Monday, July 13, 2009

Replace the World Bank with Venture Capital?

This is a guest post from Carl Hammerdorfer, the director of Colorado State University's Global Social and Sustainable Enterprise Program. Carl is an entrepreneur, returned Peace Corps Volunteer (Mali), and has worked in international development for years. In this post from somewhere in Africa, Carl proposes that poor countries (and BOPreneurs) would be better served by shutting down the World Bank, paying their experts severance, and investing the remaining multi-billion dollar budget as venture capital. Can he be serious? You decide (and comment if you'd like).

"Is it just me, or is the world actually discussing global poverty and development solutions with renewed passion and genuine rethinking? Work in the development racket for too long can make even the most starry-eyed optimist feel a bit jaded. After all, how long can you hang your hat on the success of South Korea and Poland? Sure, Ghana and Botswana are starting to seem like good stories, but what about Egypt, Burkina Faso, Honduras, Bolivia and a hundred other countries spinning their wheels in poverty’s swamp? When do we start seeing some real, long-term results? When do perennially poor states stand on their own feet?

So it has been good to see Dambisa Moyo brashly call the whole development rodeo into question. It’s been terrific to see Bill Easterly and Jeffry Sachs duke it out in the NYT, Huffington Post and all over the TV and the web. The kind of debate they’ve been having almost never, ever makes the mainstream media. That pabulum factory is too worried about Brad and Angelina’s adoptions or Oprah’s academy, both nice things to be sure, but hardly more than a gnat on an elephant’s … oh, never mind.

For those of you who haven’t been paying attention, Moyo – dubbed the anti-Bono - has said that the development industry has ruined Africa and should get out…er, except for humanitarian aid… and maybe a few scientific institutes. Jeffrey Sachs holds that it’s Western greed and selfishness that has underfunded development, thereby causing untold misery, death and destruction. “We must give more money!” he screams. “Much, much more money!” Bill Easterly stands with Moyo, deriding the World Bank, USAID and other development actors, and arguing that in enterprise lie the answers. He ridicules Sachs, while Sachs basically accuses him of murderous proposals that will damage the lives of millions. And then there’s Bono, Bob Geldoff, most of Hollywood and almost every wannabe activist between the age of 15 and 21. They all want to have another rock concert for Africa and buy more T-shirts to save the planet and all of the poor people on it.

Well, It is time for some wise person to reconcile these seemingly irreconcilable positions so that we can all get back to our I-Phones, Tivos and Priuses. I, regrettably, am not that person. Rather, I’d like to throw some more fuel on this fire and get some other people involved in this global barroom brawl. Smart people. People with big brains and big pocketbooks. People who hate to chip or mar their manicures. World Bank people!

I think it is time to shut down the World Bank. Yes, you heard me right. Shut them down.

It’s not a new or original idea, I’ll admit. Right wing nuts and crazy leftists have both taken aim at the Bank over the years, so this might actually be a chance to get two nuts in the sack together. Er, never mind. But if the extreme right and left agree on this, then let’s take a flyer and cut off the money, turn off the lights, and send all of those really smart people who want to save the developing world back to the developing world. After all, if these guys, most of whom have multiple PhD’s, are the premier experts on development, let’s send them to developing countries where they can practice their craft. And I don’t mean 14 days in the Ulan Bator Hyatt or the Dhakar Sheraton. No, I mean to live, to educate people, to reform governments, to build economies, to create civil society institutions and all of that stuff that they so ardently want to get done. How in the world are they ever going to do that from Washington DC?

Have you ever been in the World Bank? Man, it is an awesome building. All glass and steel and leather and beautiful art and ergonomic chairs. And that cafeteria? Are you kidding me? Last time I was there I had the choice of Asian fusion, pheasant under glass, sushi, sol meunier or veal piccatta. Food I can’t even pronounce, and all at rock bottom prices! Heck if they’re serving that kind of fine cuisine and not bilking taxpayers to support it, then they should be in the restaurant business, not wasting their time in the “not ending poverty business”. Shoot, the light bill alone at the World Bank could probably get both Cape Verde and Honduras out of poverty in a couple of years.

