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 :).