How to ensure inequality isn’t a lasting consequence of the pandemic

14 Jul 2020, 12:00 am
Lincoln Wilcox
How to ensure inequality isn’t a lasting consequence of the pandemic

Feature Highlight

The road to an inclusive recovery from the current pandemic runs through market-creating innovations.

KIA T600 three-wheeled car

The novel coronavirus has made the global economy sick. While the economic costs of the pandemic are certainly secondary to its tragic toll in loss of human life, the financial downturn has nonetheless been devastating for billions suffering from reduced or lost livelihoods around the globe.
    
The economic malaise caused by the pandemic manifests itself through a variety of symptoms. For instance, the total loss to global GDP due to the pandemic may reach $9 trillion, the equivalent of Germany and Japan’s entire economies combined, and nearly half the world’s workforce has been put at risk of losing their livelihoods.



Among the most concerning and potentially enduring economic effects of the pandemic is inequality. Pandemics tend to have the harshest repercussions for those who were poorest before the outbreak hit, while wealthier individuals rebound more quickly. This has been the case in the current pandemic; though job loss has been indiscriminate, less educated, low-income workers who don’t have the option of working remotely have been particularly vulnerable. The UN estimates that some 1.6 billion of the world’s 2 billion informal workers have suffered “massive damage” to their ability to earn a living.

This pattern isn’t just true for individuals. For businesses and even countries as a whole, those that are less wealthy and developed are less prepared to handle a severe economic shock like the one caused by COVID-19.

Treating inequality

As economies look toward recovery, it’s vital that success be defined by inclusive growth, not just general macroeconomic health, measured by indicators like GDP.
    
Growth is not synonymous with widespread, shared prosperity. For example, a car company that automates parts of its manufacturing process may become more efficient and make more money, but this often means laying off employees who are no longer needed. While the strategy may lead to raw economic growth, it has a negative effect on shared prosperity.

In our research, we’ve found that one of the best ways for robust, inclusive growth to take place is for entrepreneurs to target the needs of nonconsumers. Nonconsumers are people who would benefit from using a product or service but are prevented from doing so because the available options are too expensive, time-consuming, or are otherwise inaccessible to them. When an innovator transforms a complicated, expensive product into one that’s simple and affordable, she can create a new market that helps nonconsumers make progress in their lives. We refer to this as a market-creating innovation.

Market-creating innovations have two powerful effects when it comes to combating inequality. Firstly, they pull consumers into the economy who previously resided on its outskirts, enabling them to get the products and services they need to live better lives. Secondly, serving these new markets necessitates hiring a new network of local workers to make, distribute, and sell products to consumers who haven’t been served before, helping direct profits into less wealthy communities where nonconsumption tends to flourish.

Take the example of Kia Motors. After the devastation of WWII, executives at the company realized there were tens of millions of South Koreans who would benefit from an improved transportation solution, but for whom conventional options like regular cars were too expensive and inaccessible, leaving most people to get around by foot. Kia began by selling bicycles and later developed simplified three-wheeled cars that were affordable enough for many Koreans to own.

By transforming a previously expensive product into one that was simple and affordable, Kia tapped into an enormous population of nonconsumers and created a vast new market for cars in South Korea. To support this market, the company had to hire thousands of local workers to manufacture, distribute, sell, and service its automobiles. Not only did Kia help average Koreans access a product that made their lives easier and more productive, but the new market it created generated robust, inclusive growth that continues to lift millions toward greater prosperity.

In addition to Kia, our research has uncovered hundreds of examples of market-creating innovations that have created shared prosperity in economies around the globe. M-Pesa has given millions in Africa access to simple, affordable financial services and is an engine for growth in the regions where it operates. AirBnB did the same with affordable lodging for travellers in the wake of the great recession, providing additional incomes to hundreds of thousands of homeowners in the process.

The road to an inclusive recovery from the current pandemic runs through market-creating innovations. By targeting the needs of nonconsumers around the globe, today’s innovators can fuel shared growth after the pandemic and help heal the scars of inequality it leaves behind.

Lincoln Wilcox is a research associate at the Christensen Institute, where he researches ways in which individuals, businesses, governments, and nonprofits can leverage innovation to create prosperity in low-income countries and communities.

The article is published under the editorial partnership between Financial Nigeria and the Clayton Christensen Institute, to promote market innovation.


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