Development is one of the major challenges of our time. Unfortunately, it’s often approached in a way that does more harm than good. Efosa Ojomo has a better solution, and he’s here today to share it. Efosa is the leader of the Global Prosperity Research Group at the Clayton Christensen Institute for Disruptive Innovation, the co-author of The Prosperity Paradox, and the author of the upcoming book, The Prosperity Process. In this episode, Efosa explains how his first foray in the development space (building wells in Nigeria) catalyzed a journey of discovery which led him to realize that, in order to truly change the world, we need to implement pull strategies instead of push strategies and focus on market creating innovations. He shares some examples of what these innovations look like and we discuss what it takes to be a market creating innovator, how regulation impacts innovation, a new way to think about corruption, and more! Make sure to tune in today.
Key Points From This Episode:
- The lesson Efosa learned through his first foray in the development world.
- Definitions of the three types of innovation that Efosa and his co-authors explain in depth in their book, The Prosperity Paradox.
- Efosa shares the story of Mo Ibrhaim to highlight the power of market creating innovations.
- Push versus pull development strategies and the problem with the former.
- The story of Indomie Noodles as an example of the huge amount of change that can be made through the implementation of a pull strategy.
- How a proliferation of government agencies negatively impacts a country’s entrepreneurial ecosystem.
- The type of person who is best suited to be a leader in the market creating innovation space.
- Aid for developing countries: how the approach needs to change.
- Efosa explains why good laws are not enough to create thriving communities.
- Key factors that resulted in the rise and fall of Venice.
- How Efosa believes we should be tackling the issue of corruption.
- A tribute to Clayton Christenson.
- The Prosperity Process; Efosa’s future book.
Kurtis: Welcome to the Charter Cities Podcast. I’m Kurtis Lockhart. On each episode, we invite a leading expert to discuss key trends in global development in the world of cities, including the role charter cities and innovative governance will play in humanity’s new urban age. For more information, please follow us on social media, or visit chartercitiesinstitute.org.
Our guest for today is Efosa Ojomo. Efosa leads the Global Prosperity Research Group at the Clayton Christensen Institute for Disruptive Innovation, a think tank based both in Boston and Silicon Valley. Efosa’s work has been published, or covered by the Wall Street Journal, Harvard Business Review, The Guardian, the World Bank, NPR and several other media outlets.
He speaks regularly on the topic of innovation and the importance of innovation and for economic development is the central theme of his book, The Prosperity Paradox, which is coauthored with Clayton Christensen and Karen Dillon. I hope you enjoy the show.
Kurtis: Hi, Efosa. Welcome to the show.
Efosa: Hey, Kurt. It’s good to be with you here, brother. Good to be with you.
Kurtis: Let’s dive in. We’ve been chatting a bit. You’re a co-author of the book Prosperity Paradox, along with the late Harvard Business School Professor, Clayton Christensen and Karen Dillon. In the preface of the book, you tell this story of your first foray into development work, providing wells in Nigeria, where you’re from, through this non-profit that you created. Will you start with you just telling us about this work in Nigeria? Because I think that experience is a great way to frame the overall thesis of your book.
Efosa: Yeah, I will. I will tell the story. As you say, I’m originally from Nigeria, and I began to learn about poverty and development and struggles in 2008, really. I moved from Nigeria to the US for college and I stayed. I moved in 2000 and I stayed here. In 2008 I started reading and learning about poverty. It gripped me like nothing had ever gripped me before. First thing I do, I start a non-profit organization, go to Nigeria, and we go into a really poor community and they don’t have water.
What’s the first thing you do when you see a community who doesn’t have water? You’re like, “Oh, I know the answer. You build a well.” That’s what I did. I got a group of friends together. We raised some money. Started a non-profit called Poverty Stops Here, and we built a well in the community. A few months after we built the well, it broke. I’m back in the US now. I’m still based in the US. I’m back in the US, and I gotta figure out a way to get somebody to the community to get the well fixed.
I do it once or twice, but after a while, it occurs to me this is unsustainable. I can’t keep doing this, because I have a full-time job and my whole life here. That was probably the first time something hit me that something is wrong with this equation. There’s just no mechanism for sustainability.
We saw people who needed water. They didn’t have it. Water is so important. We provided what we thought was the solution, which is a well. All of a sudden, the well breaks, which is what wells do. I don’t care where you build a well, it’s going to break after a certain point of time, but there was no mechanism for fixing it. That, for me, represents the microcosm of the larger development problem.
We go in with resources. We try to help with, I think, the best of intentions. But we don’t realize the mechanism that helps sustain many of these resources that we provide. That was a big learning for me, and I’m glad I had it early in my foray into this whole development space.
Kurtis: I know a key concept or term in the book that you and your co-authors use is market creating innovations. Let’s dive into that a bit. Can you elaborate on why market creating innovations are so important? I guess, too, in explaining this term, there are a couple of other types of innovations. You guys talk about sustaining innovations and efficiency innovation. How do these three different types differ from each other?
Efosa: Kurtis, if I asked you right now and I asked all your listeners, define innovation. You would come up with what I think is a very intelligent definition and it would work. Many of your listeners would as well. However, the definitions would not be consistent with one another. They would all be correct, but they may not quite be the same. That is, I think, one of the biggest problems with the word innovation.
