When It Comes to Promoting Prosperity, Production Beats Consumption

What is the most powerful route to prosperity? And how can philanthropies fund it? For most US-based foundations, the answer has traditionally been to focus on confined problem areas, projects like reducing malaria incidence, improving school attendance, or increasing access to safe drinking water. Between 2016 and 2019, nearly half of global giving by US foundations went to health, while environment and human rights accounted for roughly 11 percent each, followed by agriculture and education.

There are many reasons why foundations structure their giving in this way. They may feel that their limited resources are only sufficient to address problems of similarly limited scope. Or they may want to be able to attribute specific outcomes to their funding. Or they may have particular interest or attachment to certain social causes. Humanity has achieved unprecedented gains in areas like health and education—at least in part due to philanthropic efforts that help people to consume more of these basics. However, there are limits to how much we can improve human well-being if, to put it simply, entire countries don’t get richer. Better boats are fine, but what we need is rising tides.

In this sense, many international development philanthropies are neglecting the most powerful route to prosperity: productive employment in a thriving economy. The empirical record is clear. Around 70 percent of the reduction in child mortality in developing countries between 1950 and 2018 would be expected based only on those countries’ income gains during that period. The story remains the same
across education, health, nutrition, housing, and safety: Adjusted for purchasing power, no country at around $3,000 GDP per capita (e.g., Nepal, Uganda, or Zambia) provides its people with these basics as effectively as any country at around $6,000 per capita (for example, Belize, Kyrgyzstan, or Vietnam). This gap only widens when you consider countries with GDP per capita even greater than $6,000.

Even though most development funders are based in countries that have already gone through system-level economic transformations—making it possible to accumulate philanthropic resources in the first place—they tend to focus on individuals as recipients or as consumers, not as productive workers in a growing and diversifying economy. While there is merit in supporting people in low-income countries to obtain better education, better health services, and cleaner water, their capacity to do so will remain limited without substantially more financial resources at their disposal.

Historically, these resources have only materialized when countries have achieved massive expansions of economic productivity and opportunity. In the absence of this kind of broad economic transformation, people in developing countries will only be able to improve their lives on the margin. By seeing them as—and helping them to become—producers of goods and services that can be sold to the rest of the world, funders can more meaningfully empower people to participate in their communities and societies in a dignified way.

Even philanthropists working on the economic issues of jobs and incomes tend to sidestep the root problem of how to strengthen an economy’s productive capabilities. Agriculture programs, for example, often focus on food security rather than achieving productivity gains, despite the fact that countries have not historically “smallholder-farmed” their way into prosperity. For all that entrepreneurship has spread across the world, the kind of “survival entrepreneurship” so prevalent in developing countries today—in which people have no choice but to run a small business, and make just enough to survive—has not been transformative at the level of a country. The most cost-effective livelihood and graduation programs—consisting of some combination of cash transfer, asset transfer, and training—may increase income and consumption in the range of 15-150 percent, which is heartening. Yet these numbers are still a far cry from the kind of 10- or 20-fold increase in incomes that would actually put many countries on a true path to prosperity, the difference between being rich in Niger (an income of $5 per day) and being rich in Norway (an income of $111 per day). A poor person in Norway earning $33 per day is six times as materially well off as a rich person in Niger. There is, in this sense, a ceiling to what vocational training or other interventions on the labor supply side can accomplish, because good jobs are scarce (labor demand is lagging).

From Consumption to Production

We need to change our perspective on the problem: seeing through a consumption lens orients us toward an arbitrary, and unacceptably-low-by-Western-standards poverty line. It diverts our attention from the core challenge of building high-value production, which developing countries themselves know is the key to their prosperity.

In the social enterprise and impact investment space, reliance on the “individual as consumer” frame can perhaps be traced back to C.K. Prahalad’s influential 2004 re-framing of the poor as consumers in The Fortune at the Bottom of the Pyramid. Asserting that the poorest people in the world actually represent a huge consumer market—a core concept that has underpinned much of the philanthropic and social innovation universe—not only promised more and better products for the poor, but also greater dignity by being treated as a customer. But while the shift from passive beneficiary to active customer represents increased agency, this line of thinking presupposes that the poor will remain so for the foreseeable future; the objective is simply to maximize their purchasing power at still-low income levels.

This is not to deny that there are meaningful gains to be achieved by improving goods and services available to the poor. The proliferation of solar lighting to replace kerosene and other dirty fuels, for example, has led to a 3-12x increase in performance quality (in lumens) at lower monthly cost, a substantial efficiency gain for poor households (in addition to health and convenience benefits). Similarly, for roughly $1 per person per year, low-cost chlorine dispensers have enabled access to safe drinking water, and thus better health outcomes, for several million people. This is not insignificant.

