Is the West too blinkered to help frontier markets?

Is it time for a rethink? Why should the West impose conventional economic beliefs upon frontier markets when these economies function radically differently? It’s not as if industrialised nations hold all the answers to successful and equitable economies – as witnessed by the economic doldrums, corporate imbalances and rapid rise in socioeconomic inequality that afflict these countries today.   

Arguably, the West tends to construe frontier markets – these are low to lower-middle income economies with great potential for innovation and growth – as chaotic and insecure. Frontier markets are depicted as lacking the institutional structures and systems to support markets and firm growth, or so the perceived wisdom goes. Western support in frontier markets seeks to address the deficiencies it sees for instance with formalisation, taxation, and entrepreneurship programmes.  

In doing so, they are missing a rich treasure trove of solutions already at play which combat social and business problems. Frontier markets, many of which are in Africa, benefit from young, fast-growing populations and are projected to achieve substantial socio-economic progress in the decades ahead. As bustling hubs of economic activities, frontier markets, we’ve found, thrive according to their own rules.

But today, opinions differ wildly on prospects for the African continent, with the special report “The Africa Gap” from The Economist highlighting that low productivity, scant investment and too many microbusinesses are hobbling economic progress.

By contrast, analysis by McKinsey Global Institute reveals huge potential for growth and productivity across the continent, led by national success stories. A young, increasingly urban population could usher in prosperity and innovation on its own terms.

Lessons from grassroot innovations

These burgeoning economies are full of solutions to social and economic problems. And the West would do well to shift their attention away from what they believe needs fixing to supporting what is already working.

Take an example – the informal economies found within African cities which fly largely beneath the official radar. Yet, these are businesses which form the backbone of many urban livelihoods – informal economies often account for more than half of national employment. And they will become ever more significant as the population of Africa is projected to grow by 900 million in just 25 years.

We’ve studied a few of these already existing solutions, notably a cluster of what seems at first sight to be basic car repair businesses in Nairobi’s Dagoretti Corner. These are dirt-floor, metal-shed kind of businesses, and numbers have soared over two decades from a handful to more than 100, concentrated in the same area. This is surprising – conventional wisdom would have it that too many similar businesses in one location would lead to stagnation and eventual collapse.

But rather than compete directly against each other, these Kenyan car repair outfits thrive through cooperation and trust.

They offer apprenticeships for labour from the rural areas, pay into communal savings and investment pots, and even coordinate informal insurance schemes. During hard times, families of business owners will be supported by pooled resources from other car repair firms. All this happens without formalised rules and regulations. “Today it’s them,” one owner explained, “and tomorrow it will be you. You are the boss, so you have to pitch in.” Business success in this context is down to collective as well as individual effort.

But it would be easy to miss this business-driven social welfare system. In Dagoretti Corner, Western support might try to impose formalisation of businesses, taxation regimes, and entrepreneurship training. Or it might encourage businesses to differentiate their service, begin to compete or try to expand. But these interventions would risk destroying the protective, communal layer of support that helps the cluster thrive, providing employment for thousands.

Rethinking support for frontier market innovation

A sharper awareness of the solutions that already exist to social and economic problems could lead to radically different innovation pathways. Frontier markets can benefit from support that would allow them to flourish and scale – this is not an ‘anti-growth’ approach.

In the Kenyan example, rather than confronting ‘needs’, interventions could instead scale the wealth of existing solutions. In this case this might mean strengthening apprenticeships for instance - reinforcing rather than replacing what already works – or supporting informal insurance schemes and communal saving plans. Similarly, pathways to scale exist as individual businesses exit the cluster and start operating on their own. Capital injections can support risky moves that are driven by entrepreneurs themselves rather than thrust upon them.

Key to this is an appreciation of how frontier markets function. If the West only problematises frontier markets, in search of what’s missing, it won’t learn how to work with what’s already there. Without this awareness, Western support won’t be part of unlocking the huge potential for rapid socioeconomic progress as it unfolds.

Tim Weiss is highly commended in the FT Responsible Business Education Awards for his teaching on frontier markets: Teaching award: rising to the challenge.