On April 11th, 2021, Ecuadorians elected a new president, Guillermo Lasso, with a 71% approval rating. When the former banker took office in May, he promised to grow the struggling economy and create jobs. However, in his first six months in office, the oil-rich country has struggled and continues to be weakened by the effects of the COVID-19 pandemic. As a result, in September, Ecuador reached an agreement with the IMF of $1.5 billion to help revive the economy.
The plight of Ecuador, whose primary export is petroleum, represents a common pattern among countries that rely heavily on exporting natural resources to bolster their economies. In 2015-2016, for instance, the country experienced a recession with an unemployment of 4.6% (the last time that occurred was the 2008-2009 recession) brought on by the drop in oil prices that effectively diminished government revenue. As of 2017, oil accounted for a third of public sector revenue and 32% of export earnings.
Ecuador isn’t the only country whose economic trajectory has taken a turn for the worse due to its dependence on oil; other petroleum exporting countries such as Venezuela have also been affected. Venezuela was once considered one of the world’s most prosperous oil economies, but today it imports oil to meet its needs. Unfortunately, their fate isn’t all that surprising, given their economic focus on resource extraction, specifically oil.
The unintended consequences of focusing on efficiency
Resource extraction is an example of what we call an “efficiency innovation,” which enables companies (or countries) to do more with fewer resources. At their core, efficiency innovations are improvements in operations that reduce costs and free up capital. Examples are outsourcing company operations to lower-cost regions or leveraging technology and automation to replace employees. Because they tend to minimize growth and reduce jobs, they have a negative impact on the economy. Late Harvard Business School Professor Clayton Christensen exemplified this in a conversation at Wharton in 2019 as such, “companies like Shell, Gulf, BP, and others go [to oil-rich countries] and drill oil, and then they ship it to the Western nations. And every time they put an oil well into the ground, they engage in efficiency innovations so that they need to employ fewer people. Their purpose is to drive down costs. That’s why these companies don’t create growth or jobs — because that’s not their purpose. Their purpose is to eliminate jobs.”
Achieving growth through market-creating innovations
At the Christensen Institute, we recommend that President Lasso shifts his economic agenda towards a market-creating innovation strategy. Market-creating innovations transform complicated and expensive products into simple and affordable products, thereby making them accessible to a whole new segment of society. In contrast with efficiency innovations, these innovations foster inclusive economies and create enormous wealth for communities, the country, and its people in the process.
For illustration, in 1992, Liang Zhaoxian, the founder of Galanz, a microwave oven manufacturing company in China, created a new market that provided much valuable product and wealth. At the time, China’s per capita income was just $366, and most Chinese people saw the microwave, which cost around 3,000 yuan ($500), as a luxury item they didn’t need. Liang, however, saw something different: people living in small, stuffy apartments with no stoves who wanted to cook. Thus, he created a new market of affordable microwave ovens that led to one of the most significant appliances companies in the world and countless jobs as the company opened nearly 5,000 Chinese stores within its first two years.
Galanz isn’t alone; other companies such as Alibaba and Huawei in China have similarly focused on making expensive products simple and affordable. As a result, these companies have in part contributed to China’s astonishing economic growth over the past four decades. In turn, the country has lifted 800 million people out of extreme poverty in the process.
What might it look like if Ecuador adopted a similar approach?
Despite the unprecedented health crisis, President Lasso has the opportunity to change the course of Ecuador’s future. By anchoring his economic policies on market-creating innovations, he can fulfill his market-oriented plan in rebuilding a prosperous economy. Focusing on this type of innovation will create new industries, millions of jobs, and prosperity for its citizens while building a sustainable economy.
