Hannah H writes*
According to Iain Hay and Samantha Muller, we are in a “Golden Age of Philanthropy” due to the unprecedented donations from the ultra-rich to philanthropic causes in recent years. Take a look at the Giving Pledge; since its founding in 2010, this voluntary commitment by the world’s richest to give away the majority of their wealth to philanthropic causes has amassed $600 billion of pledges.
But it is not only the sheer sums pledged that set recent years apart; the entrance of more businesspeople into the world of philanthropy, who Matthew Bishop calls “philanthrocapitalists”, brings a new mindset to development. Gone are the days of anonymous donations to established charities working to eliminate extreme poverty around the globe. Instead, foundations set up under the names of their financiers look for efficiency, growth, and scaling in causes. The websites of the Bill and Melinda Gates Foundation and the Chan Zuckerberg Initiative are peppered with references to “strategic investments” or “ventures.” In this new era of philanthropy, the ultra-rich treat poverty alleviation as a business.
Philanthrocapitalists are bringing market-based approaches to poverty reduction which, as Kate Cooney and Trina Shanks explain, aim to remove “the barriers that prevent the poor from participating in markets as both producers and consumers,” i.e., poverty traps. The idea that the market has the potential to reduce poverty is not particularly new. Henry Ford paid employees good wages so that they could afford his Model T. Today, the most widely used market-based solutions include micro-financing, the provision of low-interest loans to individuals to invest in small businesses or projects, and asset-building, often in the form of matched savings accounts to help individuals build wealth.
Market-based approaches are somewhat successful. Microfinance has funded a range of projects, such as developing local capacity to produce medical equipment and insuring small businesses against risk. Moreover, over 95% of loans are repaid which is substantially higher than, for instance, the rate of student loan repayments in the US. Proponents of market-based approaches believe that the outcomes improve on traditional approaches: growing wealth produces positive externalities in nutrition and education and solutions are more sustainable.
Critics of market-based approaches worry about risk. One of the arguments in favour of philanthrocapitalism is that it can take risks that governments can’t, meaning that projects which previously struggled can get funding. But what happens when risks are undervalued or ignored? At the very least it could lead to wasted dollars, but there are also examples of where microfinance loans have only acted to push people further into debt.
There are also limits to what market-based approaches can achieve. While market-based approaches can grow the capacity of small businesses, it is harder to see how they can train healthcare professionals or build schools. In these cases, other solutions might be better.
Bottom line: Market-based approaches to poverty alleviation, which have gained prominence in a new era of philanthrocapitalism, offer new pathways in the fight to reduce poverty and inequality. However, it is possible that its potential is over-stated and its risks under-acknowledged.
* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).
6 thoughts on “Poverty alleviation as a business”
Hi Hannah! First of all, this was a very clear and nicely written blog post 🙂 I have always thought that market-based approaches to global poverty alleviation were very interesting and I would love to hear about your final findings. One thing you could also look into is initiatives to increase human capital & financial knowledge. I have researched financial literacy a bit and so far the literature confirms my expectations that having more knowledge of financial knowledge is positively related to people’s ability to deal well with debts, savings, etc. La Porta & Shleifer also observed that there was a remarkable difference in the human capital of managers of formal and informal firms, which could contribute to the difference in productivity between the two kinds of firms. So in short, in the question of whether market-based approaches like micro-credit are as successful as claimed, perhaps human capital / financial knowledge is a condition for success?
Hi Benthe! Thanks so much for your response. There are both examples in the literature of where microfinance has been successful and cases where this has not been the case. Helpful next steps would be to understand why there are differences in outcomes, and looking at the role of human capital/financial knowledge could be a really interesting path for further investigation. Understanding whether human capital/financial knowledge is a condition for success would inform future projects – such as providing additional training – which could help make the outcomes of microfinance projects more consistent. Thanks for your thoughts!
Dear Hannah, I have found your blog post to be very insightful to non-state-led solutions to what some consider a governance failure: poverty. Something that particularly stands out is your discussion regarding the high degree of loans that are repaid in cases of philanthrocapitalism, which is impressive compared to the sometimes difficulty on a state level to repay foreign debts for similar public service projects. It would be interesting to hear more about possible suggestions on how the state can work together with private actors to make sure that the situations where “other solutions may be better” can be properly addressed. Possibly, it is also worth considering how the risk-seeking model of philanthrocapitalists can be an explanation of a lack of institutional bureaucratic structures, whereas public officials may be more risk-averse and therefore less effective in investment opportunities.
Hi Juliette, thanks for your response! I wanted to pick up on your point about risk aversion in public officials. I think a key source of the risk aversion in publicly financed projects is that officials are working with taxpayers’ money which is perhaps less flexible than private funds since there are greater demands on accountability. I think this relates to the institutional bureaucratic structures which you mention. But I’m not sure that the private sector provides all of the solutions in terms of investing more flexibly as the business thinking behind philanthrocapitalism can also induce risk-averse behaviour because investors are always looking for returns on investment. Therefore, both publicly financed projects and philanthrocapitalist investments are susceptible to being risk-averse. This could mean that exciting and potentially impactful projects don’t receive the funding they need. At the same time, not properly evaluating the risks also can cause problems as the failure of projects can leave individuals in a worse position. Finding a balance of proper risk evaluation with creating opportunities is hard and both the private and publicly funded projects face challenges in achieving this.
Hi Hannah, thank you for the interesting read! I agree that a lot of philanthropy has come to focus too much on the financial aspect of things while failing to address its core mission which is to aid others (except for the work done by MacKenzie Scott, she’s awesome). The “95% of [Microfinance] loans are repaid” statistic particularly stands out to me. I was curious whether this means that the loans were repaid and the individuals are better off or that the loans were repaid and the individuals were left worse off? It seems that the focus on personal loans rather than the accumulation or contribution of physical capital, for example, is not as effective for inducing long-term economic growth. I found this video by Bloomberg quite insightful when it comes to this topic (https://www.youtube.com/watch?v=N87PRcYuqkM). Also, according to the video, a good chunk of the Microfinance market is made up of Microfinance institutions that receive funding from governments for operations and or to write off debt if there is too much Microfinance debt. This would imply that tax dollars are involved and that it is not as risk free as it might appear. Overall, I really like the research journey you have embarked on and look forward to seeing your presentation.
Hi Max, thank you for your response! Your point about asking further questions about the statistics used to demonstrate the success of a project is an important one and I had not given this enough thought. Indeed, a project might be considered a success on paper if the loan is paid back but what about the actual impact? Have the goals been achieved? Perhaps this is part of the debate about the value of quantitative data, particularly when it comes to growth and development. Many of the aims of development projects are greater than measurable outcomes, such as increased income. In order to truly evaluate whether beneficiaries are better off, it is important to look beyond these figures as they can hide the success and problems.
Also, the video you linked is very insightful – thank you for sharing. It demonstrates how ideas can develop a life of their own – they become so dominant that even when there is evidence of things going seriously wrong, there is a belief that it is just one isolated event rather than something wrong with the idea in the first place. The video suggests that this has been the case with microfinance, with private foundations and states still convinced of the potential of microfinance, despite some obvious problems.