So, shut down the World Bank, I say. And, I have an idea for putting all of that money to use that would actually help poor countries. A friend of mine helpfully suggested that we not shut them down, but that we “transform” them. Ha, ha ha ha ha! Is he crazy!? Nobody’s ever going to transform the World Bank. Heck, the inertia of this institution is approximately that of the Himalyan mountain range, the pyramids and offensive line of the Pittsburgh Steelers combined… and then squared! And man, are those guys ever cagey. Do you think anyone can transform an organization that has 8500 of the smartest people on the planet, people who were able to get out of villages with no electricity, running water or flush toilets in places like Angola and Burma and Venezuela and manage to permanently entrench themselves into some of the highest paying, tax-free jobs on the planet… you think they’re gonna be transformed by anyone? Not on your life. They must be eliminated.

I think we can pay them to go away, and still have money left to implement my aforementioned plan. We could give them half of their salary for 10 years and ask them to go back to work in the real world. Heck, if you are from Niger or Chad, with that kind of money, you are going to be the man/the woman. Since the cost of living there is about 1/10th of what it is in DC, you’d be able to live off of that money and use the balance of it to manage your own personal development strategy. You could do micro-lending, women’s empowerment, maybe even build a small hyrdo-electric dam. And what could be better for the developing world than to send all of their smartest people back to them to build that country?

With the balance of the $25 billion that 185 countries put into the WB every year, here’s what I propose: Let’s use it to subsidize and incentivize the venture capital industry to invest real money in developing countries. If anyone knows how to invest money wisely, it’s the venture capital guys (excluding, of course the guys who invested in Segway). If you ask entrepreneurs in Africa or Latin America what the biggest problem is, they’ll tell you “it’s capital, stupid”. There’s a bunch of money to be made building businesses that make stuff to sell to local people and into regional markets, but rarely can the guy with the idea and the drive get the money to do it. It’s hard enough to do that here, but at least you can mortgage your house or charge up your credit cards or go to Vegas, find a roulette wheel and bet your life savings on red or black. But in Ethiopia if you have a fool-proof plan to pelletize coffee husk for fuel for people’s wood-stoves, finding an investor is like finding cockroach at the Ritz-Carlton. It ain’t gonna happen.

The reason venture capitalists are as rare as hen’s teeth in very poor countries is the perceived risk of doing business there. As one of them told me recently, “Sure, I’ll go to Africa… just as soon as I feel like I won’t earn a ‘negative return’ on my money.” Okay, fair enough. You see it as too risky. Well here’s what we’re going to do for you. We are going to take the money that’s no longer funding Italian loafers and marzipan biscotti at the World Bank and use it to buy out some of that risk. Maybe we’ll cover most of your startup in Kenya so that you can get a person on the ground looking at investments at minimal cost. Maybe we’ll provide training on how to avoid the sharks and scam artists. Or, maybe we guarantee some percentage of your investment capital, leveraging up all of that taxpayer money, all to be put to productive use.

Yes we’d need controls. No investments in illicit arms smuggling, opium production or massage parlors. But there are a few brave folks who’ve got most of those rules of the game down (go to SEAF and see what they’re doing with VC in over a dozen developing countries). Granted, it takes a while to figure out the ropes in Kenya, but it does in pharmaceuticals and biofuels too. VCs would be smart enough to hire good people and develop a methodology to evaluate investees if the incentives are there for them to make healthy returns. They’d make some mistakes, just like they do here, but they’d probably pick some big winners too, maybe even some that produced enough profit to make up for the WB money that might otherwise have gone to that beautiful office and staff in downtown San Salvador.

Let’s face it- what a poor country needs is no different from what a poor state or county in the US needs. Economic development, entrepreneurship, new companies, products… real jobs for God’s sake! Not unproductive jobs working for a foreign NGO, but jobs where people make stuff….and sell it. Michigan and California are depressed- and what do they want? Companies that give people jobs. Why should Guyana and Mali be any different from Georgia and Montana? And if there’s one thing that entrepreneurs and new companies need, it’s capital. You could have a bunch of WB guys making decisions about where to put the money, but I don’t think anyone believes that that’s what those guys are good at. So let’s let the professionals handle it… the venture capitalists.


Anonymous said...

Give more money to Africa? Lead economists all over can agree that one of the main problems is not in the money flow TO Africa but in the corruption that happens WITH the money after it's there. Countless stories of corruption in Africa's government once they get the money prove this. As for the World Bank, they are free from government corruption by dealing directly with the Ministers of Finance so as to not be persuaded into corrupt acts. The World Bank is a 24/hr highly audited organization that is looked after much more than most African governments who end up in the news much more than the World Bank regarding corruption of the money they were given.

