Book review

The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty by Clayton M. Christensen

Title: The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty

Authors: Clayton M. Christensen, Efosa Ojomo and Karen Dillon

Publisher: HarperCollins

In 2009, the Harvard University-educated Zambian economist Dambisa Moyo published Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa in which she argued that official development assistance – ODA, or foreign aid – was not merely a waste of money, but a cause of poverty in developing countries. Moyo argued that ODA caused corruption and conflict and inhibited foreign investment and capital flows.

A decade later, Harvard University professor Clayton M. Christensen makes similar arguments in The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty except that he adds the buzzwords of innovation and disruption. Christensen and his co-authors – Efosa Ojomo, a Harvard researcher, and Karen Dillon, a journalist – try to explain the importance of innovation in creating and sustaining prosperity. They use several examples, including the United States, Japan, South Korea, and Mexico, to illustrate “innovation cultures” and examine barriers to development. They discuss the relationship between “market-creating innovations” and the development of good institutions, the reduction of corruption, and the construction and maintenance of a nation’s infrastructure.

Like Moyo’s book, The Prosperity Paradox has a particular focus on the African continent. True prosperity, the authors contend, comes not from improving poverty indicators, such as poor education and health care, non-existent infrastructure, and bad governance or corruption, or from top-down business models. Rather, it emerges from investment in grassroots entrepreneurship.

But also like Moyo, Christensen and his collaborators ignore the fact that the state – not entrepreneurs – were often the keys to success in China, Japan, Korea and many other Asian countries. Interventionist, often authoritarian, state actors nurtured industry, and encouraged, if not forced, domestic elites to invest in their own countries.

“China’s recent economic growth is spectacular, especially considering the hundreds of millions of people who have been lifted out of poverty,” the authors write. “The conventional story of China’s growth is that discontinuities in policy initiated by Deng Xiaoping in the late 1970s unleashed the previously dormant economic giant. This is certainly true to a point. However, it is not possible to tell the story of China’s rise without emphasizing the initiative of entrepreneurs and other citizens.”

Christensen follows the so-called Schumpeterian approach to economic growth, in which growth is primarily driven by entrepreneurial innovations. He bolsters his arguments with support from those of a similar vein, such as Huang Yasheng, Professor of International Management at the Massachusetts Institute of Technology, who argued that China’s economic policy in the 1980s was fuelled by entrepreneurship and market-driven solutions, not top-down intervention.

The Prosperity Paradox soon turns into a “magic formula” treatise with a selective view of the relationships between the public and private sectors. There is no explanation of how innovation can take root where the government is absent, incompetent or malign.

The control of corruption is central to economic success, the authors argue. By some estimates, corruption could be costing the Chinese government as much as US$86 billion annually. While the authors blame Chinese officials for such losses, there is, however, no roll call of Chinese entrepreneurs currently in prison on graft charges. “Note that China and many other poor countries have tried to eradicate corruption primarily by using laws, but with limited success,” they write. “Paradoxically, the more laws these countries enact to fight corruption, the more corruption has seemed to spread.”

Christensen argues for not so much the elimination of corruption but more of a reclassification, such as lobbying, a US$3.3 billion business in the United States. Chinese corruption, he adds, is “covert, but predictable. And thus, can be included in the calculation of the ‘cost of doing business’ in China.”

The book notes the case of Malawi, in which the east African country created an anti-corruption framework by essentially borrowing Hong Kong’s Independent Commission Against Corruption Ordinance. While Malawi is seen to have strong anti-corruption legislation, there is still a significant gap between the law as it is written and actual practice and enforcement.

“By investing in market-creating innovations,” Christensen and his co-authors argue, “investors and entrepreneurs inadvertently engage in nation-building. Market-creating innovations have the ability to pull in what’s needed, regardless of the existence of sound institutions or the state of corruption.”

Christensen writes that he does not believe corruption can be completely eradicated from any society, but that it can be significantly mitigated. “And this matters to a society’s potential for growth because limiting corruption makes room for predictability, which ultimately improves trust and transparency.”

While that is no doubt true, Christensen and his co-authors ignore the role of the state at their peril.

Author interview: Clayton M. Christensen

Much of what inspires Clayton M. Christensen, Kim B. Clark, Professor of Business Administration at the Harvard Business School, came to him in his youth as a Christian missionary. One of his first assignments was to spread the gospel as interpreted by the Church of Jesus Christ of Latter-day Saints in South Korea in the 1960s.

“When I was a missionary, South Korea was viewed by everybody as the most impoverished of the nations of Asia and just poverty was everywhere. And now the country has become quite prosperous,” he says.

Later at Harvard, Christensen says, he sought to understand the process by which South Korea transformed itself, and why it wasn’t a universally applicable process. “In the Philippines 30 years ago, they were an impoverished nation and they’re still impoverished.”

According to Christensen, innovations snowball into economic ecosystems. “And remarkable things happen when you develop innovations,” he says. “People that are not consuming the existing products on the market are the engines of growth for society. Because when you make a product that targets many more people that haven’t historically had access [to them,] you don’t just need people to make the product, you need people to sell them, distribute them, market them, advertise and so on.”

Christensen believes there are enough case studies to prove his thesis that innovation can bring growth. He cites Tolaram, a Nigerian company that brought in Indonesia’s Indomie noodles. “What Tolaram has done in Nigeria is astonishing,” he says. “Since its entry into Nigeria in 1988 – when Nigeria was still under military rule – Tolaram has invested more than US$350 million to create tens of thousands of jobs, developed a logistics company and built infrastructure including electricity and sewage and water treatment facilities.”

It has been so successful selling 50-naira (HK$1.20) packs of noodles that it has been able to fund educational institutions and community development programmes. The company has also taken a lead role in developing a US$1.5 billion public-private partnership to build and operate a deep-water port in the state of Lagos, Nigeria’s commercial capital. “Without overstating it at all, Indomie noodles is development,” says Christensen.

The Harvard professor is a passionate believer in disruption and creative destruction. “Disruptive innovation allows a company to do more with less and by making it affordable and accessible,” he says. “A much larger population of customers are able to use and improve on those products.”

Christensen sees the current disruption in the automotive industry as a bellwether. He says he has no idea whether Tesla will win its battle for sales with existing customers. That is not the main point, he argues. “Tesla might be better at making better cars than anybody else, but  [what is interesting is] that they have energized the incumbents.”

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