Finding a path that can eradicate poverty is possible, but first of all you need to understand what creates poverty and start thinking differently.
Charity actions aimed at reducing the most obvious signs of poverty (these are called push strategies), such as the construction of wells due to lack of water or roads to improve transport, do not create long-term prosperity because very often they are infrastructure still unwanted and unsustainable by the current market.
Prosperity is a relatively recent phenomenon for many countries (see China or South Korea), prosperity means the process by which more and more people in a region reach a higher level of social, economic and political well-being.
Some countries can be considered rich, because for example they have many primary resources, but are not prosperous, since prosperity is generated by the increase in social, political and economic freedom and does not depend individually on the resources present in the country.
And this is the paradox of prosperity: research in most countries shows that long-term prosperity is not achieved by reducing poverty, but by investing in innovations that create new markets (destructive innovations).
These act as catalysts for initiating sustainable economic development.
Important innovations in creating prosperity and how to use them to solve the prosperity paradox
The elements to solve the prosperity paradox are:
- find opportunities in the markets of countries that are in a difficult economic situation, where apparently there are no consumers;
- investing in innovations that have the ability to create new markets (which in turn produce jobs and increase the country’s economy);
- perform Pull development strategies (attraction), this means that new infrastructures and institutions are created in a country when the market requires it and not before;
When we talk about innovation we mean “a process by which an organization transforms work, capital, materials and information into products and services of great value”. Therefore, the innovations that create new markets make complex and expensive products and services cheaper and more accessible to a new segment of people, in a society defined as “non-consumers”.
Non-consumers are people who have difficulty making progress because the solution has always been out of their reach, they are the segment of the population that cannot afford the product / service due to the lack of means, the innovations that create markets are targeted precisely to them.
The good innovations that create markets have three distinct results:
- create jobs (critical factor in establishing a country’s prosperity);
- they create profits which are then invested to finance public services;
- have the ability to change the culture of a company.
Once the markets that serve non-consumers are created, these same markets attract other necessary resources (infrastructure, institutions, education, etc.) to ensure their survival.
Practical example: in 1990 Mo Ibrahim, a former technical director of British Telecom, was the first to think of founding a mobile phone company in Africa, going against the general idea that the country was a desperate case. Ibrahim founded Celtel with the idea of creating a pan-African telecommunications network.
Of course, he was faced with several obstacles, first of all the creation of an infrastructure network from scratch, but in six years Celtel extended to thirteen African countries, spreading the use of mobile phones. Mo Ibrahim had created a new market in Africa and a domino effect that managed to unlock the potential of other sectors, such as financial technology (telephone solvency could now be used as collateral to provide credit).
Classify the different types of innovation and their different types of impact on the market
Research shows that there are three types of innovations:
- sustainability innovations are improvements to existing solutions on the market and are aimed at consumers who require better performance from a product or service, do not attract new consumers and their impact on development is limited;
- the innovations in terms of efficiency allow companies to produce more using less resources, generally they are innovations that influence the processes of creating products / services and rarely create new jobs;
- the innovations that create markets do it literally, but they do not create any market, the created markets serve individuals for whom there was no product or for which the existing product was inaccessible, in a sense democratizing a previously exclusive product / service.
While sustainability and efficiency innovations keep markets competitive, they don’t play an important role in creating new markets or jobs like innovations that create markets, the latter are capable of creating local jobs (difficult to transfer to others countries) and global (easily transferable to other countries to take advantage of low labor costs). In addition, the profits from the innovations that create markets produce a domino effect and can finance future local innovations. Understanding which innovation causes certain results is the first step to achieve one’s goals, secondly one must understand why non-consumers decide not to use a certain product and create the right solution for them.
The five elements that an entrepreneur must look for in creating a new market are:
- an economic model aimed at non-consumers. These can be identified through four barriers that prevent individuals from progressing: the lack of skills that allow you to use the existing product on the market; the lack of wealth to afford the product; the inability to access the product; the time required by the service / product is prohibitive for this bag of “possible” consumers.
- A technology that offers progressively high levels of low cost performance.
- A new network of values, a new production / product network that redefines costs. Very often, in a poor country, this means creating infrastructure from scratch and forming an integrated economic model when it is not possible to depend on suppliers, for example logistics, packaging, energy production and shipping. When a company integrates all these aspects, the costs can be turned into profits by selling the services created for the production and distribution of its product to other companies in the country.
- A flexible strategy.
- Get support from executive levels.