What we try to do in the book is provide a very simple definition of the term, and then categorize innovation into three main buckets, which you’ve highlighted. Simple definition is a change in the process by which you transform inputs of lower value into outputs of higher value. Very simple. You go to a restaurant, there’s innovation going on. They take all these ingredients, they transform it into a nice meal. Outputs of high value. Now, when we begin to think about that definition in the context of economies and economic development, what we recognize pretty quickly is there are going to be some people in the economy who have access to the outputs of higher value, and there are going to be others who do not have access.
It’s important for us to categorize innovation that way because categorizing it that way helps us identify what we need to do to make those innovations come to life. You’ve hit on the three main types of innovations. The first are sustaining innovations. These are innovations that make good products better. They are innovations that target people who can already afford the existing products on the market, but the existing products, maybe they don’t quite fulfill all their needs.
When you get a new phone and you get a new camera on your phone, or you get a new car and you get new features, autonomous driving, those are additions to existing products, sustaining innovations. They target people who can already afford products and services. To use the restaurant analogy, you go to this restaurant and they’ve got new items on the menu that they may sell for a little bit more money. That’s sustaining innovation.
Efficiency innovations are the second type. These are innovations that help you do more with less. They are incredibly important as well, because if you don’t invest in them, your competitors will. Then soon, you’ll find yourself out of the market, but they serve a different purpose. Efficiency innovations help free up cash flows for firms. This is when firms say, “You know, let’s outsource this particular operation to a lower wage area. Let’s leverage some robotics automation to reduce our wage costs.” These are efficiency innovations.
The key here is they are targeted. These types of innovation, they tend to be process improvement type innovations, and they target people who also can already afford products and services. Another main industry that is very focused on efficiency innovations are resource extraction industries. Whether it’s oil, gas, diamond, any kind of precious metals, they are notorious for efficiency innovations, because you don’t really set the market price. The lever you have in that industry, because you’re selling a commodity, is to reduce cost. Managers are constantly trying to figure out how to invest in efficiency innovations in those sectors.
The last type, which we talk about in the book and we really describe how powerful it is, are market creating innovations. These are innovations that transform complicated and expensive products into products that are simple and affordable, so many, many more people in society can afford them. If we go back to the restaurant example, imagine if the restaurant had meals that could only cater to the top 10 percent of people in a particular city. All of a sudden, they figured out a way to develop a business model that would take the food and resources of the restaurant and make it available to maybe 50 percent of people in that region of the city.
All of a sudden, think about all the things the restaurant now has to do. It has to build more restaurants, hire more people, get more inputs, more ingredients, get more plates, cutlery and more staff. It’s a whole different ball game. That’s the power of market creating innovations. There are tangible examples across the world that have significantly impacted societies. That right there is where market creating innovations, I don’t want to say better, but in terms of the impact, because innovation, you always have to look at the circumstance you find yourself in, but that’s the power of market creating innovations. That’s where, in many regions across the world that have not yet achieved prosperity, they, I think, are the key to helping these regions thrive.
Kurtis: I think, the restaurant analogy is great for each of the three types and breaking it down, but maybe for the market creating innovation, a good example, I thought, that you guys used in the book was the story of Mo Ibrahim and how he broke into the telecoms market in sub-Saharan Africa, when absolutely no one else, no other market player thought that that was a remotely sane thing to do. Maybe to just make this point about market creating innovation a little concrete, do you want to tell the story of Mo Ibrahim?
Efosa: First of all, he’s been incredibly successful, living in London, working as a consultant to the telco industry. Built a very successful company. He looks at the landscape of Africa and says, “Oh, my goodness.” This is late 1990s. He’s like, “There’s no phones.” Fewer than 5 percent of the population had access to mobile phones and the majority were in South Africa. He’s like, “I can do something here.”
Well, a lot of people he went to talk to were like, “You’re crazy. There’s no way. Africa is filled with poor people. They’re corrupt.” Some people were even talking about Idi Amin in the 1990s. Idi Amin was a dictator in Uganda, who brutalized his people and political opponents. He’s like, “Dude, Idi Amin has been dead. How are you still talking about him?” It occurred to him that many people did not know much about Africa.
He decides to sell his company, raise the necessary financing, which was incredibly difficult for him, and build out mobile telecommunications infrastructure across several countries in Africa. Democratic Republic of Congo, Congo-Brazzaville, Sierra Leone, Liberia, I think Mali. He goes in, I think, seven countries. Uganda builds out this mobile telco infrastructure and the response was overwhelming. I mean, they had people knocking down the doors, people wanting to buy this product and service.
Well, in seven years, specific to Mo Ibrahim’s success, in seven years was able to build a company, hired a little over 5,000 people, revenues of over half a billion dollars a year, profits over 150 million. Now, think about this. In the poorest, poorest continent in the world, economically speaking, in seven years, he’s able to create this value. That’s amazing. What is even more amazing is the ripple effect of market creating innovations. It is what they trigger.
Today, you fast forward 25 years and today as I talk to you, there are over a 100 mobile phone companies across the continent. That sector provides millions of jobs, 2 to 3 million jobs across Africa. Generates billions of dollars in taxes annually for governments. As you know, revenue is a big problem for many African governments, and has created this culture of innovation and entrepreneurship, has led people to believe there are other ways to make money, to create value and to have the impact. Those are incredible outputs when you think about the power of market creating innovations.
Today, it’s no longer a fool’s errand to tell somebody you want to go make a mobile phone service available for people in Africa. It’s like, “Of course people have it.” We forget. We forget what life was like 20 years ago, 25 years ago when it was, “Oh, my gosh. That’s impossible.” I think a message for innovators, entrepreneurs, government officials is many market creating innovations seemed impossible before the market is created. They seem like there’s no way this will work, but there are certain ways we can identify the struggle, identify what in our language we call non-consumption, where people who would benefit from having access to a product or service don’t have access. And building the market in a methodical way, that creates a ton of value for society.
