Reshaping Markets to Solve Poverty and Inequality

Written

Reshaping Markets to Solve Poverty and Inequality

Academics, investors, and nonprofit leaders on how to find innovative solutions for the world’s starkest problems.
A woman prepares an injection for a meningitis vaccination in East Darfur. Credit: Reuters/United Nations-African Union Mission in Darfur/Albert Gonzalez Farran
Vaccination lends itself to market shaping because of the clear metrics to gauge progress and success. | Reuters/United Nations-African Union Mission in Darfur/Albert Gonzalez Farran

Science and technology research can make drastic improvements to health, education, and well-being, but far too few innovations are reaching people who need them most.

Despite many advances, “we haven’t seen many large-scale applications to problems of the poor,” says Susan Athey, professor of economics at Stanford Graduate School of Business.

Athey spoke at the Inaugural Market Shaping Conference on Sept. 21-22 at Stanford GSB. The conference, organized by the school’s Initiative for Shared Prosperity and Innovation, examined how interventions by governments and private organizations could encourage innovations with massive social impact despite meager financial returns. Market shaping isn’t a new concept — consider how pharmaceutical companies offer cheaply discounted vaccines in developing worlds. But as Athey pointed out, the opportunity to identify and address problems of poverty and inequality around the world “is still wide open.”

Supported by Schmidt Futures, a philanthropy promoting emerging technology and science, the event drew about 45 academics, investors, foundation executives, and others. Speakers discussed examples of market shaping successes as well as the many challenges in designing and implementing them. Following are some highlights:

Pointing to Successful Models

Despite demand for innovation, supply often doesn’t materialize in large part because the consumers who would benefit can’t afford to pay market prices for a drug, app, or educational program. That free-market failure is evident in many realms, such as in the development and manufacture of vaccinations for poor countries, speakers noted.

Still, speakers cited some of the successful programs, including a 2007 market shaping initiative to develop a vaccine to fight a strain of the pneumococcus bacteria, which causes pneumonia and meningitis, prevalent in poor countries. Five Western nations and the Bill & Melinda Gates Foundation pledged $1.5 billion toward developing, manufacturing, and distributing a pneumococcus vaccine. In 2017, 156 million doses were distributed, and the effort is projected ultimately to save 655,000 lives.

Vaccination in particular lends itself to market shaping because of the clear metrics to gauge progress and success. Governments can easily track the number of doses produced and individuals vaccinated. Generally, market shaping is more challenging in areas where there aren’t clear-cut goals or other quantitative metrics that determine success.

Navigating the Obstacle Course

A successful market shaping initiative requires identifying a problem, evaluating science- or technology-based solutions, selecting a specific target population, designing and implementing an intervention, and assessing impact. Those steps sound straightforward enough, but market shaping is actually fraught with complexities, from government red tape to politics. The U.S. Department of Labor, for example, doesn’t have a research-and-development budget to examine the effectiveness of workforce-development programs, says Thomas Kalil, chief innovation officer of Schmidt Futures. Governments often lack the expertise to support a market shaping initiative with a private-sector partner, and many agencies “have little or no capacity to interact in a productive way with the research community,” says Kalil. He notes also that government money for social spending is often sliced into small chunks distributed among states and local organizations so that no piece is large enough to support a large-scale initiative to create, for example, an app to improve adult literacy. “There’s no one in the system who’s empowered to say, ‘If you could develop something like that, I’d buy it,’” Kalil says.

Despite so many advances in science and technology, ‘we haven't seen many large-scale applications to problems of the poor.’
Susan Athey

Some government bodies, including the U.S. Agency for International Development, have begun experimenting with various market shaping approaches but may need input from the private sector. “Government can just try to do this by funding the research, but it’s difficult to pick winners, and there's bureaucratic incentive to keep funding what you’re already funding,” says Michael Kremer, professor of economics at Harvard.

Determining what and how much to spend on a market shaping effort, too, is an inexact science. The amount needs to be large enough to incentivize innovation but not so high that it appears to the public that a company is profiting excessively, says Kremer.

Furthermore, comprehensive data, essential to designing an intervention, can be difficult to find and assemble. If researchers want to study a possible intervention targeting homeless individuals, for example, they might want to connect and integrate data on homelessness with data on health care and schooling. “You’d think we’d be able to do that, but the homeless data’s over here, and the health care data’s over there, the education data’s over here,” says Mark Duggan, professor of economics at Stanford. “I’d love it if a technology company partnered with a state or local government to integrate all their data so if we want to know how kids who have been homeless in the last two years are doing in school, you could push a button and know that.”

Rewarding the Results

Prizes, whether publicly or privately funded, are another way to encourage individuals and companies to innovate for widespread social good. Since 1994, the XPrize Foundation, for instance, has launched 17 prizes totaling $144 million in such areas as public health, the environment, transportation, and public safety. Awarded only for success and not merely effort, prizes incentivize innovation, says Shlomy Kattan, an XPrize executive director.

“Most XPrize competitions presuppose that demand is there and that the problem is supply, and we need to change the technology available for addressing that particular problem,” says Kattan. Currently, his organization is offering a prize for developing the mobile app that results in the greatest increase in literacy skills among participating adult learners over a 12-month period.

Philanthropic investments are also driving current market shaping initiatives. For example, to address high rates of student-loan defaults, the philanthropic investment firm Omidyar Network has invested in the Connecticut-based for-profit Holberton School, which offers training in software engineering. Although tuition for Holberton’s two-year program is $85,000, the school offers income-share agreements in which students enroll with no upfront tuition payment and afterward give the school 17% of their income for 3.5 years once they’re making $40,000 annually.

That model of financial aid, which shares risk between Holberton and the student, gives low-income individuals a chance to avoid debt, says Vinice Davis, an Omidyar venture partner. Without this kind of income-share agreement, many students might not pursue higher education at all. So far, about 500 students are attending Holberton under an income-share agreement.

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