents itself as “nonconsumption”—where would-be consumers are desperate to make progress in a particular aspect of their lives, but there’s no affordable and accessible solution to their problem. So they simply go without, or develop workarounds, but their suffering continues—usually under the radar of conventional metrics used to evaluate business opportunities. But in that nonconsumption, Ibrahim saw the chance to create a market. So with very little financial backing and just five employees, Ibrahim founded Celtel¹ with the goal of creating a pan-African mobile telecommunications company.

The obstacles were enormous. Creating the necessary cellular network infrastructure was a mind-boggling undertaking—done without relying on support from local governments or from major banks. Raising capital was so difficult that even after he’d proved his business model and reached predictable cash flow in the millions of dollars, banks still refused to lend him money. Ibrahim had to fund Celtel entirely with equity financing, “a first in the telecommunications industry for a company of our size and scale,” he explains. But that, and the many other challenges he faced, didn’t deter him. Where there was no power, he provided his own power; where there were no logistics, he developed his own; where there was no education or health care, he provided training and health care for his staff; and where there were no roads, he either built makeshift roads or used helicopters to move equipment around. Ibrahim was fueled by the vision he had of the immense value of millions of Africans no longer having to struggle to keep in touch with one another. Eventually, he succeeded.

In just six years, Celtel built operations in thirteen African countries—including Uganda, Malawi, the two Congos, Gabon, and Sierra Leone—and gained 5.2 million customers. At the openings of many of Ibrahim’s stores, it wasn’t uncommon to see eager customers line up by the hundreds. Ibrahim’s Celtel was so successful that by 2004, revenues had reached $614 million and net profits were $147 million. In 2005, when Ibrahim decided to sell the company, he did so for a handsome $3.4 billion. In such a short time, Ibrahim’s Celtel unlocked billions of dollars’ worth of value from some of the poorest countries in the world.

But Celtel was just the tip of the iceberg. Today, Africa is home to a sophisticated mobile telecommunications industry, with numerous mobile phone companies (including Globacom, Maroc Telecom, Safaricom, MTN, Vodacom, Telkom, and others) providing more than 965 million mobile phone lines. These companies have not only raised billions of dollars in debt and equity financing, but by 2020, the industry is forecast to support 4.5 million jobs, provide $20.5 billion in taxes, and add more than $214 billion of value to African economies.² Mobile phones have also unlocked value in other industries, such as financial technology, where companies now use phone usage records as a proxy for credit-worthiness, extending credit to millions of credit-worthy people who historically could not receive it.

It may seem obvious now that mobile phones are ubiquitous all over the world—and all over Africa—but remember that twenty years ago, Ibrahim saw what others did not.

The market Mo Ibrahim built, and the difficult and seemingly unlikely circumstances in which he built it, represents a solution to what we call the Prosperity Paradox. It may sound counterintuitive, but our research suggests that enduring prosperity for many countries will not come from fixing poverty. It will come from investing in innovations that create new markets within these countries.³ True and lasting prosperity, we have found, is not reliably generated through the flood of resources we are directly pouring into poor countries to improve poverty indicators such as low-quality education, subpar health care, bad governance, nonexistent infrastructure, and many other indicators in which an improvement would suggest prosperity. Instead, we 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.

Contrast Mo Ibrahim’s approach to building Celtel with Efosa’s efforts to build wells through his nonprofit organization, Poverty Stops Here. Poverty Stops Here is significantly smaller in size, but it is emblematic of the thinking behind many of the efforts undertaken to help poor countries today. For example, just 18.2 percent of Official Development Assistance goes toward “economic infrastructure” projects, while the bulk funds education, health, social infrastructure, and other conventional development projects.⁴ In addition to aid from OECD countries representing a vast majority of foreign aid expenditures, the pattern of expenditure also has a signaling effect to many others who donate and fund projects in poor countries. In a sense, it’s what inspired Efosa’s projects, the belief that if we just channel resources into an impoverished area, we can fix poverty.

But what might happen if we flipped the emphasis to innovation and market-based solutions rather than conventional development-based solutions? Or to put it another way, what if we focused less on Efosa-type projects and more on Mo Ibrahim–type ones? Efosa wanted to fund and build more wells as a way of solving a problem. Ibrahim figured out how to solve problems by creating a market that targeted people who were willing to pay for a product. They’re not the same thing. And as our research has demonstrated, they have very different long-term effects.

Understanding the Prosperity Paradox

I’m not an expert on every low- and middle-income economy, but my personal toolbox for solving difficult challenges relies on theory, which helps us get to the core of a problem. Good theory helps us understand the underlying mechanism driving things.

Consider, for example, the history of mankind’s attempts to fly. Early researchers observed strong correlations between being able to fly and having feathers and wings. Stories of men attempting to fly by strapping on wings date back hundreds of years. They were replicating what they believed allowed birds to soar: wings and feathers.

Possessing these attributes had a high correlation—a connection between two things—with the ability to fly, but when humans attempted to follow what they believed were “best practices” of the most successful fliers by strapping on wings, then jumping off cathedrals and flapping hard. . . . they failed. The mistake was that, although feathers and wings were correlated with flying, the would-be aviators did not understand the fundamental causal mechanism—what actually causes something to happen—that enabled certain creatures to fly.

The real breakthrough in human flight didn’t come from crafting better wings or using more feathers, even though those are good things. It was brought about by Dutch-Swiss mathematician Daniel Bernoulli and his book Hydrodynamica, a study of fluid mechanics. In 1738, he outlined what was to become known as Bernoulli’s principle, a theory that, when applied to flight, explained the concept of lift. We had gone from correlation (wings and feathers) to causality (lift). Modern flight can be traced directly back to the development and adoption of this theory.

But even the breakthrough understanding of the cause of flight still wasn’t enough to make flight perfectly reliable. When an airplane crashed, researchers then had to ask, “What was it about the circumstances of that given attempt to fly that led to failure? Wind? Fog? The angle of the aircraft?” Researchers could then define what rules pilots needed to follow in order to succeed in each different circumstance. That’s a hallmark of good theory. It dispenses its advice in “if/then” statements.

As a business school professor, I’m asked hundreds of times a year to offer opinions on specific business challenges in industries or organizations in which I have no special knowledge. Yet I’m able to provide insight because there is a toolbox of theories that teach me not what to think, but how to think about a problem. Good theory is the best way I know to frame problems so that we ask the right questions to get us to the most useful answers. Embracing theory is not to mire ourselves in academic minutiae but, quite the opposite, to focus on the supremely practical question of what causes what—and why? This approach is at the core of this book.

So how, then, does theory relate to our quest to create prosperity in many poor countries and ultimately make the world a better place? The appeal of many things that correlate with prosperity—of strapping on wings and feathers—is incredibly alluring. Who isn’t moved by the sight of a newly dug well providing clean water to a deprived community? But in reality, no matter how many good efforts we invest in, if we aren’t improving our understanding about what creates and sustains economic prosperity, we will be slow to make progress.

In our study of the path to prosperity, examining progress (or the lack thereof) in a variety of economies around the world—including Japan, Mexico, Nigeria, Russia, Singapore, South Korea, the United States, and several o...