Gates Gives a Glimmer of Hope

The G20 meeting in Cannes has enough on its plate figuring out a way to save the Eurozone, with or without Greece. So it is a credit to the meeting’s host, French President Nicolas Sarkozy, that he booked a slot on the agenda for a discussion of how to finance the fight against poverty based on a report by the world’s biggest private donor, Bill Gates. Amid the gloom about the global economy, Mr Gates’s report is a remarkably cheering document that reflects on past achievement and opportunities for the future and presents a clear vision of how the world of development is changing. It is also curiously understated.

One of the characteristics of Mr Gates’ brand of philanthrocapitalism is its recognition that even a donor of his scale cannot take on the world’s problems alone. When we interviewed him for the book he offered a surprising description of the Bill and Melinda Gates Foundation, which gives away $3 billion a year, calling it a “tiny, tiny organisation”. His point is that there are so many other actors out there – from official aid agencies, to nonprofits, to the private capital markets – that his philanthropy will only have an impact if it can leverage the whole system. One of the most important forms of leverage he has is his celebrity power to take on the pessimism about development of writers such as Dambisa Moyo, author of Dead Aid. That is why he started bankrolling the campaigning organisation One ahead of the G8 Gleneagles summit of 2005, when the rich countries made big new aid commitments, and has been touring with his Living Proof presentation to show that aid does make a difference.

The opening section of the Gates report is about this optimism: what has been achieved in development so far and what more could be achieved in the future. Basic economic development has been good for the poor, he argues, celebrating the fact that global GDP is five times higher than it was in 1960. Growing incomes mean improved nutrition and better public services and, with the help of aid money, real progress on poverty reduction: the lives of a million mothers saved from death in childbirth since 1990, a 20% reduction in mortality from malaria in just the last decade, and so on. There is, he believes, much to celebrate.

Unsurprisingly for a tech entrepreneur Mr Gates credits innovation as the reason for much of this progress and it is innovation that makes him most optimistic for the future. The report breathlessly lays out some of the opportunities available: an affordable vaccine against meningitis A, new ways of growing soyabeans in Africa, new strains of rice, and so on. The four horsemen of apocalypse can, it seems, be engineered away.

It is in this discussion of innovation that the second theme of the Gates report begins to open up – that the old model of aid from the rich world helping the poor world is not disappearing, it is already extinct. Many of the innovations he describes are being led not by the U.S., Europe or Japan, but by emerging powers like Brazil, India and China. Mr Gates hails a new era of ‘triangular partnerships’ between rich, poor and emerging nations to solve the problems of poverty. In doing so, he issues a timely reminder that the fight against poverty is financed largely by poor countries’ own resources. Aid is just the icing on the cake. The success of the economies of poor countries, particularly in Africa, over the last decade and the rise of new economic powers like China, he also points out, has expanded the resources available to the world to fight poverty – with a bit more commitment the world could really can kick on and solve many of the problems facing the poor.

Which takes us to the third element of the report, what is supposed to be the meat, Mr Gates’ ideas on how such a great leap forward in human wellbeing could be financed. What has gone before is his headline message to the G20: don’t let the economic crisis be an excuse for cutting aid budgets. Good luck to him on that one, although we should give him credit for shoring up the commitment of countries like Britain that have agreed (so far) to keep increasing aid despite the world’s economic woes. Mr Gates tots up current aid commitments as $80 billion and then offers ‘options’ to raise a further $85 billion.

More than half of this extra cash ($57 billion) is to come from new taxation. Indeed, the much-trailed recommendation of his report is his support for the Robin Hood Tax, a levy on financial transactions that supporters claim could raise $100-$250 billion globally (and we think is too good to be true). Yet Mr Gates’ plan only assumes a measly $9 billion. This is, in part, due to the fact that he assumes that only Europe would be willing to implement it. What he actually says in his report also suggests some ambivalence about the idea. The drafting is classic bureaucrat-speak: “there has been a lot of discussion”, “[it] has been widely advocated”, “this broadly holds true”, “some modelling suggests”, and so on. There is, ultimately, no hard endorsement of the tax and the fact that it is such a small part of his plan shows that his support is probably tactical only. “For those that choose to adopt it,” he concludes, “I urge you not to use all of the proceeds as general revenue. It is critical that a portion of the money raised be reserved for investments in development.”

Rather than taxing financial transactions, Mr Gates is much more bullish about taxing two other global ‘bads’: smoking and carbon. The World Heath Organisation recommends, he notes, that 70% of the price of a pack of cigarettes should be tax. Since even the EU average is only 55% at the moment, there is headroom to push that up a bit and keep a small slice ringfenced for development (10 cents per pack in rich countries, 6 cents in middle income countries, and 2 cents in poor countries). He estimates that this would raise about $11 billion and cause a lot of smokers to quit. He thinks an even larger sum of $37 billion can be raised by adopting a proposal already made by the World Bank and IMF to tax aviation and shipping fuel.

The remaining $28 billion a year in the Gates plan comes from private sources. No, he is not suggesting a whip-round of his billionaire pals who have signed up for the Giving Pledge. Instead he wants to harness global migration to get diasporas to do more. Remittances, he notes, are now more than $300 billion annually. If the cost of sending money home could be cut to, say, 5%, this would save $15-16 billion and if poor countries issued ‘diaspora bonds’, as Israel and India have tried in the past, this might claw in a further $4 billion a year of additional investment. These ideas around raising maybe $20 billion of development aid from remittances are the shakiest in the report. Yes, remittances are big but this total includes all money sent home, a fair chunk of it from rich people to their rich families, and much of the rest not focused on financing development. Yes, boosting remittances may help the poor a bit and there are lots of interesting things that could be done to try to channel more remittances into investments that support development (like Mexican ‘Hometown Associations’) but Mr Gates is over-claiming.

By contrast, when it comes to opportunities to harness the private sector, the Gates report seriously under-claims. The final building block of his plan is $8 billion a year coming from sovereign wealth funds investing just 1% of their capital in infrastructure in Africa. This is a perfectly good idea but there is so much more he could have said. A year ago, JP Morgan reported that there could be a $1 trillion market for ‘impact investments’ like this, excluding investments in energy and climate change. As Mr Gates recognises in the report, impact investments, though for-profit, can target high-impact development interventions such as sanitation. Other philanthrocapitalists like the Omidyar Network are important innovators in this field, whereas Mr Gates has blown rather hot and cold on the idea. Sadly, this means that he has missed a trick. There is a lot that the G20 could do to stimulate this market: from using some of their budgets as ‘first loss’ risk capital to leverage other investors into this area, or by reforming their own financial regulations in ways that encourage this type of long term investing with high social returns.

The Gates report is not the last word on the future of development financing but it does offer a glimmer of hope that the current economic crisis need not be a catastrophe for the world’s poor.