Co-authored with Matt Bannick
(June 6, 2013: Redwood City, CA) -- Winston Churchill said it best when he concluded, "democracy is the worst form of government ....except all those other forms that have been tried from time to time."
The same can also be said about capitalism. In the past several decades, international markets have pulled millions out of poverty, unlocked life-changing technological and scientific innovation, and raised our global standard of living to unprecedented levels. But, distressingly, far too many people are being left out. This is true everywhere, including in the United States, where the wealthiest one percent now own 43 percent of the country's wealth compared to just 25 percent in 1950. Globally, the numbers are equally concerning since the 1.2 billion poorest people account for only one percent of world consumption, while the billion richest consume 72 percent. Clearly, this disproportion warrants urgent attention.
In 10 days, the G8 will gather in Enniskillen, Ireland to consider, among many other things, how our international economic system can address this inequity, recognizing its enormous human cost and the threat it poses to global stability. Daunting though that is, we are far from discouraged. In fact, we know firsthand that market-based solutions can be a powerful way to create jobs and deliver services to those who need them - at the scale required in a world of seven billion people. And we are especially heartened to see a new movement afoot called "social" impact investing, which explicitly seeks to apply the power of the market to help solve stubborn economic and social challenges.
Simply put, "impact investments" are those that generate social or environmental value, as well as financial return. The enthusiasm surrounding this concept represents a paradigm shift: an understanding that market-based tools, imperfect as they are, can be leveraged to help even those who have been left behind by global capitalism. This year alone, impact investors will channel billions of dollars to fund transformative solutions in sectors as diverse as sustainable agriculture, affordable housing, clean energy technology and financial services for the poor. And, just last week, the United Nations High-Level Panel identified impact investing as a viable "third way" for post-2015 sustainable development.
One well-known example of impact investing is M-Pesa, a private sector mobile money and payment service that has transformed the Kenyan economy. Launched in 2007, it now provides 15 million Kenyans - the vast majority of whom had previously no access to traditional bank accounts - the opportunity to deposit, withdraw and transfer funds through their mobile phones. M-Pesa's adoption has been so astounding that it now handles 80 transactions every second, which amount to nearly a third of Kenya's $33.6 billion GDP.
What is not widely known, however, is the fact that M-Pesa is the direct output of a public-private partnership. Its seed capital came from Vodafone and the U.K.'s Department for International Development. Both took a chance on the then-unproven idea that a mobile platform could leapfrog traditional banking infrastructure and provide financial services to the poor.
M-Pesa is a great example of how impact investing aligns incentives between the private and public sectors to create enormous social benefit. In the U.S., we have launched a social impact bond project at Riker's Island Correctional Facility in Queens, New York. The aim of the initiative is to cut re-offending through intensive education, training and counseling to young inmates. Goldman Sachs is providing the initial funding and Bloomberg Philanthropies is offering a loan guarantee, with MDRC, a leading non-profit organization, overseeing the project.
The City of New York will act as broker. If recidivism drops significantly, it will pay out on the contract. If it does not - and there are no savings from the reduction in re-incarceration - the taxpayers won't have to pay a thing.
Social impact bonds have their origins in the UK, where policymakers have been admirably forward-looking in their embrace of these and similar innovations. To his credit, U.K. Prime Minister Cameron has leveraged his G8 chairmanship to bring impact investing to the next level. Today, in London, Cameron has assembled leaders from civil society, government and the private sector to flesh out exactly how it can be incorporated more systematically into the world's problem solving toolbox at Enniskillen later this month.
As Americans, we are pleased to see the United States at the forefront of these efforts as well. Along with activity at the state level, like the Riker's Island venture, the U.S. Government has also supported a national Social Innovation Fund to scale non-profits with proven track records, and USAID's Development Innovation Ventures provides risk capital to early-stage solutions that could deliver socioeconomic impact in cost-effective ways.
Like democracy, impact investing is far from perfect. But we have seen first-hand at eBay and PayPal how market-based solutions can change millions of people's lives for the better.
We have great unfinished business to attend to. While market-based approaches - and impact investing in particular - are not a silver bullet, they must form part of the solution to our development challenges. We call upon G8 leaders to grant them the thoughtful due diligence that they deserve.
Matt Bannick is managing partner of Omidyar Network and former president of PayPal and eBay International.