03 April 2011

Postponing and off-loading catastrophe

It's unlikely governments are going to be the first to implement a Social Policy Bond regime. Some private bodies and government agencies are making tentative first steps along the road to paying for the achievement of favorable outcomes (search for, and see my posts on, 'Social Impact Bonds' and 'Payment for Success Bonds). But typical efforts to bring about social and environmental goals focus on the tried, tested and (largely) failed approaches. So while there has been a downward trend in violent political conflict, for example, and increases in the aggregate level of human well-being, it's quite likely that present-day successes are being bought at the cost of more extreme calamities in the future. That is certainly how the current and still unresolved world financial and environmental crises seem to be shaping up.

The underlying reasons can probably be found in the too close relationship between government and large corporations, but identifying them is less important than fending off catastrophic risks to human well-being, which could take the form of an unravelling of our complex financial and economic systems, or large-scale warfare, or calamitous environmental disasters.

I've written a short paper about using Social Policy Bonds to reward people who help avoid such catastrophes. Perhaps the people with the strongest financial incentive to issue such bonds are the combination of private insurance companies, national export credit agencies and multilateral bodies such as the World Bank's Multilateral Investment Guarantee Agency which, according to the current Economist (subscription), offer businesses cover against political shocks such as the 'sudden imposition of currency controls, expropriations, conflicts and terrorism, and for governments failing to keep their part of an investment deal, such a supplying a new factory with electricity.'

It's difficult to get the attention of such bodies. But perhaps even if they did know of Social Policy Bonds they wouldn't be particularly interested. There is huge, tragic, and maybe a growing, mismatch between human suffering and the market. The people who are least able to escape from or adapt to catastrophe of any sort are the ones who cannot afford to buy insurance but who need it most. We could well be seeing not only escalation of problems that aren't dealt with early enough, but the off-loading of these problems onto those least able to bear them. The victims of these escapes from responsibility and are future generations and the poor.

It's unlikely that any coalition of insurance companies or government and multilateral bodies will spontaneously form to mitigate or avoid potential disasters as climate change or, say, large-scale warfare involving poor countries. They have little incentive to do so since the main victims have little market power. My hope is that some combination of philanthropists, non-governmental organizations, and the public will get the ball rolling and together issue Social Policy Bonds that will address the concerns of those who cannot enter the marketplace for conventional insurance.

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