Kurtis: You ended off there about building the market. You guys provide this great framework in the book, this distinction between push strategies and pull strategies. The pull is literally in some cases, building that market. I know, Mo Ibrahim had to build a lot of infrastructure around providing telecoms in a place that didn’t have this mobile phone infrastructure before. Maybe a few more examples around the distinction between push and pull strategies. You talk about Henry Ford’s Model T in the US. You talk about Tata in India, the noodle company in Nigeria, all demonstrate this power of pull. Do you want to just explain this distinction?
Efosa: We started this podcast talking about the well that I went into the community to build. That is an example of a push project. When you go into a community, and you see the lack of something. In my case, it was water, and you push what you believe is the solution to the problem. In my case, I pushed a well. I had the best of intentions. I mean, it was a non-profit. I wasn’t getting paid. That is a push strategy.
Whenever you read an article, or you read a report and you say, “Oh, we’re building so many schools. We’re building so many hospitals. We’re building so many fill in the blank,” even investing in anti-corruption measures, that is often a push approach. You don’t typically push bad things. You push good things. You push things that people are going to generally agree with. Like, “Oh, of course. Of course. We need that here. People need water, so the well. Or people need schools, so education.”
The problem is when you go in with a push approach with nothing to sustain it, nothing to pull it in, those solutions last for a little bit and over time, they essentially crumble. The biggest example of this is what happened in Afghanistan, where the US pulled out August of 2021. What you have is billions, hundreds of billions of dollars invested in schools, hospitals, economic development stuff and all that crumbled a few weeks after the US pulled away. That’s a whole country, there was nothing pulling it in.
Now, the distinction here with the pull is very clear. Now the pull approach, it doesn’t happen because you go in and build schools just because schools are good and education is important. No, you’re going in and you’re creating a market. The example I’ll give you highlighted is the noodle company. There’s a noodle company in Nigeria. They sell 20-cent packs of noodles, like ramen noodles for many folks in the US. It’s called Indomie noodles. They go in 1988 they start importing the noodles. They realized, “Man, there might be a market here for noodles.”
In order to make this 20 cent pack of noodles available for the average person in Nigeria, not the richest, but the average person in Nigeria, they realized, “Oh my gosh, we have to build manufacturing plants. We have to build distribution warehouses. We have to set up our own logistics company. We have to set up retail facilities, so that we can sell the noodles to as many people as possible. We have to provide some financing for the retail sites. Oh, and by the way, we have to invest in education, because many of the folks coming out of the schools are not at the level we need them to be.” So they’re investing in education. In some communities, they’re investing in healthcare, because they’re like, “Well, we need the people eating our noodles to be well. We need our workers to be well,” so they’re investing in health care. You see how going in to sell a pack of noodles to people causes you to invest in a bunch of other things. Those things, because they’re pulled in and connected to the strong noodle market, they are sustained.
Henry Ford’s example is the same. Go back 120 years in the United States of America. It was a lot more corrupt. It was a lot poorer. The infrastructure wasn’t the way it is now, at least the transportation infrastructure. Henry Ford says, “I want to build a car for the average person.” His investors laughed at him. Some of them pulled out. Ford started in 1903 and he was making cars for wealthier folks. 1908 was when the model T came around. Some of these guys laughed at him. But Ford said, “I think I can do this.”
Well, in order to do it, he couldn’t just say, “I’m just going to build a better car.” He had to invest in steel mills, iron ore mines, glass factories, paint factories, rubber plantations. You have to build gas stations. As a consequence, many other things were pulled into the American economy. School attendance began to shoot up. Agriculture and farming began to be a lot more productive. The government starts collecting taxes. How do Americans pay for their roads today? It’s taxes. It’s gas taxes and tire taxes.
Now, imagine a poor country trying to build roads without cars. You come to America, you see a bunch of nice roads and so on and so – Maybe not Boston. Our roads aren’t the best. But you see a lot of nice roads. “What was wrong with my country? Why can’t we?” You cannot put the cart before the horse. You cannot have good roads if you do not have good cars. You have to figure out a way to get cars to the average person in your country, and the roads will come, because the cars are taxed. They create more productivity in the society. Those taxes now help you fund a bunch of other things in the economy.
It’s a fundamentally different approach that you go to a country and you say, “Oh, they need roads. They need bridges.” Everybody knows we need that, but what pulls it in? That’s the question we gotta be asking. That’s important.
Kurtis: Just to further highlight the importance of this pull-push distinction, there’s this excerpt from the book where you write, I think it’s early 1900s America, I’m quoting now, “There were no federal agencies for labor. That wouldn’t come until 1913. None for Veterans Affairs, 1930. Health and Human Services, ’53. Housing and Urban Development, 1965. Transportation, ’67. Energy, ’77. Education, 1979.”
None of these agencies would come until well into America’s life as an independent nation. The key sentence here is, you wrote, “These agencies would form and evolve over time in response to public outcry of some sort, or to manage the affairs of a new and thriving market.” This struck me, because traveling to a lot of low-income countries – I just got back, for example, from Kenya and Malawi and Zambia, there are so many departments and agencies and yet, these countries have per capita incomes oftentimes below the per capita income of the US in 1900, which was around 4,500 bucks. Then I think back to when the US was founded and it was founded with just three departments. There was Treasury, State and War. I think an Attorney General was added within the first year, so that made it four departments.
