The Prosperity Paradox

The Prosperity Paradox

In the late 1990s, when Mo Ibrahim first conceived of setting up a mobile phone company in Africa, people said he was, well, nuts. “Everybody said Africa is a basket case,” he recalls now. “It’s a dangerous place, it’s full of dictators, it’s full of crazy people. . . . who are all corrupt.” In fact, people laughed when he shared his idea.

Ibrahim, the former technical director for British Telecom, who was running his own successful consulting firm, planned to develop, from scratch, a mobile communications network in sub-Saharan Africa—where most people had never used a phone, let alone owned one. The African continent, which ranges from the bazaars of Morocco to the big business complexes of Johannesburg, is home to fifty-four countries. The total population of more than one billion is spread over 11.7 million square miles—more than three times the size of the United States. The vast majority of this territory had no existing infrastructure for old landline telephones, let alone the cell towers necessary for a mobile phone company to function. At the time, mobile phones were seen as an expensive toy for the rich, a luxury that the poor could not afford, and, more important, did not need. When many, including Ibrahim’s clients and former colleagues at the major telecommunication companies, assessed the opportunity in Africa, they noted the level of poverty, lack of infrastructure, fragility of governments, and even lack of access to water, health care, and education. They saw pervasive and palpable poverty permeating every aspect of society, not fertile territory for new business.

But Ibrahim, to his credit, saw things differently. Instead of seeing just poverty, he saw opportunity. “If you live far away from the village where your mother lives and you want to talk to her, you might have to make a seven-day journey,” Ibrahim recalls now. “If you could just pick up a device and speak to her instantly, what would be the value of that? How much money would you save? How much time?” Notice that Ibrahim did not say How will millions of Africans, for whom three meals a day is often a luxury, afford a mobile phone? or How can you justify the investments in infrastructure for a market that does not exist? He focused on the struggle to accomplish something important for which there were few good solutions. For Ibrahim, struggle represented enormous potential.

This struggle often presents itself as “nonconsumption”—where would-be consumers are desperate to make progress in a particular aspect of their lives, but there’s no affordable and accessible solution to their problem. So they simply go without, or develop workarounds, but their suffering continues—usually under the radar of conventional metrics used to evaluate business opportunities. But in that nonconsumption, Ibrahim saw the chance to create a market. So with very little financial backing and just five employees, Ibrahim founded Celtel1 with the goal of creating a pan-African mobile telecommunications company.

The obstacles were enormous. Creating the necessary cellular network infrastructure was a mind-boggling undertaking—done without relying on support from local governments or from major banks. Raising capital was so difficult that even after he’d proved his business model and reached predictable cash flow in the millions of dollars, banks still refused to lend him money. Ibrahim had to fund Celtel entirely with equity financing, “a first in the telecommunications industry for a company of our size and scale,” he explains. But that, and the many other challenges he faced, didn’t deter him. Where there was no power, he provided his own power; where there were no logistics, he developed his own; where there was no education or health care, he provided training and health care for his staff; and where there were no roads, he either built makeshift roads or used helicopters to move equipment around. Ibrahim was fueled by the vision he had of the immense value of millions of Africans no longer having to struggle to keep in touch with one another. Eventually, he succeeded.

In just six years, Celtel built operations in thirteen African countries—including Uganda, Malawi, the two Congos, Gabon, and Sierra Leone—and gained 5.2 million customers. At the openings of many of Ibrahim’s stores, it wasn’t uncommon to see eager customers line up by the hundreds. Ibrahim’s Celtel was so successful that by 2004, revenues had reached $614 million and net profits were $147 million. In 2005, when Ibrahim decided to sell the company, he did so for a handsome $3.4 billion. In such a short time, Ibrahim’s Celtel unlocked billions of dollars’ worth of value from some of the poorest countries in the world.

But Celtel was just the tip of the iceberg. Today, Africa is home to a sophisticated mobile telecommunications industry, with numerous mobile phone companies (including Globacom, Maroc Telecom, Safaricom, MTN, Vodacom, Telkom, and others) providing more than 965 million mobile phone lines. These companies have not only raised billions of dollars in debt and equity financing, but by 2020, the industry is forecast to support 4.5 million jobs, provide $20.5 billion in taxes, and add more than $214 billion of value to African economies. Mobile phones have also unlocked value in other industries, such as financial technology, where companies now use phone usage records as a proxy for credit-worthiness, extending credit to millions of credit-worthy people who historically could not receive it.

It may seem obvious now that mobile phones are ubiquitous all over the world—and all over Africa—but remember that twenty years ago, Ibrahim saw what others did not.

The market Mo Ibrahim built, and the difficult and seemingly unlikely circumstances in which he built it, represents a solution to what we call the Prosperity Paradox. It may sound counterintuitive, but our research suggests that enduring prosperity for many countries will not come from fixing poverty. It will come from investing in innovations that create new markets within these countries. True and lasting prosperity, we have found, is not reliably generated through the flood of resources we are directly pouring into poor countries to improve poverty indicators such as low-quality education, subpar health care, bad governance, nonexistent infrastructure, and many other indicators in which an improvement would suggest prosperity. Instead, we believe that for many countries prosperity typically begins to take root in an economy when we invest in a particular type of innovation—market-creating innovation—which often serves as a catalyst and foundation for creating sustained economic development.