Applied to Haiti: The Prosperity Paradox
This will be the first, of what will likely be a series of posts, where we will seek to apply the ideas asserted within various books on international development to the issues faced in Haiti today. There have been many books on development written and cited by academics from around the world. We will try to focus on those listed within the syllabi of respected universities. It is important for the reader to understand that StimPack is new in its mission to lead development efforts in Haiti. This is an audacious mission considering the many brilliant minds that have preceded us. However, our approach is far more humble than it might initially appear. We intend to stand on the shoulders of our experienced predecessors, leveraging their experimentation and resulting wisdom to move this work forward. StimPack also realizes the value of development work done outside of Haiti that may have significant value within it. This article will work to apply to Haiti the ideas of the late Clayton M. Christensen of Harvard Business School and his co-authors Efosa Ojomo and Karen Dillon as taught in their book The Prosperity Paradox. We hope you will find this a valuable exercise.
This will not be a summary or thorough book report. We have instead extracted a few points we find relevant to Haiti.
Foreign Aid does not effectively address poverty.
Christiansen sites the trillions in foreign aid that have been spent with less than inspiring results and argues that money could be better spent. The $13 billion Haiti has received since 2010 has produced disappointing results. Furthermore, in some countries the effects of aid are negative, as the money only serves to bolster and entrench the oppressive and corrupt leaders.
• Economic Development is more likely than Foreign Aid to alleviate poverty.
Christiansen argues that foreign aid dollars, in contrast to economic development dollars, are spent to alleviate symptoms within developing nations; rather than addressing a nation’s ability to fund the alleviation of its own symptoms. Christensen makes the point that if poor economics is the root cause of poverty, then we ought to address poverty through economic development. This point requires some clarification of terminology.
Let first take a look a data set obtained from the Congressional Research Service:
Source: Foreignassistance.gov and CRS calculations. Note: Figures represent net obligations, including de-obligated funds. A similar framework table is included in annual SFOPS congressional budget justifications, and includes only funding in the international affairs (function 150) budget.
Foreignassistance.gov is also a good source of U.S. spending data, but naming conventions have not been normalized. So, we will stick with the terminology used by CRS in the image above.
You can quickly see that the U.S. Foreign Assistance spending covers a broad range of objectives. If we categorize spending into the following three buckets, we can see that economic development funding is a relatively minor component of total spending annually.
Source data: https://crsreports.congress.gov
We at StimPack believe that economic development spending ought to be increased (a point we address in this article).
For now it is important that we establish that in the bar chart above, the budget segments in grey are NOT designed to address poverty. These segments are intended to address a myriad of other issues, the virtues of which will not be addressed here. Rather, we identify this segmentation in support of Christiansen’s point that foreign aid does not effectively address poverty. That is, in large part, because it is rarely even trying to.
There are certainly segments in the chart that could be expected to indirectly enable economic development, but it is not reasonable to believe that for example, political competition, security reform, good governance, etc. are designed to directly impact the economy.
It is certainly reasonable to claim that foreign aid aimed at improving the rule of law, population health, and civil society will positively impact the economy. However, it is not reasonable (as further argued in this StimPack article) to expect progress in any of the aforementioned non-economic development areas without also directly, separately, and intentionally developing the economy of a given population. In other words, economic development is more likely than foreign aid to alleviate poverty.
This point may seem obvious. However, many prominent development thinkers have promoted ideas to the contrary.
“The key is to reflect on six kinds of capital goods: business capital, infrastructure, human capital, intellectual capital, natural capital, and social capital. ”
Sachs, circa ‘08-’14, seemed to advocate for a holistic approach to poverty alleviation. To his great credit, Sachs promoted and spearheaded a massive experiment to test his theories. The results of his experiment cast significant doubts on the holistic approach to poverty alleviation and are generally inconclusive. The negative results may further support Christiansen’s claim that focusing on economic development can prove more impactful than a generalized approach to aid.
Side note: StimPack wishes to emphasize its praise for Sachs and his many donors in their willingness to attempt a plan like The Millennium Village Project. Humanity owes them a debt for this contribution of knowledge and expertise.
Innovation is the most impactful type of economic development
Christiansen argues that ‘market-creating innovations’ transform developing economies in a way that other economic development efforts do not.
It stands to reason that innovation will grow an economy, but to distinguish ‘market-creating innovation’ as a key economic driver, as opposed to other types of innovation, is worth further investigation.
• Opportunity lies in targeting “nonconsumption.”
Christensen et al. posit that innovative activity should target “nonconsumption” or underconsumption of key goods. This claim stems from the presumption that poor countries have a significant portion of their populations that exist outside of a given market. They are either too poor or are otherwise barred from participation in a given market. For example, think of Africa just before the precipitous global expansion of cell phones. Many said that rural Africans were too poor or too remote to fall within the addressable market for cell phones. Many within Africa were ‘non consumers’ of cellular phones and their associated services because of a lack of availability and high costs. But innovation made it possible to address those non consumers profitably. Once rural Africans were able to afford cell phones, they were able to enjoy the increased production efficiencies and the new innovations it enabled.
Why would this phenomenon be particularly effective in alleviating poverty? It makes sense that entrepreneurs would be motivated to build products that more people could spend their money on. But this might sound to some like a way to make the poor even poorer and the entrepreneurs richer. So why then is there a strong correlation between innovation to address non consumers and the alleviation of poverty?
It should be remembered that, if consumers are purchasing some new product, it is because the gains they expect from the new product are greater than the price that is paid. So one reason for the correlation may be that, if the innovator has invented a product or service that the poor have begun to consume, then it should be presumed that the innovation somehow improved the production efficiency of the market into which it is selling. If it allows for greater convenience, (more affordable water, transportation, communication, and fertilizer) enabling impoverished demographics to be more efficient. If a population can achieve greater efficiency, then there is greater opportunity for self-sustaining economic profitability . The inctroduced innovation will either aid the market or be rejected.
The alternative is to focus innovation on the middle and upper classes who already actively participate in the economy. This will certainly grow the economy. However, growing only these sectors of the economy does little to address the problem of economic underparticipation. The poor will continue to consume services and utilize infrastructure without contributing to their production. Developing innovations to increase economic participation among lower income individuals, through specialization and trade, will both free the economy from the drain on resources and bolster the economy with a surge in productivity; fueling it with increasingly wealthy consumers.
Infrastructure projects often lead to “a prosperity trap”.
• Emerging market innovators tap into the power of “pull strategies.”
One final point we will share is simple to the point of being nearly unnecessary to mention. However, the tendency in development toward central planning merits frequent reminders that top down approaches have risks worth mitigating. Let this be yet another such reminder: if you think you know exactly what infrastructure is needed for the next decade within a given region, then be prepared for waste, and even the slowing of the economy.
Let the economy show what is needed organically. Let its businesses request, guide, and perhaps fund its own infrastructure.
In conclusion, The Prosperity Paradox is full of rational arguments, but offers little data beyond the anecdotal evidence upon which it leans to make most of its claims. We would love to see further evidence to support the recommended principles found in the book. If any of our readers are familiar with such support data, we’d love to hear from you. Please contact us or comment below.
Thank you.