19 March 2008

Social Policy Bonds as insurance

In an ever more complex, interlinked world more and more things that could be ignored or used to be handled informally now have to be managed by government. This applies to many aspects of the commons and particularly the environment. Given the record of government, this is quite scary. Government policymaking can succeed when it's well meaning, has sufficient resources and the problems it has to solve are easily identified and do not conflict too much with powerful interests. Unfortunately, many of the new problems arising from globalisation are difficult to anticipate and isolate from a myriad of possible causes. What's raised this concern in my mind is my reading of the methane clathrate gun hypothesis, but there are any number of other possible ways in which the lives of millions of humans could be endangered: other environmental disasters, nuclear proliferation, pandemics, asteroid impacts, etc. How should governments deal with such threats?

The UK government is the first to set up a National Security Forum as a result of its work on a National Security strategy. Terrorism seems to be given greater attention than perhaps is necessary, but the limitations of such an exercise are more serious, I think, than a bias towards highly visible shocks.

One way forward might be to issue Social Policy Bonds as insurance against large-scale disasters. The cause of the the disaster need not be specified: the bonds would function in a similar way to increasingly popular catastrophe bonds, except that they would have the purpose - and the backing- of making it worthwhile for investors to prevent disasters happening. A national government could issue Social Policy Bonds that would reward investors if an event killing more than, say 10000 of its citizens in any one 48-hour period, does not occur before a specified date. The bonds would encourage investors to investigate all sources of potential disaster, impartially; that is, without favouring those that have a high media profile, for example, or those that are the remit of existing public or private sector bodies.

Globally, the concept could be scaled up: a collection of governments under the auspices of the United Nations or non-governmental organizations could issue similar bonds, aimed at preventing even larger-scale disasters.

In both cases, the particular merit of the Social Policy Bond approach is that there is no need for a handful of experts to try to anticipate the causes of future disasters and to allocate funds according to their views and today's knowledge. Investors in Social Policy Bonds would do this work themselves, without bias and during the entire lifetime of their bonds.

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