Try again.

Vonni Media Mogul

Olasofia said...

@Vonni Media Mogul
Who said that the answer is to give to corrupt governments?

Find *trusted* parties in the country, and begin there.

Where there is a will there is a way.

In Bangladesh, BRAC has the will and found a way. Grameen has the will and found a way.

These organisations are not a panacea but if someone did the maths I think they would find far far more value for money in investing in those organisations than in the World Bank.

I have been to Bangladesh and seen their impact first hand.

I absolutely agree with the author's article that sending people to live in the country and to build things there will lead to better solutions. (But not if they live in isolated complexes and without any long-term accounability for their work)

Dan said...

I really liked this article - straight to the point. New VC firms focused on SME/SGB development are popping up all over the place: Endeavor, SONG, IGNIA, Root Capital, Acumen Fund... the list goes on and on. And many of these are for-profit funds. Private investors are starting to fill the gap that is so clearly remaining void despite WB efforts to single-handedly jump-start local economies. Leave it to the people to do!

VonniMediaMogul said...

Leave it to the people sounds like the beginnings of government. Without direction and order there will be chaos. One thing that can be said about the World Bank is that at least we have someone to hold accountable. Though many of the employees may not stay in a country for extensive periods of time there are in fact departments to hold accountable.

As for the private sector taking control, have we not learned anything from the fall of the world's bankd? It happened because of years of privatizing loans and wanting to give everyone a chance. It is obvious that the private sector will ALWAYS have their own best interest at heart because that is the entire purpose of going into business for yourself. That is why the government has had to step in regarding the car industries and the banks because clearly the private sector cannot do so alone.

Carl Hammerdorfer said...

Invest money in profitable ventures that provide a product or service that consumer value. Create economic growth, jobs and the accruing social benefits. Seems like a decent start doesn't it?

Lucy Garrick said...

Problem with VCs is that they are not in for the long-haul- most just want to create wealth as fast as possible by going public. Once a company goes public we are caught in the other eternal nightmare of maximizing return to public investors quarterly- also not a long-term strategy so companies tend to make stupid decisions to maximize short-term profit at the expense of long-term gain. Private investment is not a bad idea, but there needs to be a more socially conscious exit strategy as the ROI from the developing world will be most likely small and slow.

CSF42 said...

The disolution of the World Bank is an interesting idea - not one that I see happening because, as you said, the World Bank is a beast that is not going anywhere anytime soon. There are also some very corrupt developing nations out there that need the structure that the WB provides in order to help the funding get to the right place. So, the WB does serve a purpose and has had its successes.

What if the WB collaborated with local private social enterprise to fill in the gaps? I think that the private sector has gotten a bad rap lately. There are companies out there that are doing good things (Danone working with Grameen Bank in Bangledesh, for example), and if properly incentivized, I would imagine this would become an attractive option for them.

Brian Murray said...

Why isn't there a middle road?

Realizing that getting rid of the World Bank is no easy task, there seems to be an interesting opportunity for the World Bank to at least support and build on the successes of social venture funds. These are the VC funds that are balancing between financial and social returns by using patient capital such as: IGNIA in Mexico, Acumen Fund in East Africa, India and Pakistan (full disclosure: currently working at Acumen), Agora Partnerships in Latin America, and Bamboo Finance.

Imagine the World Bank supporting this movement with financial support and incentives or building new funds modeled off of social funds' best practices. Wouldn't it be great to have 20 other Acumen Funds working all over the world?

The World Bank could also provide incredible leverage for many of these funds who find themselves in the public-private trenches by providing expertise, establishing immediate legitimacy in new markets, and helping build a society of entrepreneurs (and bankers)who think about social as well as financial returns.

The founder of Acumen, Jacqueline Novogratz, has suggested a Global Innovation Fund - why can't we get the World Bank involved in this?

Having said all that, I would love to see all of these brilliant people from the World Bank return to their countries to push change from the ground level up. Reverse the brain drain.

Carl Hammerdorfer said...

A VC that has a very good record is Small Enterprise Assistance Fund ( Granted, they're not a traditional VC, but under my diabolical scheme, you'd look for ones who would take a SEAF approach in exchange for the help minimizing risk.

