The Great Debate

Who will be Rockefellers of BRIC nations?

John D. Rockefeller’s immense wealth made “rich as a Rockefeller” part of the lexicon. But his legacy rests not on what he earned. As the founder of Standard Oil and the richest person in history, Rockefeller donated so much money during his life that he needed a team of philanthropy specialists to distribute it. The result was the Rockefeller Foundation, chartered in 1913 “to promote the well-being of mankind throughout the world.”

Much as the Gilded Age in the United States created titans like Andrew Carnegie, Cornelius Vanderbilt and Rockefeller, the economic success of emerging powers has produced a new class of multimillionaires and multibillionaires. Brazil, Russia, India and China are home to 276 billionaires, according to the most recent Forbes list, almost a quarter of the world’s total. Many have begun to focus on what Carnegie called “the business of benevolence.” This nascent trend is poised to grow. But it requires support if philanthropy is to meet its potential to tackle the developing world’s socioeconomic challenges.

Philanthropy is a powerful tool because its contributions can go well beyond money. Many emerging donors are prominent citizens because of their business success. This gives them familiarity with their countries’ economic and policy issues as well as an ability to influence the national agenda. They can invest not just financial resources but also expertise and connections that can bolster the projects they support.

The need for both is great. The same growth that has produced remarkable wealth in emerging countries has left many behind. According to the latest World Bank data, 22 percent of rural Chinese live on less than $1.25 per day — far fewer than in the past, but still alarming. In India, 34 percent of people in rural areas and 29 percent in urban areas live below the same threshold. And in Brazil, while acclaimed programs such as Bolsa Familia have drastically reduced poverty, the poorest 10 percent continue to earn less than 1 percent of all income. The richest 10 percent earn some 55 times as much. Organized philanthropy can play a central role in helping those who remain poor in increasingly rich societies.

Small-scale individual and community charity has a long history in the Global South. What is unprecedented is the number of people with the wealth necessary to tackle the root causes of major socioeconomic problems on a transformational scale. This capacity has existed in the West since Rockefeller, but developing economies have produced this level of private wealth only in the past two decades.

Impact capital is the new venture capital (Part II)

By Sir Ronald Cohen
The views expressed are his own.

The first part of this essay laid out the rationale for impact investing, whereby investors can simultaneously create social impact and achieve financial returns. How can we bring it about? First, we need an enabling environment. In the 1970s and 1980s, the venture capital community argued successfully for changes in taxation and the regulation of financial institutions to foster investment in venture funds. Governments were lobbied to improve the climate for start-up and early-stage ventures. Markets to raise equity and trade stocks in pre-profit companies were introduced in the US (Nasdaq in 1970) and in the UK (USM in 1979). Rates of direct, personal taxation were reduced. And, in 1978, amendments to the USA’s ERISA legislation were specifically designed to foster venture investment by U.S. corporate pension funds. Such liberalizing measures were adopted first in the USA, which, as it turned out, reaped most of the benefit of the high-tech revolution, largely funded through venture capital.

Social enterprise and impact investment need similar rule-changes to foster investment in mission-driven ventures that deliver social returns in combination with financial returns. We need tax incentives, as well as several rule changes: in the permitted scope of activities by charitable foundations; in the role of banks in low-income areas;  and in the rules governing institutional investment. In particular, the restrictions on investment by charitable foundations and financial institutions need to be adapted to enable the inclusion of social investment. For example, regulatory encouragement for pension funds is needed, so that social investments are included within the definition of prudent investment.

The Social Investment Task Force, which examined these issues in the UK over the period from  2000 to 2010, recommended the creation of a system to support social investment. Its specific proposals included the introduction of Community Investment Tax Relief, fashioned after the U.S.’s New Markets Tax Credits; the formation of community development venture funds to take a long-term view of equity investment in poorer, underinvested areas; greater disclosure of the lending practices of banks in low-income areas to encourage best practices, following the U.S. lead; greater latitude and encouragement for charitable trusts and foundations to invest in community development initiatives; and the strengthening of the community development finance industry through the creation of a professional association.

Impact capital is the new venture capital (Part I)

By Sir Ronald Cohen
The views expressed are his own.

Broadly speaking, capitalism does not deal with its social consequences. Even as communities grow richer on average, so the gap between the “haves” and the “have-nots” increases. For example, since the mid-1970s, both the USA and UK have actually become less equal rather than more equal. In the long post-war boom many governments did make significant headway in ameliorating the consequences of social inequality. This can be seen in levels of investment in areas such as health and in critical performance measures such as life expectancy. Nevertheless, governments, despite their best efforts and even in the best of times, have not been able to resolve all social problems.

Commentators on one side of the political spectrum attribute this failure to the lack of resources available to the state and to the state’s reluctance or inability to act appropriately. Commentators on the other side attribute government’s shortcomings to the inherent inefficiency of the state itself. The truth is that the political process, which focuses on short-term gains, does not favor long-term, preventative investment of the type required to address major social problems.

The social sector, which is also called the voluntary, non-profit or third sector, has done its best, with the support of philanthropic donations and government, to address the social problems that fall through the gaps in government provision.

Say it with philanthropy

combojulie- Matthew Bishop and Michael Green are the authors of “Philanthrocapitalism: How the Rich Can Save the World.” They blog regularly at Philanthrocapitalism. Their views are their own. -

Bankers keep telling us how sorry they are for getting the world into the current economic mess, but the public doesn’t seem to want to accept their apology. To show they mean it, the rich need to discover philanthrocapitalism and start to give back to society – for their sakes and ours.

Reckless financiers are public enemy number one and everyone seems to be enjoying the schadenfreude of watching them squirm in front of Congressional and Parliamentary inquisitions. Cathartic as these spectacles may be, it doesn’t seem that the bankers are going to be let off the hook that easily.