To me, the proliferation of all these federal agencies in low-income countries that often lack administrative capacity, lack appropriate budgets, this just results in something you were alluding to, in agencies in name only. Organizations with the form of the federal agency, but not the function. I think, at least in my experience, what this does is it often just results in a stifling of entrepreneurs, rather than an empowerment of them. I think this has perverse outcomes that governments oftentimes become the only game in town, which further prevents the emergence of this entrepreneurial class.
It’s stories like this that show me, indicate to me that the story you tell and specifically, the chapter on laws and institutions is generally right, but I worry about the fact that really centralized political power often doesn’t have an interest in decentralizing authority. Agencies rarely say, “Actually, I don’t think we’re needed right now. You can close this down until a later date when we have more administrative capacity.” How do you deal with this fact where in many poor places, the business class is really nascent and therefore pretty weak, such that government is often the only game in town and government doesn’t really have an incentive to change that reality?
Efosa: That is an excellent point. It’s a big problem. One of the things that I am not shy about saying is how difficult the problem of development is. You’ve raised a really good one. A couple of things. You talked about the inability for governments to actually perform. Well, that’s also connected to, you talked about their budgets, how much money they have. If you look at America, we’re spending $30,000-ish, the federal government, per person per year. That’s what they’re spending. Nigeria is spending a couple of hundred dollars. Kenya, maybe $400. That’s everything. That’s education, infrastructure, fighting corruption, paying salaries, roads, hospitals, everything. There is no way, absolutely no way the Kenyan government will provide what it needs to provide for the Kenyan people, not in my generation, maybe even my kids’ generation, if there is no fundamental paradigm shift.
I think the first thing we gotta do, you talked about the government, they’re the only game in town and how they may not want to give up some of their power. The first thing we need to do is to educate. Just let them know we appreciate the work they’re doing but in some ways, we have done them a disservice, because we have asked them to do a lot more than they can do. We come into the picture not as, “Hey, give me some of your power,” but we come in saying, “Hey, let me help you, because if I’m successful, your revenues at Nigeria of 200 a year, I think I can double that. I think I can triple that. Here’s why.” Most people are okay with a little bit more money in their pockets.
Now, I’m not saying everybody and I’m not saying every government official will get the message, but I do think there are enough people working in government who will be incentivized enough to listen at the very least. To listen to this reframing of, “I don’t even want your resources. If I’m successful with this, I will triple your ministry’s budget. That is what you’re leaving on the table. I’ll do this before you’re out of office, so that you can reap the benefits.” We have to start thinking in that way. The second is there is a book I’m in the middle of now written by a guy in the UK, who, I know you’re getting your PhD in the UK, I think he’s at Oxford.
Kurtis: Is it Gambling on Development?
Efosa: That’s right. Gambling on Development.
Kurtis: I have him on the podcast in a couple of weeks.
Efosa: Okay. There you go. Well, you tell him, so far I’m a fan, but I think his solutions are still too top-down. But he’s spot on when he talks about, if the elite in a country do not decide to take a gamble and say, “Let me bet on the prosperity of this country. Let me give up some of my short-term gains and benefits, so that I can see this country prosper,” there is no prosperity. I don’t care what you do, what you invent, the elites in a country, which comprise the government and many of the business elites, the folks who are benefiting from the state of the country today, they need to make the decision that we can create prosperity.
I think it’s an incredibly difficult road. There’s no doubt about it. One of the things that I’m starting to research as I think about my next book is, what does it take to lead market creating innovation efforts? It’s not a normal kind of leader that I’m finding. I’ve interacted with so many people since the first book came out and I will be very clear in the second book that if you are not willing to be this kind of leader, please go do other types of innovation. Go and extract more oil and get rich. This is not for you.
This is for folks who have a higher calling. I have to be very clear about that. I wanted this to be for everybody. I’ve wanted this to be democratic, in a sense, but it’s not. It’s really not. It’s almost like saying anybody can wake up tomorrow and run a marathon. You don’t have to train. You don’t have to – That’s a lie. Running a marathon, which is synonymous to building a market creating innovation, it takes effort, it takes willpower, it takes training, it takes perseverance. If you’re not willing to do these things, market creating innovation is not for you. I think the elites in the country, they are the ones who would have to do this. I’m glad you’re – now his name is escaping me.
Kurtis: His name is Stefan Dercon.
Efosa: Stefan. Yeah.
Kurtis: That’s crazy you’re reading his book because in preparation for the podcast with him in a couple of weeks, I’m reading it, too. I got to read it at the same time as yours. I’m reading these two books and I’m like, “Okay, these align in a lot of ways.” One of the things Stefan has been on this press tour. Your book was published in 2019, but his was just published, so he’s been doing a lot of interviews. One of the things he said is that aid has been close to irrelevant in solving the problems of developing countries.
He’s seen nations that have achieved fast growth and declines in poverty. He mentions Bangladesh and Ghana. They do so, as you were saying, thanks to their own elites’ commitment to bring change and not to outside help. The issue is there’s still a lot of aid money out there. If the status quo way that aid is currently directed isn’t really helping all that much as your book and I think Stefan’s seem to attest, then in your view, what’s a better way to allocate that money?
