Harnessing the winds of change

How developing countries can exploit new technologies

By Rajesh Chandy 31 January 2019

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Everyone agrees that new technologies are set to transform the world we live in. But who will benefit from these changes? The distribution of economic benefits from globalisation is already being questioned, with some arguing that it has accentuated global income inequalities.

While numbers living in extreme poverty have shrunk by more than a billion since the 1980s, the total still stands at over 800 million. The richest 1% of the population pocketed 82% of the wealth created in 2017. And it’s estimated that some 40 or so individuals have as much wealth as the total of the poorest half of the planet. If developing countries have struggled to capture the value global trade is creating, how will they fare as the fourth industrial revolution gets under way?

Concurrent change

Rajesh Chandy, Professor of Marketing, Tony and Maureen Wheeler Chair in Entrepreneurship, and an academic director of London Business School’s Wheeler Institute for Business and Development, believes there are encouraging signs that many developing economies are already creating the kind of social and cultural environment that will help them navigate the next wave of technology successfully.

There is some evidence for this in the growth-rate statistics. As Chandy notes, during the 19th century the West went through a process known as “the Great Divergence”; a period of growth fuelled by industrialisation that set today’s wealthy countries on a different economic path from poorer ones.

Yet even during this period of accelerated growth, the annual growth rate in the West was about 1 to 2%, on average. This compares to current average GDP growth in emerging markets and developing economies of 4.9%, with China at 6% and India at 7.4% (IMF figures as of April 2018). During the period 2000 to 2007 many developing economies posted double-digit growth. Africa, which was labelled “the hopeless continent” by The Economist magazine in 2000, subsequently went through a period of growth that caused the magazine to pronounce it the “hopeful continent” in 2013.

Chandy suggests that one reason for these comparatively high growth rates is the pace of technological change: “The developing economies have been exposed to similar waves of technological change as the developed economies, but in a highly compressed timeframe. What the West encountered with significant time gaps – the lag between development of the highway and the smartphone was substantial, for example – Indian and African consumers and innovators are often encountering at the same time.

You get all these technologies coexisting. It is concurrent change.”

“Imagine a villager in Kenya,” he adds. “Today they can watch TV, do a voice search on their mobile phone, get a relative to send money via mobile payments, buy a bus ticket and travel on a new highway to Nairobi. All these technologies may be a relative novelty to them. And in Nairobi they will become part of this incredible process of migration and aspiration taking place right across the developing economies.”

Education and skills to drive growth

Rapid concurrent changes give rise to another factor that makes developing economies well-placed to exploit new technologies, Chandy believes. As people travel more widely and are exposed to new technologies, they realise it is possible to become prosperous not just by virtue of birth or status in their village, but though effort channelled into education and entrepreneurship. This has led to a dramatic increase in private spending on education in the developing world. According to statistics collected by Thomas Zhang (LBS PhD 2017) in 2000 the average rural household in India spent 0.6% of its total expenditure on education. By 2015 that figure had risen to 20% – a factor of 33.

Furthermore, there is a keen focus on developing the skills needed to drive growth in the future. Chandy cites the success of employability assessment firm Aspiring Minds, founded in India in 2008, as an example. Its skills assessment work increases awareness, puts pressure on policymakers and schools to deliver education and training that is relevant to the needs of employers, and sensitises parents to the type of skills their children need to earn a good living.

Chandy refers to “the winds of change”, a metaphor he uses in his work with the Wheeler Institute for Business and Development, when discussing the enabling environment in developing economies: “With sufficient wind, and sailors able to harness that wind, a sailing ship can travel great distances and carry heavy loads.

Similarly, when the technological, socio-cultural, economic and regulatory winds are coalescing and blowing as strongly as they are in the developing countries, someone with an innovation can take that idea much further than previously, creating solutions and exploiting opportunities.”

But it is not all plain sailing. Some believe the new wave of technologies will take the wind out of the sails of the developing economies by encouraging developed-world companies to reconfigure value chains and repatriate previously offshored work, depriving suppliers in the developing world of business and future generations of job opportunities. How might developing economies turn the latest technologies to their advantage? Chandy is cautiously optimistic.

For a start, he says, it is difficult to predict with any certainty what impact the fourth industrial revolution will have on productivity growth. In the 25-year period from the 1970s to the mid-1990s, when the computer was making a huge impact on society, there was little indication of a corresponding impact on productivity growth. As Robert Solow, the Nobel Prize-winning economist, famously wrote: “You can see the computer age everywhere but in the productivity statistics.” A positive computer-productivity correlation only became apparent nearly a decade later.

