At the 2015 Quartz Africa Innovators Summit in Nairobi, one of Kenya’s best known tech investors and activists, Ory Okolloh, spoke about how entrepreneurship was being promoted to the point of being fetishized in Africa. Referring to the lack of basic infrastructure and weak governance, she famously said, “You can’t “entrepreneur” around bad leadership, we can’t “entrepreneur” around bad policy.”
That sentiment was widely hailed at the time and since then and has become quite popular. But what if sentiments like that inadvertently delay progress by causing us to demand “rich-country institutions” that just can’t work? Or more importantly, what if it actually blinds us from seeing the critical role entrepreneurship plays in helping Africa overcome bad leadership?
Rankings such as, World Governance Indicators, Corruption Perception Index, and the Global Competitiveness Report do a great job in contrasting the many failings of African governments with the successes of rich-country governments.
But they don’t tell the whole story. Consider this. In addition to being severely debt burdened, African governments have very limited funds to spend on their citizens; the average expenditure African national governments spent per citizen in 2017 was around $740. DR Congo, Central African Republic, and Burundi spent $39, $57, and $65 per citizen respectively. Contrast that with Norway, Denmark, and Sweden that spent $36,871, $30,415, and $27,000 per citizen respectively.
Considering the severe lack of financial resources, which often dictate the level of technical, managerial, and operational capabilities of a government (you get what you pay for, even in the public sector), it is incredibly difficult to expect poor-country governments to function similar to the ones in rich countries. They’ll always end up at the bottom of indices like the aforementioned, and whatever progress some progressive new government makes is often short lived.
Thankfully, there’s hope for governments and citizens in economically poor countries.
Innovation’s value creation
Understandably, innovation and entrepreneurship are often assumed to only be possible after a society develops, that is, after it fixes its institutions and builds reliable infrastructure. However, as we describe in our book, The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty, innovation is the process by which societies develop.
More specifically, market-creating innovations, which transform complicated and expensive products into products that are simple and affordable so that many more people in society can have access to them, provide the most stable foundation for economic development that can lead to social change.
The most visible example of this phenomenon happening in Africa is in the mobile telecommunications industry.
From barely nothing in the late 1990s, today virtually every African country has a thriving mobile telecommunications sector. Before this new industry was created, access to mobile phones were limited to those who were wealthy, but new business models made telecommunications so simple and affordable that the average African now has access to mobile phones.
This industry has not only generated hundreds of billions of dollars of value, but also provides tens of billions of dollars in taxes annually and is responsible for more than three million jobs across the continent. In addition, thousands of other African startups—from payments and insurance to health and logistics—are leveraging this vast network to build new companies.
If the bold entrepreneurs such as Mo Ibrahim and Strive Masiyiwa—who risked capital and reputation to build this new industry—had waited for African institutions and infrastructure to develop, they’d still be waiting today. Instead, they created a new market that served the vast majority of people and that has led to significant development.
Innovation to governance
What makes market-creating innovations so powerful is that they create jobs that provide income for many more people, and for the governments as well via taxes and licenses. This new dynamic not only empowers citizens to demand more from their governments, but it also begins to change the social contract in the region. In our research, we’ve seen this phenomenon play out in many prosperous nations today that boast “good governance.” Consider the United States, Europe, and fast growing East Asian nations.
In the United States, as more people created wealth for themselves during the Industrial Revolution, their dissatisfaction with corruption and government mismanagement was taken more seriously. “Politically, the rage of victims counted for very little in 1840, not much in 1860; by 1890, it was a roaring force” is how Stanford Law Professor Lawrence Friedman put it.
During that era, the United States saw an increase in public outcry against government corruption and mismanagement. This gave rise to organizations such as Good Government Clubs, many of which fought to reform their local governments.
As America’s prosperity grew, so did the strength of these clubs. In their paper, The Rise of the Regulatory State, Edward Glaeser and Andrei Schleifer note, “American capitalism of the 1920s was less corrupt and abusive of workers and consumers than it was in 1900.” And most would agree that American capitalism today, while not perfect, is definitely more consumer and worker friendly today than it was in the 1920s. As innovation increases, governance improves.
This isn’t strictly an American phenomenon, however. In his book, Prosperity and Violence: The Political Economy of Development, Robert Bates describes the process by which corrupt and authoritarian European governments were forced by a growing middle class to build modern democratic institutions, including parliaments, that began to dictate budget expenditures, and courts, that grew in their power to arbitrate disputes among citizens.
And in several prosperous Asian countries, a similar evolution of their institutions and governance occurred. In Economic Growth and Development: A Comparative Introduction, Matthew McCartney provides evidence illustrating how fast growing East Asian nations shared similar “bad” governance characteristics in areas such as bureaucracy, rule of law, corruption, expropriation risk and contract repudiation, to poor-performing countries.
But as those countries became more prosperous, through investments in innovations, their governance equally improved. McCartney concludes that, “improving institutions was an outcome not a cause, of rapid growth in East Asia.”
And so, could it be that we have the equation backward in Africa? While governments should not be absolved of their responsibility to develop strong political and economic institutions that enable their constituents thrive, it seems that most efforts at instituting good governance in poor, African countries lead to little, if any, progress. Clearly, there must be a better way.
Development isn’t a linear process, and innovation and entrepreneurship alone won’t solve governance challenges or build strong political institutions. But market-creating innovations are often what begins the process of societal transformation, especially in poor countries. Though entrepreneurship is by no means a substitute for good governance, it is the best vehicle to achieve it.
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