The Indian Economy Blog

August 31, 2005

Wealth Creation, Not Wealth Substitution

Filed under: Growth — Amit Varma @ 11:07 pm

CK Prahalad writes in the Wall Street Journal (subscription link):

There is an inherent paradox in the debate about poverty alleviation that escapes even the most sophisticated observers in the West. Consider the conventional thinking about China and India: They are seen as a threat to the West. The fear is not only about “exporting well paying U.S. jobs” but also about competition for resources such as oil and commodities. Yet India is home to more than 500 million people who live on less than $3 a day. In China, the number may be around 400 million. Just these two countries represent 900 million people in poverty, a larger number than the entire population of Africa. There are about 600 million in Africa who live on less than $3 per day. Why, then, do China and India evoke fear and anger, while Africa elicits pity and guilt?

Despite the magnitude of their respective poverty problems, China and India may have a chance of meeting the Millennium Development Goals established by U.N. Their economies are following the lead of other countries that have raised their populations into a middle-class economic base. For example, between 1975 and 2004, GDP per capita in South Korea increased fourfold. Over the same period, Malaysian incomes rose threefold.

On the other hand, in those decades, per capita incomes in Nigeria declined by a tenth. Why? During the period 1955-2004, the West and multilateral institutions invested more than $1 trillion in aid and subsidies in emerging economies. But poverty persists.

Prahalad questions “the role of aid and subsidies in promoting sustainable economic development,” and says that the quickest route to alleviating poverty is to allow private firms to explore the bottom of the pyramid. (By and by, have you read Prahalad’s book?) One example:

Consider “connectivity.” Between 1998 and 2004, the number of mobile-phone users in Africa grew 41-fold to 81 million — the fastest growth in the world. The spread of mobile phones in Africa illustrates the power of market-based solutions to usher in social and economic transformation. Bottom-of-the-pyramid consumers understand and accept high technology and are willing to pay for it. A focus on access, availability and affordability is needed to create markets at their level.

Entrepreneurs have created this capacity to “consume” connectivity in Africa. The spread of cell phones around the world — estimated to reach two billion by 2006 — will be accomplished by the private sector (likely in the face of stifling state regulation). The private sector has made investments to create a marketing ecosystem for connectivity. So why not in other products and services?

Prahalad concludes, and I couldn’t agree more:

To “make poverty history,” leaders in private, public and civil-society organizations need to embrace entrepreneurship and innovation as antidotes to poverty. Wealth-substitution through aid must give way to wealth-creation through entrepreneurship.

If you have a subscription to the Wall Street Journal, read the full piece here.

(Link via reader Anuj Tiku.)

5 Comments »

  1. I would also say that a well-functioning transportation network is
    essential in civilizing a country ie keeping it away from anarchy.
    That could also be a difference between India/china and africa.

    By the way, despite new National Highways and cheap airlines, the
    travel in India is getting less and less civilized, thanks
    to Indian railways dysfunction and Govt’s determination in
    not funding Railways’s much needed track expansion (mainly track doublings)
    It is very peculiar that in the time of rising oil prices, the Govt
    encourages air travel by putting in thousands of crores for airport
    construction and also private investment. While much more efficient
    railways (which also provides for travel for 95% of Indians)
    is largely disregarded. It is as if the Elite of bureucrats, politicians
    and high journalists have decided that they only care for air travel and
    let the middle and lower classes goto hell.

    Comment by Vishal — September 1, 2005 @ 6:40 am

  2. Two comments:
    1. This notion that China and India evoke fear is exaggerated. Of course, there will be political debate about outsourcing jobs, but has the US actually done anything about it? No. The developing world is benefiting from these emerging economies and global growth is good for everyone. There is a HUGE difference between Africa and China/India. There is so much concern about Africa because there seems to be no hope in that continent. China and India have up-and-coming economies, India has a flourishing democracy, both countries are on a hot path to growth. Africa on the other hand is full of corrupt dictators, genocide prevails, their institutions are in shambles– OF COURSE we need to be concerned about Africa.

    2. Prahalad is using very faulty logic in trying to say that Africa got aid but is stil poor so aid is bad. Replacing government by private agencies at the “bottom rung” is risky business. Can we count on private entrepreneuship to provide BASIC amenities like education and health if there is no big profit in it? And what happens if they decide to pull out suddenly? Cell phones are NOT basic amenities like food or water or shelter. They involve large technologies-of-scale that make them profitable and attractive to entrepreneurs. But what a WEAK example in trying to use the cellphone industry to model provision of basic human needs!!

    Comment by Ishani — September 1, 2005 @ 9:06 am

  3. Vishal

    Apropos your comments about railways being disregarded.. che3ck out Atanu Dey’s essays
    1) http://indianeconomy.org/2005/07/17/an-integrated-rail-transportation-system/
    2) http://indianeconomy.org/2005/07/22/irts-part-2/

    Comment by Prashant Kothari — September 1, 2005 @ 11:16 pm

  4. for non subscribers for wsj
    the article can be seen at
    http://www.ivanyi-consultants.com/articles/wealthcreation.html

    Comment by GGK — September 9, 2005 @ 5:13 pm

  5. One major factor in staying independent of the west is to keep your currency “untied” to the US Dollar. India is the largest democracy in the world. People forget that. China and India have the momentum as emerging economic powers. This will always threaten whoever is currently at the top. Create your wealth within your borders. Stay away from foreign ownership and employ your own people.

    Comment by Wealth Creation — December 28, 2005 @ 7:03 pm

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