As development organizations work furiously to support vulnerable communities that have been most impacted by the coronavirus pandemic, they’re faced with a sobering reality: Half a billion more people may fall into poverty, causing global poverty rates to rise for the first time in over two decades.
The COVID-19 pandemic has highlighted the fragility of many jobs — and markets — across the globe. CDC Group’s Nick O’Donohoe argues that building resilience in the private sector today will ensure a swifter and more sustainable economic recovery in the months and years to come.
Although it’s important to provide near-term relief in the form of health care and aid, it’s clear that the predominant development strategy — providing poor communities with resources — has failed to generate the economic resilience that’s needed to weather economic shocks.
Even when efforts have succeeded in lifting people out of extreme poverty, those who have escaped remain vulnerable to the slightest downturn, whether it’s a pandemic or a natural disaster. A better, more sustainable strategy is needed to help people and economies recover and build resilience for future economic shocks: investing in market-creating innovations.
Market-creating innovations transform complicated and expensive products into products that are simple and affordable, making them accessible to a whole new segment of people for whom there was always underlying demand but no adequate solution on the market. We call this segment of the population “nonconsumers.”
In many emerging economies, the population of nonconsumers for most products and services far surpasses that of consumers. As a result, when entrepreneurs develop market-creating innovations, the societal impact can be immense.
For example, Ghanaian health care company mPharma, which launched in 2013, has made quality medication affordable to around 1 million Africans annually. In addition to the company’s direct impact on the economy — having raised more than $55 million and currently serving over 400 pharmacies — it has been instrumental in ensuring that personal protective equipment, medications, and more than half a million COVID-19 testing kits are available in the countries it serves.
As we explain in our research paper “Avoiding the prosperity paradox: How to build economic resilience in a post-COVID world,” successful market-creating innovations are powerful engines for development because of their three distinct outcomes.
First, they have an outsized impact on job creation because many more people are required to make, market, distribute, and sell the new innovations to the vast new market. These jobs ultimately build economic resilience as they are often better paying and more secure than jobs in the informal sector.
Second, market-creating innovations generate profits that create a sustainable stream of tax revenue to help fund public services such as education, infrastructure, and health care, as well as strengthen the institutions that are critical for growth and prosperity.
This is critical since most governments in emerging economies are severely underresourced and struggle to provide the level of infrastructure they need to thrive. In a time of economic crisis such as the current moment, improved infrastructure and institutions can help nations recover more swiftly.
If there were ever a time to rethink which investments trigger lasting development, it is now.—
Third, successful market-creating innovations trigger an entrepreneurial culture that values innovation. As entrepreneurs, investors, and governments experience the benefits of successful new markets, they become inspired to invest more heavily in market-creating innovations, creating a domino effect of development. The sheer prosperity generated by subsequent market-creating innovations enables nations to respond more boldly during economic crises.
Consider the case of Japan.
In the years after World War II, the country was in dire economic straits. Its per capita income was lower than Mexico’s and Colombia’s and five times smaller than that of the U.S. Japan experienced a severe food shortage and, not unlike many emerging markets today, faced an enormous uphill battle to rebuild.
Although the prospect of Japan’s economy recovering swiftly from the shock of war seemed unlikely, its gross domestic product per capita of over $49,000 nearly 70 years later had eclipsed those of other high-income countries. This is in large part due to innovators such as Sony, Toyota, Toshiba, Panasonic, Honda, and others — all of which launched market-creating innovations.
Sony, for instance, began operations in a bombed-out factory with no government assistance. Despite these humble beginnings, Sony’s co-founders, Akio Morita and Masaru Ibuka, focused on developing simple and affordable products and services for nonconsumers in Japan.
By 1982, the company had successfully built twelve new markets. These included the original battery-powered pocket transistor radio, the first portable solid-state black-and-white television, video cassette players, portable video recorders, 3.5-inch floppy disk drives, and the now-famous Sony Walkman.
By serving nonconsumers, Sony created hundreds of thousands of jobs, paid billions of dollars in taxes, and helped foster a culture of entrepreneurship and innovation in Japan. Over time, Sony and many other companies helped Japan become synonymous with innovation and prosperity. Perhaps unsurprisingly, this subsequent prosperity has enabled Japan to respond boldly to the economic crisis caused by the pandemic, spending more than 20% of its GDP on stimulus packages to manage the economic fallout.
If there were ever a time to rethink which investments trigger lasting development, it is now.
As philanthropists and development organizations work with leaders in emerging economies to overcome the devastating effects of the pandemic, they have an opportunity to prioritize investments in market-creating innovations such as mPharma. By doing so, they will not only jump-start sustainable development that builds resilience but could actually catalyze a movement that may achieve the end of poverty in our lifetime.