Even predicting the impact of technology in the short term is risky. Chandy cites the results of an Industrial Research survey published in 1969.

"Whenever there are big problems, they offer opportunities for innovators to provide solutions"

Attempting to improve on previously inaccurate attempts to forecast the future, the authors selected nearer time horizons and consulted subject experts, rather than just futurists. They asked more than 1,000 experts to predict the biggest technology developments for the decade from 1969 to 1979. The top 10 featured nuclear-powered aircraft, levitating vehicles, manned exploration of Mars and Venus and, in top spot, plastics dominating the business landscape.

“Understandably, the list reflected the obsessions of the time: space, nuclear power and plastics”, says Chandy. “They almost completely missed the impact of computers and IT.”

By contrast – and subject to certain key caveats – Chandy believes the developing world need not fear the next technological revolution. He admits there could be indirect effects as rich-world companies apply technology to onshore manufacturing, using robotics to automate the entire process of fabric and garment manufacturing, for example: “Robotics and AI might take over from people in developing countries, especially in repetitive, low-end manufacturing, and these are jobs a lot of low-skilled people would hope to have taken on as a route to the middle-class and education for their children.” And there is some evidence that low-cost manufacturing peaked in many developing countries even before people could become middle-income or wealthy: “Those people thought their salvation would be in services, whether call centres or retail sales. AI may mean fewer of those jobs are available.”

But this is the pessimistic narrative. The counterargument, Chandy points out, is that “whenever there are big problems, these problems offer opportunities for innovators to get paid a lot more by providing solutions. My assumption would be that, given the connectedness that now exists within and between these countries, and the increasingly educated population, the developing economies will figure out a way to solve these problems.”

These range from health and education issues to managing resource shortages and improving infrastructure (many of which are addressed by the UN’s Sustainable Development Goals). These issues are likely to shape the context and nature of innovation in developing countries for some time. “In the developing world, crises and adversity, whether natural or man-made, typhoons or civil wars, tend to be more prevalent than in the developed world, and the effects relatively more serious,” says Chandy. “Consequently, both policymakers and entrepreneurs are trying to use technology to solve some of the problems associated with these crises.”

Problem-solving innovations

Chandy points to India’s nascent unmanned aerial vehicle (UAV) industry, set to be worth nearly US$1 billion (£0.76 billion) by 2021. Drones are being used in India for a variety of tasks, including helping to automate disaster-management assistance, spraying crops and assessing crop damage, and monitoring critical infrastructure.

As Chandy notes in a co-authored paper Big Data For Good: Insights From Emerging Markets, there is a similar story regarding the use of data in crisis management: “Historically, the story of the developing world has been one of data poverty – sparse amounts of poor-quality data. But now, thanks to these new technologies, you have huge amounts of very precise data being created.”

That data is being put to good use. For example, mobile phone location data is being used to construct a more accurate map of where people should go after a disaster, such as an earthquake, and thus where responses need to be targeted.

Another example of the many innovators using new technology to tackle development issues is the Kenyan firm M-KOPA, which provides solar-powered lighting to the 600 million or so people living off the electricity grid in Africa.

Founding the business was only possible by harnessing the favourable winds of technology – in this case, the growth of local mobile payments firm M-Pesa. Furthermore, each solar lamp is part of the Internet of Things, connected to the firm’s servers, so that M-KOPA knows exactly who is using which lamp, for how long, and where. Data harvested from hundreds of thousands of solar devices can potentially be used to enhance existing services.

Chandy points out that companies in developing countries can leverage these context-specific catalysts (such as experience in dealing with crises) to innovate and move well beyond their domestic markets. Who could rival Ulaanbaatar in Mongolia in having to deal with air pollution 133 times the WHO safe level, or Monrovia in Liberia, with its acute energy poverty (less than 7% of the population has access to electricity), for example? With the necessary investment (and there is still plenty of money chasing developing-country investment opportunities, Chandy says), it should be possible to build world-leading exporters of products and services in such areas.

People have wrongly written off the developing countries before, notes Chandy. It is human nature to fear the impact of change. When Barthélemy Thimonnier invented the sewing machine in France in the 1820s, he was awarded a government contract to make military uniforms. Having established a factory to fulfil the contract, it was promptly burned down by fearful Parisian tailors. Across the channel in Great Britain similar destruction had been perpetrated by the Luddites – but today many millions of people are employed globally in the textiles and clothing industry.

“Human ingenuity is a powerful thing,” concludes Chandy. “We are driven by solving big problems. In the developing world, given the right conditions, with strong winds of change, people’s capacity to innovate will likely outweigh any barriers to growth.”

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