The Power of Catalytic Philanthropy

How would the wealthiest, most astute business people solve the world’s biggest problems?

161 billionaires gathered for a Summit on Philanthropy to try to help solve the world’s most intractable problems.  Bill Gates, who is destined to be remembered for his good works rather than his software, gave a keynote address in which he laid out a vision for ‘catalytic philanthropy’ – creating markets, using capitalistic approaches, to help the needy in long-term, systemic ways.

Gates’ keynote is published on the Forbes website and is well worth reading.  Much of it is posted below.

Bill Gates

Source: parade.com

I am a true believer in the power of capitalism to improve lives. … But when my wife, Melinda, and I made our first trip to Africa in 1993, it was really our first encounter with deep poverty, and it had a profound impact on us. …

We assumed that if millions of children were dying, there would be a massive worldwide effort to save them.  But we were wrong.  While the private sector does a phenomenal job meeting human needs among those who can pay, there are billions of people who have no way to express their needs in ways that matter to markets.  And so they go without.  And while private markets foster many stunning innovations … the private sector still under-invests in innovation. … There are huge opportunities for innovation that the market ignores because those taking the risk capture only a small subset of the returns.

Innovations for the poor suffer from both of those market limitations.  The market is not going to place huge bets on research when there are no buyers for a breakthrough.  This explains why we have no vaccine for malaria today, even though a million people die from it every year.

In this gap government plays an important role.  It can offer services where the market does not and thus provides a safety net.  To some extent it also fills in where the market leaves off in funding innovation. … But government faces its own obstacles to funding innovation.  It generally does not take the long view, because election cycles are short.  Government is averse to risk, given the eagerness of political opponents to exploit failures. …

So when you come to the end of the innovations that business and government are willing to invest in, you still find a vast, unexplored space of innovation where the returns can be fantastic.  This space is a fertile area for what I call catalytic philanthropy.

Catalytic philanthropy has the high-stakes feel of the private market but can transcend the key market limitations above:  The investor doesn’t need a share of the benefits – those go to poor people or sick people or society generally, all of whom stand to gain earth-shaking returns from the kind of innovations that business and government likely won’t pursue unless philanthropy goes first.  And once you’ve found a solution that works, catalytic philanthropy can harness political and market forces to get those innovations to the people who need them most. …

Philanthropy’s role is to get things started.  We used foundation funds to set up a system to make market forces work in favor of the poor, guaranteeing purchases so drug companies could make a little bit of money or at least not lose their shirts.  As the value of this approach became clearer, governments put in money to add to the market incentives, and some drug companies began to factor poor-world diseases into their business model.  In both research and delivery, well-targeted philanthropic money triggered action from business and government. …

In short, wealthy philanthropists should put their money into the high risk game of finding solutions to problems that markets and governments ignore.  And when they find a solution, they need to work the governments and markets to maximise the impact.

I am working on a couple of blog posts outlining my perspective on how markets and businesses can be harnessed for good, and what role there is for government.  Bill Gate’s address is very insightful and relevant to my thinking.  I agree that a market approach should work alongside charity and government.  It seems to me though that business has usually been viewed as part of the problem, rather than the solution.  But maybe this traditional perception might be challenged as 161 of the sharpest business minds in America begin to invest billions of dollars into worthy causes in ways that create the greatest impact.

Do you think that philanthropy is effective?  What is your view on the balance between the public, private and charitable sectors?

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