Efosa: I think a better way to allocate aid money, we’ve done this in the past. Go back to South Korea. How did we allocate aid money in South Korea? Go back to Taiwan, how did we allocate aid money in Taiwan? Now, don’t go back to the Marshall Plan, which is what many people go back to, because Europe after World War II was in a fundamentally different place than South Korea was in the 1950s, 60s and 70s. They were more synonymous to many poor countries today. We gotta go back to more apples to apples.
What kind of aid projects were invested in? There were projects that contributed to the economic development of a particular region. It’s not to say they didn’t invest in things like education and so on, but they invested in enterprise. They invested in what I would call economic infrastructure. There was one case where it was either South Korea or Taiwan, where the donors were pushing a particular project, and the recipients were like, “Wait. What are we going to do with this when we build this?” Maybe it was a big port, or a big road, “We are not going to be able to manage it, so we don’t need this,” and they rejected that project. That’s the mentality that needs to be had, vis-a-vis the dollars today.
Now, if we don’t want to go back, if history is too difficult for us, I’ve written quite a bit about this, then it’s not history, then honesty. I started this podcast by talking about the wells that I built and how after a while, I built them, they’d break. We built five wells. They all broke. Now, I had to be honest with myself and say, “If I build a sixth one, or seventh one, it’s going to break.” There cannot be development without honesty. If you’re not honest about what’s working and what’s not, if the aid industry looks itself in the mirror and says, “We’re actually doing good,” they figure out a way to get annual reports and say, “Look at all we did.” And they’re patting themselves on the back, then, Kurtis, I got nothing to say to them, because you cannot look at a wall that’s painted white and call it black, and then you want me to then say, “Oh, Efosa, how would you advise such a person?” I can’t do that.
When they start to say, “Maybe this wall is not quite black. Maybe it’s a little of white,” then we could have a conversation. Until then, I’m sorry, I got nothing, because the answers are too obvious. The answers are, before you build a school, ask yourself, “When funding dries up, how is the school going to be sustained?” Make sure you answer that question. If it takes bringing education entrepreneurs into the mix, bring them in. Do the hard work of changing your processes to get those guys in to sustain schools.
Ask yourself, “What kinds of hospitals are being sustained in this country? How are they working?” Okay, let’s go learn from them. “Can we franchise?” Don’t just build a 200-bed hospital, because the country doesn’t have health care. The reason I’m getting all passionate about this is the answers are there. You just have to be honest. Honesty is key. There’s no development without honesty.
Kurtis: Moving on to the chapter in your book about good laws not being enough. That chapter, it was fantastic. I think it relates to our work here at the Charter Cities Institute, too. We’ve had Yuen Yuen Ang on the podcast in the past to chat about her work on China.
Efosa: I just want this on record, man. I know you might cut out some parts of this podcast, but don’t cut this out. I love Yuen Yuen Ang. I think she’s amazing. One of the greatest economists of today. She is brilliant beyond measure. The way she explains delicate – She’s got a book on corruption that breaks it down in a way that helps us understand that not all corruption is created equal.
Kurtis: She’s great. This is why we had her on, and that book, especially her 2016 one on China escaping the poverty trap has shaped my thinking about institutions and how they evolve. That’s what I found really interesting about her thesis, is this co-evolution of institutions and markets that you and your co-authors get at as well.
She basically says that it was Chinese entrepreneurs trying to build profitable businesses that usually pulled in new rules and institutions that made more sense in this rapid market building phase of growth. Then, these new market building institutions allowed these businesses to then grow and mature. Then as these businesses matured, they pulled in yet more sophisticated institutions that allowed them to function even more effectively. Your chapter, I think, really echoes the chapter on laws not being enough. First, do you want to lay out the main point of this chapter, and then how did Ang’s work influenced it?
Efosa: Good laws are not enough is modeled after this idea that any human being who is not – doesn’t have mental health issues, after a certain age, five, six-years-old, you know right from wrong. You know you shouldn’t steal, take what’s not yours. You know when you get to a stop sign, you should stop at a red light, you shouldn’t go past it. You know what side of the road you should drive on. These are simplistic.
The fact that we codify these things in laws is not what makes people do or not do things. We have to get at the root of the matter. That’s the main idea there. The other is we have evidence now. Matt Andrews, who we cite in the book, Lant Pritchett, Michael Wilcox, I believe. There are a few economists who have data now on these institutional reform programs in many, what people call emerging markets that are struggling. Not because people don’t know what to do, but because good laws just saying, “Hey, this is what you should do,” are not enough.
What we have to do, like many things, is go back and say, “How did we get many of the laws that we now have in wealthier countries?” They emerged. They emerged as people who are trying to solve problems. You highlighted earlier the building of different departments and administrations in the US. That’s very consistent with, market gets created, maybe a decade or two or five earlier, the market gets really big and then we have to figure out a way to wrap our arms around it and manage the growth and evolution of that market better.
As a result, you create a department of ministry that your job is to regulate. What is a regulation if it’s not setting the rules of the game, laws and things you should and shouldn’t do, things like that? The disadvantage today with many poorer countries is many of the rules of the game, they look really, really good on paper. One of the analogies is, how do you have a game with our rules, right? That’s what a regulation is for. Imagine, I just give you a soccer ball and say, “Go play.” I don’t tell you where the goalpost is and so on. That’s how regulations are often pitched. But, we have to understand regulations, every single regulation adds a cost; financial cost, time cost, stress cost. Every regulation has a cost.