Anonymous said...

Let's create sound VC firms to foster entrepreneurship in Africa. No country has ever developed thank to aid money. Africa needs people like you and others to let the world know that their entrepreneurs are as able as others to come up with solutions tailored to their native markets. I have not respect for the "humanitarian mafia" represented by the UN, World Bank etc.
Economic development will ONLY come thank to the private sector and the moment is right for "donor countries" to understand that

Anonymous said...

You obviously haven't heard about the International Finance Corporation (IFC), which is part of the World Bank Group. We do VC and PE and are the largest EM debt issuers and equity investors in the world. We're also the largest microfinance investor in the world. Several of the social VCs mentioned by others above have been invested in or looked at by IFC. Do some more research next time before suggesting an organization should be shut down.

Carl Hammerdorfer said...

Dear Anonymous,

First, it would be nice if you would use some identity other than anonymous if you believe strongly enough in your position to debate this question.

Second, can you possibly provide the users of this blog with a link to the list of investees in the SME space if you can. It would be instructive if we knew how many investments in how many countries over what time period and at what ROI? As a taxpayer, I would really like to see this info readily available on your site.

Third, there is an IFC policy that may be at the root of your ineffectiveness, namely: "Although IFC does not take any government guarantees for its financing, IFC's work often requires close cooperation with government agencies in developing countries."
I would argue that giving financing to companies via a ministry is like trying to give lettuce to them via a rabbit.

Fourth, could you comment on the SEAF approach? I note that IFC has been an investor in some of their funds and wonder how that is working for you.

Thanks for the counterpoints.

sara said...

I second the motion to shut down the World Bank, but it wouldn't make a difference without scrapping the IMF and WTO at the same time. Who's to say another all-powerful international institution wouldn't spring up in the place of these three money-hungry monsters who are perfectly happy with maintaining the status quo? The people who work in the upper echelons of development are happy as clams - they have excellent salaries, get to live in swank houses in third world ghettos, and they get to say they're 'helping' people. They have NO incentive to change their ways. None.

I've read World Bank studies, seen their monitoring and evaluation manuals, and heard the praise given to them. I've also seen the impact of the projects they have funded, supposedly participatory planning and M&E, and thoughtful exit strategies. As far as I can see, they've got great PR and a whole boatload of good intentions. But who is holding them accountable on the ground? The people at the grassroots in poor countries certainly don't have the privilege of doing so - and the American people don't seem to care to.

I am beginning to think that the role of nonprofits and NGOs and funders should be to provide support to purely local ideas for development, facilitate capacity building and provide technical training when asked, and give advice but not commands or prescriptions. Working on advocacy so that people can hold their governments accountable is key, but that runs the risk of challenging that status quo again. I'm more frustrated every day with the way things are being run in this sector - especially in cases like Madagascar where aid is being used as a foreign policy tool (unsuccessfully, I might add) and countries like the U.S. have made a more detrimental motion to cut off trade agreements, which would only serve to crush the average Malagasy person, not the clownish moron who has assumed power.

Where's the action? I see so much great work being published, so much inspiring writing. I know social change is slow, but we need to get out from behind our desks and connect with humans again.

Anonymous said...

This is fun to read...but VCs don't work on building the institutions that make a country run well. That's really the strength of the World Bank.

Yes, private companies can build roads, put up schools, and probably run elections, but (sorry anarchists) you need an effective government to help manage these activities. Why would a VC invest in a company running primary schools in rural areas? Those kids can't pay so it's not profitable to run those schools.

But anyway, fun debate.

Carl Hammerdorfer said...

I'd change the headline on this (which I didn't write) to: "Shut down World Bank; Use money to promote investment in private investment."

You are right to say that VC cannot do what the WB aims/claims to do. But I question the WB's alleged success in building effective government institutions. Where is the evidence for this and what has been the cost?

I'd support billions to government and institution building if I thought it wasn't money down a rat hole, but the list of failures dwarfs the rare success.

There are a dozen activities to invest in. I'm just arguing that our chances for reasonable returns (financial, social and environmental) are better if we invest in entrepreneurs and private enterprises which we can actually influence than in ineffective governments.

The reason that we can influence an entrepreneur is that we can align our interests and measure results. Tough to do with Presidents and Ministers.