But while there may be greater dignity in being a customer than a recipient, is there not even more dignity in being a breadwinner that can use their own growing financial resources to consume more and better goods and services? Once we view people in developing countries not simply as consumers of goods and services but also as people who can and should contribute productively to their economies, we are in a better position to see where the most important leverage points might be. The ability to produce more and more sophisticated goods and services that others want underpins a country’s ability to advance economically. To do so, a range of inputs is required: land, infrastructure of various types, raw materials, policies and regulations, machines and technology, and critically, the know-how of individuals and groups to bring these all together for the purposes of producing something.

This presents a conundrum: developing countries struggle to put these inputs in place because to do so requires substantial financial resources, but these inputs are required to become richer and thus accumulate those resources in the first place. To wriggle out of this conundrum, developing countries have to embark on a journey of learning, about what can be produced competitively in their place and about what specific inputs are needed to do so. This learning takes place in, and is best done by, the firms that are doing the production. Many of the countries that experienced rapid economic catch-up in the 20th century (particularly in Asia) have dedicated substantial attention and resources to learning within firms, which enabled them to compete internationally and hence achieve rapid gains in material well-being.

Funding to Support Production

Philanthropy can be catalytic in bringing the production-based lens to the fore. First, funders should provide more support to “doers” that are directly working to expand developing countries’ productive capabilities; in other words, funding economic systems change. Some of these doers work at the level of the individual firm, such as Gatsby Africa and Wadhwani Advantage. There is solid evidence pointing to promising interventions yet to be scaled–such as support to firms on management practices and export facilitation–that encourage firms’ productivity and performance. Other doers—like our own organization Growth Teams, or the ODI Fellowship— work at the policy level with governments, to formulate more sound policy proposals or to enable better implementation of governments’ economic strategies. Various others work in the space in between, like Charter Cities Institute on urban development and economic clusters.

Needless to say, this kind of work will not fit neatly in the conventional thematic categories that organize philanthropic funding today. Enterprising philanthropists will need to either accept some breaks with custom, allowing activities to fit in the white space outside their usual buckets, or add a new category to the standard mix. Of course, it’s important that philanthropic resources allocated to what one might call the “prosperity” portfolio not be a giveaway to market actors. On the contrary, just like in education and health, there are positive knock-on effects that philanthropists can unlock by supporting doers in this space. Productive employment opportunities not only directly increase incomes; they also enable people to invest in other aspects of their well-being and stimulate productive work in other parts of the economy.

Second, to the extent that philanthropies and social impact actors continue to direct resources toward specific problem areas, they should do so in a way that is explicitly tied to the central objective of expanding productive capabilities in developing countries. Take formal education, for instance. It is obviously important for countries to prosper in the long run, but it is also the case that it takes nearly two decades for someone to complete formal schooling, and hence to produce substantial economic returns. In many countries, learning outcomes have lagged for so many years that despite the increase in years of schooling, we see significant mismatches in the labor market between skills in demand by firms and skills that workers possess.

Low levels of formal education, however, have not prevented countries from embarking on their economic transformation journeys. Fifty-five percent of Taiwanese were illiterate at the end of WWII, with the illiteracy rate only improving to 45 percent by 1960. Literacy in South Korea in 1950 was lower than in Ethiopia today. These countries had to figure out how to productively employ their workers, with whatever skills they had at the time. They could not wish away the question of what to do with them, just like today’s developing countries cannot.

Philanthropies working in the education space should therefore look beyond the formal education system, for example, by facilitating staff secondments to developed country firms to encourage technology transfer (e.g. as Korean firm Daewoo did with Bangladeshis in garments), or providing more and more effective training support to firms on efficient operations and management. Faster economic progress will itself enable families to invest more in their children’s education and hence to demand better quality from the education system, which, in turn, can enable further economic progress as the economy advances and diversifies.

The question of re-orienting toward production over consumption isn’t completely alien to the West. The United States’ economy has grown on the back of consumption in the last few decades, fueled by globalization and free trade that facilitated cheap imports and thus an increase in consumers’ purchasing power. The limits of this approach, however, have now been recognized. As evidenced by the recent passage of the bipartisan Infrastructure Investment and Jobs Act and the CHIPS and Science Act, there appears to be widespread belief across the ideological spectrum that the United States should re-center its productive capabilities in order to build a more prosperous economy and create good jobs.

Philanthropists, social entrepreneurs, and impact investors should extend this same vision to the international development work that they support.

Read more stories by Kartik Akileswaran & Jonathan Mazumdar.