The Wealth Gap Challenge

02/10/2012 01:32 pm ET | Updated Apr 11, 2012

Philanthropy and the wealth gap challenge

Economic growth and the question of its "if and when" is a very popular topic these days. Analysts have been providing outlooks on 2012's economic development. But in their attempts to foresee the future one thing is already clear: regardless of how the economies will develop, the outcome is going to be more positive for those who already have and earn a lot compared to the financially less fortunate. This phenomenon, the "wealth gap," is not new and we have become used to the fact that, with few exceptions, particularly in developing countries the wealth disparity is growing steadily. What is new though is that within developed economies -- among them are some of the strongest globally -- the wealth gap is widening too.

Countries as diverse as the U.S., Italy and Germany all have grown their Gini-coefficient, a measure of income inequality, over the last 30 years. And even Hong Kong, whose economy grew by over 6% at 3% unemployment last year, not only holds a global record for growing the number of millionaires but also, or maybe therefore, one for the highest income inequality ratio among developed economies.

An ever-growing challenge

This has given rise to substantial concern. While low levels of economic inequality are desirable to maintain an impetus for individual economic development, a large wealth gap is known to discourage individual economic efforts which, in turn, results in lessened economic power for large parts of the society. Public upheaval and political revolutions as seen during the Arab Spring are only the most blatant symptoms of the detrimental effect on societies caused by limited economic opportunity and unfair wealth distribution. With low-income households statistically producing a higher number of off-spring, strong income inequality virtually results in an increasing number of children slipping off into poverty, poor healthcare and education. The generation responsible for long-term economic growth is hence disengaged, and a society's ability to innovate from within itself jeopardized. Ultimately, this will limit the future economic potential also of those on the more fortunate side of the wealth gap, too.

Donating doesn't do the trick

The economic crisis of 2008 caused a tightening of public budgets which, in turn, has resulted in reductions of social welfare. This has led to a more critical public view on the financially successful, and so the wealthy nowadays have both an intrinsic and an extrinsic motivation to re-consider their role in dealing with the wealth gap and related social issues. It comes by no surprise that therefore the past years have seen many wealthy go public with their social engagement and openly demand more substantial measures to foster social equality from their peers. The public response has been very mixed with reactions reaching from friendly acknowledgement to acid accusations of fig-leaf efforts.

A closer look at the role private philanthropy can play in closing the wealth gap might therefore be appropriate. One myth to make away with at the outset is that donations to the poor won't solve the wealth gap challenge. While total global private giving is estimated to exceed USD 600 bn annually, this amount represented less than half of the wealth transferred from the bottom 80 to the top 20 percent of households in the US during the financial crisis from 2007 to 2009 alone. Hence, private philanthropy by wealthy individuals must play a different role if it means to prevent societies from getting destabilized.

An entrepreneurial approach

Indeed, philanthropy can have a catalytic role in encouraging and supporting social innovation: being liable to their own preferences and requirements only, as opposed to donors like most public fund-raising non-profit organisations, philanthropists can take higher risks like funding interventions and organizations in early stages of development. Philanthropists can afford the risk for a project to default, e.g., through a project owner's unexpected death, knowing that the draw-back will be off- set by other successful initiatives within their portfolio. In addition, today's private donors are increasingly seeking ways to make their social engagement not only more strategic and long-term in

order to achieve systemic change, but they go far beyond their mere financial contributions. Building on their professional success they leverage their knowledge and network, engage non-financial capacities like companies and employees, and most importantly, they apply their mind-set and experience as an entrepreneurs and investors to their philanthropy. Addressing social issues with an entrepreneurial approach including the idea of revenue generation through the provision of social products and services has resulted in efficiency and scalability and triggered some of the most remarkable recent trends in the social sector. On the giving side Venture Philanthropy and Impact Investing have taken giving beyond grants towards actual investments that include the expectation of a financial return for the investor. The ratio of social versus financial return generated by the investment may vary depending on the social investor's priorities. But the mere fact of making an investment, rather than giving money away, has a groundbreaking effect on the recipient's commitment, not least as it is an explicit sign of trust in the recipient's abilities. All these trends yield social interventions that often address social issues that weren't addressable before. But in all cases they increase the efficiency and effectiveness thereby growing the social impact.

Enabler and catalyser

It is through this role as enabler, supporter and advocate of social innovation that private philanthropy addresses the wealth gap challenge: not only do they deliver new social interventions, but by using their extensive networks and acting as figures of public influence they promote what ultimately will be adopted by larger non-profit organisations and, increasingly, by governments. Especially the latter are turning towards private philanthropy on their search for social innovation that enables the public sector to fulfill its social mandate while minding the costs. The recent launch of a program by the German bank for economic development, KfW, that provides financing to social entrepreneurs under the condition that they can secure additional funding by private donors, is an apt example of governments trying to harness the innovative power of private philanthropists. These interventions will increase the ability of the less fortunate both in developed or developing countries to have access to appropriate healthcare and education. This will help lay the foundations for future economic growth and participation in it: by linking private philanthropy of the wealthy to the economic participation of the less wealthy, the social fabric that makes for a stable, fair society is strengthened.

Transparency to gain momentum

Private philanthropy will not balance societies that are otherwise challenged in their social cohesion through an overly inhomogeneous distribution of wealth and income. But it can, if done credibly, be a starting point for systemic change -- all the while shaping the future of the wealthy, too. Transparency on individual efforts could create the desired momentum as it allows for discussions on objectives and priorities as well as for collaboration. However, given the reputational risk and the challenges of building a successful philanthropic track record, such transparency may at first only be acceptable within the peer group. Closed conferences, of which there aren't too many yet, but where leading philanthropists, experts and social-sector professionals gather to exchange knowledge and further their philanthropy, have proven to be a very effective means. Very often such gatherings boost alliances around a shared theme of interest, they build scale and subsequently become visible to the broader public including private, public and civil sector organizations.