We have to then think about the cost to innovation. How does this regulation impact innovation today? Is it stifling it, or is it helping us manage it? You have to ask that. You have to make sure that your laws are consistent with the context in your country in which you find yourself. A quick one on the FDA. Mid to late 1800s, you had the Industrial Revolution in America. Lots of innovation in agriculture. We were figuring out ways to make food, produce more and harvest more, and so on. We got to a place where one manufacturing plant somewhere, one meatpacking plant could impact the health of everybody on the Eastern Seaboard.
It’s like, “Whoa, whoa, whoa. We need to be able to regulate this. We need to manage this.” We’re seeing that now in the US with the baby formula shortage. You’ve got a plant in, I believe it was Michigan shut down, and all of a sudden, we’re all running around. We don’t have baby formula. I got two babies at home, so that’s impacted me. Well, how can you have a similar type of regulation or laws governing a country where over 70 percent of people are subsistence agriculture?
You gotta say, this is how we should do food, does that make sense considering the context in which we find ourselves? Not really. I think making laws that are consistent with the context is incredibly important. How you do it is another question. But, I think, that does need to be the goal.
Kurtis: What I liked about this chapter is it gets at this Hayekian distinction between legislation, which is codified rules and law, social law, social norms, behaviors and underlying cultural attitudes. Me and you talked a bit before the recording started about Charter Cities and what we’re all about. I look at this space and I think 95 percent about what’s written about charter cities and institutions is about formal institutions, how new formal rules within this new jurisdiction can crowd in investment and entrepreneurship and therefore, kick start growth. I’m also a believer that charter cities can kickstart a transformation in informal institutions as well, the underlying norms and behaviors, cultural attitudes, just because thriving cities of opportunity, they create and inculcate, I think, just fundamentally different individuals, different beliefs, different attitudes about the future, than more stagnant, or staid rural areas.
I see a big contribution of charter cities being this change in informal institutions that actually gets talked about very little in this space. You have talked about this in your example of Venice in the book, and the growth of this merchant class in Venice and then the establishment after that growth of that merchant class of the , if I’m pronouncing that right. Can you chat about this a bit?
Efosa: That was an interesting story, actually, that is often used as a way to describe the importance of institutions. You have in Venice, I’m going to mess up the dates, but the 1000s, they had shipbuilders, were merchants who would go out and do long-distance expeditions to bring stuff back. They figured out a way to get more average folks to be able to invest in this expedition.
You could imagine right now the equivalency would be private equity type deals. I can’t invest in private equity deals. I have to be an accredited investor. I have to have so much capital, and so on and so forth. Imagine if you figure out a way to get the average person working a man of five, investing a little hundred dollars in a little private equity deal with 20X multiple. Venice became this booming town and city. So much wealth was created, because now, average folks are able to invest, or more average folks, should I say.
As that was happening, you could see the benefits happen for a few hundred years, and then it gives you the opportunity to advance in society politically as well. Money, even until today, is equivalent to power and it’s very connected to political power. Well, at one point, a bunch of the folks who were now at the top decided, “Yeah, let’s actually change the law and not make it possible for people who are lower than we are to be able to invest.” That led to the decline of Venice.
Now, what that showed me was the importance of market creating innovations, the importance of increasing access to a lot of people, so that they could invest and they could build wealth for themselves and for the city. It also made me realize that at any given time, those in government have this unique ability to decide the future of a particular country, what it does or doesn’t do. We say, “Oh, if it’s a democracy and .” True, but let’s think about the United States over the last six, seven years. Think about the presidency of Donald Trump. Think about one of the first things he did was pulling out of the Paris climate agreement. Think about the Supreme Court that we have today.
The strength of your democracy does limit certain powers of people. But don’t be fooled that those in power have this unique ability to decide in some ways the direction of a country. That for me, underscored not the importance of government, but further the importance of innovators, because there’s almost nothing I can do about the next president. I can’t do anything about President Trump, or President Biden, or the governor of my state. I mean, I could try to vote them out, but what they do in office, I don’t know.
But there are things that I can do to empower other citizens so that at the very least, especially when we talk about poor countries, they have enough food to eat. They can educate their kids. They can access health care. Those things, we have a little bit more control over, versus the guys up top.
Kurtis: I want to maybe move on to one of the case studies. You write about, among others, Mexico. I want to play devil’s advocate here for a bit. Economists, Acemoglu and Robinson, they write about Mexico at the beginning of their pretty famous book, Why Nations Fail, which is about the primacy of institutions for economic development. They first tell the story of how Bill Gates made his billions in the US, founding Microsoft, one of the most innovative companies ever.
Then they contrast that story and those innovation-inducing American institutions with the story of Carlos Slim. At border of Mexico, made his billions. They say Mexican institutions are such that they more rewarded the political connections of Carlos Slim. Then they rewarded innovation. They rewarded Slim for getting Mexican law and bureaucrats to erect barriers to entry for his competitors and to protect his own company’s monopoly power. Therefore, Slim’s time was better spent on these rent-seeking activities, than on innovating new products, or new markets, like Microsoft. How do you square this story from Acemoglu and Robinson with your story about institutions being pulled in, rather than a precursor to growth?
Efosa: When I hear stories like that, they’re true, but they’re incomplete. Number one, Mexico is in a different phase of development than the US. That’s number one. Mexico’s per capita income is what, a fifth of the US? Something like that. You gotta go back six decades if you want to do apples to apples. That’s number one. Number two, a story like that implies that all our laws and institutions in America are just inviting of innovation.
