Economics 101 & Public Square

A Sustainable Solution to Poverty

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What’s the best way to help the poor without trapping individuals in a cycle of dependency? It’s not aid. Not philanthropy. Not even straightforward commercial activity. Previous posts have shown how all of these solutions have unintended consequences that can actually harm the most vulnerable in society.

So, do we have any options left? It turns out that we do: impact investment.

Defining Impact Investment

This type of investment is made into companies, organizations, and funds with the objective of generating an economic return. It also has measurable social and environmental impacts. It is commercial investment seeking a financial return like any other commercial organization but with a focus on financial payoffs and community impacts. In emerging markets, these investments have been made in a variety of ways including:

  • creating jobs
  • building affordable homes
  • providing clean drinking water
  • improving agricultural productivity
  • providing access to better healthcare, education, and finances

At present, this market is relatively small with around fifty billion dollars of funds raised. Some are now predicting that impact investments will reach five hundred billion dollars by 2014, and possibly grow to a trillion dollars over the next ten years.

Social and Environmental Effects of Impact Investment

Let’s link this type of investment to our last blog on enterprise as the key to development. Even if we believe that enterprise is the best way of tackling poverty, can it also address the social issues of human trafficking, HIV, literacy, and global warming?

We believe it can, with some adjustments to the investment criteria. An experienced entrepreneur can look at a social need and design a business that can address these needs while achieving a financial return. And thus, we believe impact investing can be a game-changer in the world of economic development.

A number of groups, foundations, and funds have been engaged in investing in this new asset class for a number of years, including the Shell Foundation, Omidyar Foundation, LGT, the Calvert Fund, Springhill, and the Transformational Business Network (TBN).

For impact investing to become a recognized asset class, there needs to be an ecosystem that mirrors the mainstream.

Networks of Support

Businesses can grow only in environments that support entrepreneurial activities, which is important because we know that our individual work can be used together to help the common good. Businesses need lawyers, accountants, and access to various types of capital. But above all they need committed entrepreneurs and talented managers.

This is where the value of outside networks can be invaluable. If a local business in the slum can tap into a network of experienced businesspeople who can provide voluntary technical assistance as well as advice on their business and marketing plans and financing options, these businesses will stand a better chance of success.

These businesspeople can provide the advice either as investors or just because they are motivated to help.

A number of these networks exist. The Ashoka Network is one of the largest. Ashoka fellows are highly talented and motivated individuals who have built successful social enterprises and are engaged in assisting local social entrepreneurs with building their businesses. Started by Bill Drayton, Ashoka Fellows and Ashoka-supported social entrepreneurs can now be found in over seventy countries.

Another such network is the Transformational Business Network. TBN is a network of investors, entrepreneurs, and business people who are disillusioned with writing philanthropic checks, and who invest their time, talent, and money in building enterprises among the poor.

Since 2004, the TBN network of fifteen thousand members has invested in over sixty-five projects in fifteen countries, creating more than twenty thousand jobs. TBN networks are being formed in several more countries to mobilize local business people to engage in this form of investment.

TBN members are also creating various forms of investment vehicles to attract more capital into this type of investment for social venture capital, revolving credit loan funds, fund of funds, and listed holding companies.

Such networks are challenging to build. They are often started by visionaries looking for innovative approaches to tackling poverty through enterprise. They tend to be funded by foundations or private individuals.

Perhaps some international aid funding should be targeted at creating local entrepreneurial networks that are connected to global networks such as Ashoka and TBN. Such connections would help build local capacity, provide mentoring, and as is the experience of TBN members, lead to investment opportunities and long-term friendships.

An enterprise approach to poverty alleviation is taken by building commercially sustainable small-medium enterprises that create jobs, empower the poor to improve their livelihoods, and address their social and environmental issues.

Is enterprise the best way to alleviate poverty? 

Editor’s note: This is a continuation of excerpts from IFWE’s book, For the Least of These: A Biblical Answer to Poverty. This post is the third part of Lord Brian Griffiths’s and Dato Dr. Kim Tan’s chapter entitled “Fighting Poverty through Enterprise,” which examines the effects of aid and various ways of introducing enterprise to the poor as a means of reducing poverty.

This post was coauthored by Lord Brian Griffiths.

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