The interview above with Fareed Zakaria remains one of my favourite from 2009 because it is spot on in addressing the crux of the issue vis-à-vis economic development on the African continent.
One the one hand, there is a growing chorus of voices (refreshingly, many of them from aid-recipient countries) proclaiming the massive failure of international aid to address poverty – especially in Sub-Saharan Africa. Dambisa Moyo (‘Dead Aid’), Hernando DeSoto (‘The Mystery of Capital’) and William Easterly put forward compelling arguments for the scrapping or complete reformation of our current approach to international aid. Despite spending over a trillion dollars on aid to Africa over the past 60 years, we have seen little real growth, and in many cases even contraction and growing poverty.
Aid has too often undermined local businesses by flooding markets with free or subsidized products and created a dysfunctional handout culture, where recipients’ ingenuity and creative energies are diverted elsewhere, rather than creating goods or services of real local value. Whether you believe in reform or wholesale abolition of international aid (Dambisa’s TED talks are fascinating in this regard), there is no question that the current system is broken.
On the other hand unfettered markets have tremendous power to create wealth and are doing so for many formerly impoverished populations. Markets, by definition, treat poor people as customers – listening and responding to their needs and priorities, rather than parachuting in ill-suited ‘solutions’ to grateful ‘beneficiaries’. That said, market also often bypass or ignore particularly vulnerable and poor populations. The truth is that many of the populations – economically disadvantaged, rural families who depend on small parcels of marginal land for their livelihood – live with the reality of market failure. I for one have witnessed how incredibly resourceful, hard-working and savvy farmers in Southern Africa are. However, their communities are a high-risk proposition for most would-be investors and service-providers.
For one, they are poorly served by local communications and transportation infrastructure, they are subject to a variety of nuisance and exploitative policies and engaged in scattered production of low-volume, low-margin products far from major markets. This is by no means “low-hanging fruit” for businesses looking to fill a niche.
This is where I believe the idea of spurring would-be capitalists through social venture capital fits perfectly. According to Business Week at least $7.3 billion has been invested in 100 socially responsible alternative asset funds of which $5 billion is venture capital. It is clear that an increasing number of venture investors are hunting for small enterprises that can yield social benefits as well as high profits.
However, in developing countries in Africa and Asia where populations are notoriously risk-averse and focused on short-term returns, , it is clear that “patient capital” is the best way forward. This essentially entails making investments that are risk-tolerant and long-term. Investments of this type have tremendous potential in that they have all the discipline of venture capital — demanding a return, and therefore rigor in how they are deployed — but they expect a return that is more in the 5 to 10 percent range, rather than the 35 percent that venture capitalists look for, and with a longer payback period.
Patient capitalism can fill the gap between the social aims (but often limited effectiveness) of philanthropy and the power (but often limited social motivation) of the market. In East and Southern Africa, there are good examples of breakthroughs being made in housing, healthcare and agriculture as a result of sound investments by social private equity and venture capital funds. These success stories need to be need to highlighted, celebrated and emulated.
Will patient capital solve everything? No. Firstly, the environment needs to be conducive to growth and development -what good is investment when the business and legal environments are so bad that you cannot guarantee returns? Moreover, it is important to consider the opportunity cost of capital? A mainstream VC obviously will not invest in a fund that's offering 5 percent when he could find something that's delivering 35 percent. The problem clearly for investors and entrepreneurs is how to effectively apply the venture capital model to social enterprise. How do we make it workable and most importantly scalable? That is the challenge.
Great discussion. Interesting how Zakaria pretty much stayed out of the way :)
ReplyDeleteI think the smallpox example is interesting because it represented a massive convergence of what we normally see as competitors: Government, NGOs, MNCs, etc. all more or less working together to achieve the same goal. Maybe poverty also requires the use of every tool at our disposal, if only because we do not seem to yet be able to determine which one is actually the most effective.