It wasn’t until President Biden a few weeks ago, we’re in June 2022, just for the record, he instituted a decree where we could now import baby formula from other countries. You had essentially a duopoly of baby formula. This baby formula is not a national security threat. America, we love freedom. We love innovation. We love enterprise. We have erected barriers that prevent Germany from selling us its baby formula. Let’s not even start talking about prescription drugs. When you hear that, this assumption that America has these institutions that are so inviting of innovation, and is amazing and so on, but it’s not complete. It’s not false, but it is incomplete. We should tell the full story.
The second thing I’d like to say about that is, as amazing as America’s institutions are, we’ve got a lot of problems, too. The average American today has a problem with, if you slap them with a $1,000 – You have a $1,000 emergency, the average American cannot find that money, and it would cause them stress. This is the richest country in the world. This is the country where innovation, institutions and so on. So, we have to be very careful in how we talk about Bill Gates and he was able to build Microsoft and this thing. How has that trickled down to help the average American in the richest country in the world to be able to afford a $1,000 emergency? We’re not all innocent.
Mexico is not perfect. They have a ways to go. It does help explain why perhaps, it’s not even the only thing, I mean, the fact that we’re English speaking and the language of business in the world is English, to me, it also has a role to play, and Bill Gates being American versus Mexican. All these things matter. It’s not as simplistic as the institutions were right and Carlos Slim took advantage. That’s part of it, but that’s not the whole of it.
If I ever get a chance to talk to those guys who are incredibly much, much smarter than I am, I’m sure it would be a rich and interesting conversation. I have struggled with the book Why Nations Fail and how it simplifies the issue of economic development. Maybe this was not their intention, but people who read it just talk about institutions. Let’s build inclusive institutions as if institutions just fall down from the sky. No, no, no. These things, they emerge, they evolve over time. You don’t just build inclusive institutions. I think in some ways, that book unintentionally has done more of a disservice to actually helping countries than I think the authors might have intended.
Kurtis: One more on Mexico, one more devil’s advocate point. You already touched on the differences between the three types of innovation with sustaining, efficiency innovation, market creating innovation. In your Mexican case study, you guys say the problem, I guess, of why Mexico is stuck in this middle-income trap, you could say, and hasn’t continued to higher incomes, like for example, South Korea has, is because Mexico’s type of growth has mainly been based on efficiency, innovation, minimizing costs and getting more for less, as you said at the beginning.
This is typical, you mentioned, of extractive industries, but also manufacturing industries. In this chapter, you discuss the maquiladoras in Mexico, these manufacturing sharing operations that are duty-free, or tariff-free. On this point, hasn’t, for example, textile manufacturing being just this amazing basis from which many countries have started on their industrialization trajectory and began to slowly but surely jump up the value chain from there? I’m thinking not just Mexican maquiladoras, but China, Vietnam, Mauritius, Bangladesh, Ethiopia before the Civil War. What am I missing here? Isn’t this type of efficiency innovation around manufacturing good to kickstart growth and then enable marketing creating innovation later on?
Efosa: Well, I think in many ways, Kurtis, you’ve answered the question. You said, good to kickstart growth. You used the word kickstart a couple times as you asked. We must see the investment in efficiency innovations as the beginning, not the end. The goal is not to have a manufacturing hub somewhere, where we manufacture a bunch of stuff. That’s not the goal.
The goal is to have people wake up every day, have access to good jobs, well-paying jobs, and they can take care of their family and their responsibilities. That’s the goal. When we make the goal construction and manufacturing things, exports and so on and so forth, I think we’re missing the point. All those countries you mentioned, which I think we highlight in the book, China, that was making textiles, the goal was just make a bunch of shoes in China and that’s it.
China would not be sending the United States over 150 billion dollars of what’s called advanced technology products today. Those are the highest-end semiconductors. Taiwan, China, there are issues about the two regions, or nations, whatever you want to call them. We get a lot of advanced technology products from these countries. You have some of the most innovative companies in the world investing in China. Not because they want to go and make T-shirts there. We don’t have a similar thing in Mexico. 1994 and after kicks in and we send a lot of car manufacturing over to Mexico. I don’t drive a Mexican car. It’s still efficiency innovation. That’s 20 something years since 1994.
The key here, I’ve written about this a lot, is not exports, it’s not manufacturing, it’s not even industrialization. The key is innovation, and innovation is learning. It is changing that process by which you transform inputs to low value to outputs of higher value The key is a Mexican working in one of these Mexican plants for Ford, or for GM saying, “Huh, I could learn how to build a spark plug a little better and start a small company to get some financing.” You can begin to see an industry, the whole ecosystem bubble up around that entrepreneur, or a group of entrepreneurs. That’s what development entails, not building a textile plant, or something like that.
It helps, but Lesotho, for instance, I wrote about how Lesotho invited a lot of textile manufacturers, taking advantage of a trade that was a WTO deal that limited how much textiles the countries in the East could ship to Europe and America. What did they do? They went to Africa, take advantage of AGOA, Africa Growth and Opportunity Act, and they built a textile manufacturing in Lesotho. That is all they did in Lesotho. There’s not been learning. There’s not be an innovation.
What happens in Lesotho when the WTO charter expires? 25 percent of people in Lesotho lose jobs. These aren’t great jobs. It was textile jobs. $50 a month. That’s not prosperity. For me, I see it as a stepping stone, not a destination.
Kurtis: You talk about, and you’ve mentioned this before, when I brought up Yuen Yuen Ang, you talk about hiring and firing corruption, which I like that terminology, and that basically, people who bribe, or are party to some corrupt act aren’t often morally bankrupt people. They hire corruption to get a job done, or solve a struggle they have. What are the implications of this view of corruption for how to lessen corruption and mitigate its more distortionary impacts?