Practical example: Tolaram is one of the best known companies in Nigeria, the creator of the famous Indomie instant noodles. In 1988 Tolaram started selling spaghetti for 20 US cents each in a country bordering on poverty. Tolaram made accessible a product for which it was thought there was no market and thanks to it he created the infrastructure of the whole of Nigeria: infrastructure for electricity production, for water treatment, a network for waste water and facilities education; thus introducing millions of new jobs and selling infrastructure services created to other emerging companies. Tolaram has actively become a promoter of the country’s prosperity and development.
The impact of innovators on the development and prosperity of their countries
After the Second World War, Japan was impoverished and in a terrible economic situation. Akio Morita and Masaru Ibuka began repairing radios in a half-destroyed department store and started a company of twenty people, without any support from the state and without any obvious request for the innovative products they intended to create. Nowadays their company is called Sony and is worth 49 billion dollars. Morita had identified an opportunity and a bag of non-consumers in a difficult situation.
Other companies at the time followed the example of Sony (Toyota, Toshiba, Panasonic, etc …) and now Japan is one of the greatest economic powers in technology and innovation in the world. Sony’s own path was then followed by Samsung, which helped South Korea out of poverty.
This teaches that privileging investments in innovations that create markets, even in difficult conditions, provides poor countries with a sustainable path to prosperity.
Mexico on the contrary, although it is a country full of opportunities, is a magnet for efficiency innovations, which do not create markets large enough to attract the other components necessary for long-term development and create global jobs, which as we have seen, they can be moved elsewhere easily.
Impact, development and prosperity on a country’s culture
The institutions of a company reflect its values, they do not create them, so exporting efficient institutions that work in another country is not an effective solution. Institutions cannot be imposed, since they evolve with the society to which they belong. In general, poor countries are plagued by corrupt institutions that limit their development.
To solve this problem, the first step is to understand the values of a country and therefore first understand how a culture is formed. Culture is defined as a method of collaboration towards common objectives which is so often followed and produces results so visible that individuals do not think they follow any other method. If a culture is formed, individuals will independently do what is necessary to succeed. Institutions are therefore the result of a series of behaviors that have been codified because they are effective.
As already mentioned, the innovations that create markets produce services and solutions accessible to a new class of consumers, this new solution can have a great impact on society. The reward and punishment system is important in a developing country, if there are no jobs that can reward individuals, they will find other ways to receive profits, even if these methods are not productive for society.
So it does not matter how well intentioned an institutional reform is, if it is not created or connected to markets that serves as many individuals as possible, it will be difficult to sustain. In a nutshell, the more innovators democratize solutions for the masses, creating opportunities and potential growth and wealth, the more institutions can grow and remain strong.
The formation of a culture and respect for institutions is a cumulative process, but understanding what creates and supports effective and efficient institutions and the reason that pushes individuals towards corruption is the first step towards prosperity.
Practical example: the development of local institutions helped Venice to become one of the major commercial capitals in the world. Long-distance trade had enriched merchants who used their new influence to make changes in “leadership”, for example, led to the end of the custom that Doge’s office was hereditary and the establishment of a parliament in 1172 AD. During this period the institution known as Colleganza, a kind of joint-stock company, which financed long-distance explorations flourished.
In this way, the Colleganza distributed the risk of participating in such trips to a larger number of people and also democratized their reward, since it allowed more Venetians, for whom it was previously impossible, to invest in such expeditions. In the same way, the Collegenza influenced the shipbuilding industry, the resources necessary to build them and the demand for crews, therefore had a wide impact on different economic sectors.
Turning the prosperity paradox into a prosperity process
The path to prosperity may be different for different countries and is ultimately dependent on the present economic situation, however the prosperity paradox can become a process of prosperity if sustained by a continuous commitment to innovation.
Analyzing innovators and nations through the lens of innovations, it allows you to clearly see that the greatest impact of some innovators is due to the process that allowed them to democratize a product / service, so as to make it accessible to more individuals.
Innovation is the process by which society repairs itself and can be summarized in the following elements:
- each nation has internal growth potential identified with non-consumers;
- the products on the market have the potential to create new markets and growth if they are made more accessible;
- an innovation that creates markets is more than just a product / service, it is an entire system that influences infrastructures and institutions and produces new local jobs;
- the strategies that have the greatest chance of creating development and prosperity are the Pull (attraction) and not Push (push) strategies;
- expanding into a non-consumer market is relatively cheap.
The innovations that create markets can act as catalysts for new opportunities in many poor countries and are the solution to the paradox of prosperity.