Efosa: Kurtis, that’s an interesting question you ask about corruption. Maybe I’m putting words in your mouth, but the way I heard that question was, “If we begin to think about corruption differently and why people might hire it, that somehow we might let people off the hook, suggesting they are not completely morally bankrupt.”
Well, just a couple of quick reactions to that. The first is, we’ve been treating corruption a certain way for the last several decades, demonizing and bastardizing people who are involved in it. Where has that gotten us? From almost all indications, it looks like corruption is getting worse. That’s the first. The second is, I think our jobs as researchers is not to moralize. It is to understand. We think about corruption the way a scientist with a cancer. When you see a cancer in someone, you don’t immediately say, “What’s wrong with you? Why did you get that cancer? What have you been eating, or drinking, or whatever?”
You try to understand the cancer. Where did it come from? Why is it here? How is it growing? How is it spreading? Is it going to kill you? Is it not? Is it going to help you change certain behaviors in your life, so that you might even live a better life? Some people that get cancer and the tumor goes out and they start living better. We have to understand it. That is the approach we are trying to take with corruption. Let us understand it. Let us understand, why do people even engage in this terrible, terrible behavior?
After we understand it, then we can prescribe solutions to mitigate it. Not eradicate, but to mitigate. Because I think, wherever you have humans, you will have corruption, regardless of how rich a country is, or morally excellent. So, that’s the approach we’ve taken to corruption. We think it has legs. We think it’s consistent with the other amazing economists. You’ve mentioned Yuen Yuen Ang, who writes about the different types of corruption and how some types actually can instigate economic development. We should not have a simplistic view of corruption, “It’s bad, let’s eradicate it.” No, no, no. We have to be more intelligent than that. We really do, if we are serious about solving problems.
Kurtis: Clayton Christensen was one of your co-authors on this book. He passed away a couple of years ago after the book’s publication. He was a pretty famous professor at Harvard Business School and especially well known for his theory on disruptive innovation, which is pretty notable throughout the book. Can you just talk about him as a mentor, how you guys came to work together, and what major lessons you learned from collaborating with him?
Efosa: It’s not an exaggeration when I say Clayton Christensen changed my life in every sense of the word. Changed how I am as a person, as a writer, a researcher, a thinker, a professional, a husband. He changed my life. I think the way he did it was he saw me not as just a work colleague who could get things done for it. He saw me as a person and he chose to love me. See, I think the word love today is often left out of the workplace. You love your family. You love your friends. Maybe you don’t even love your friends anymore, but you love your family.
I think, if we grow to love the people we work with, and what do I mean by that? I mean, I’m talking, you love them in the sense that you look at them and you want the best for them. You want the best for their families. You want them to thrive. We can make this world a better place. That’s what Clay gave me. I knew he wanted us to do good work, but I knew he wanted me to be a better person, a better version of myself.
He exemplified that with his life. He was generous with me, with the opportunities he gave me, to speak on stage with him, to co-author this book with him, to travel the world with him. One of the last trips we went on was in South Africa. I’m not just saying he loved me. He showed me practical ways that he wanted the best for me. I talk about Clay every chance I get, at every opportunity, so that I never forget what you did for me and what my job is for the people who I’m working with, but also, to perhaps change the mind, or help, or encourage somebody in the crowd who might hear how Clay was to me and then be that to somebody else. He truly, truly was a man that transcended the work he did. He was a special person.
Kurtis: I’m pretty convinced that the innovation that Christensen wrote about is made possible through mentors, like he seemed to be. I’m glad you two were able to come together and produce this innovative book. Last question here, what are you working on now, Efosa, and what’s your next project?
Efosa: Thank you, Kurtis. You’ve been very kind over this last little over an hour we spent together. I thought we’d be done in 30 minutes, but I think we could go another hour. You’re going to hear it first, everyone listening. I’m working on part two of The Prosperity Paradox. For now, we’re calling it The Prosperity Process. When Clay wrote The Innovator’s Dilemma in 1997, he introduced disruptive innovation. Many people were like, “You can’t just introduce disruptive innovation and not tell us how to go do it.”
Well, in 2003, he published The Innovator’s Solution. On the day The Prosperity Paradox came out, Clay sat me down that same day as we were celebrating. He said, “Efosa.” This is another way he showed me he loved me. He said, “What’s next for you and how can I help you?” Right there, I said, this is January 15th, 2019. I said, “Clay, you know what you did for Innovator’s Dilemma and Innovative Solution, well, I want to do the same for The Prosperity Paradox. I want to write The Prosperity Process.” He said, “All right. Well, let’s go figure out how to do that.”
Unfortunately, he got really sick a few weeks later, and I was in and out of the hospital, and then he passed away. I think, the next project has to be The Prosperity Process. This market creating innovation we talk about and how do we make it a little bit easier for the hard-working innovators out there to do it? I don’t know the answer to that, Kurtis, but I hope that in a couple of years after I’m done writing, I can come and share one or two things that I learned along the way. That’s the hope.
Kurtis: Efosa Ojomo, that’s all the questions I had. Thanks so much for coming on today. I really appreciated it.
Efosa: Absolutely. Thank you for the work you’re doing and I wish you all the best.
Kurtis: Thanks so much for listening. We love engaging with our listeners, so please always feel free to reach out. Contact information is listed in the show notes. To find out more about the work of the Charter Cities Institute, please follow us on social media, or visit chartercitiesinstitute.org.