02 October 2019

Harlem trendsetters

Years ago John Fund asked:
“If you had a financial windfall and wanted to help the poor, would you even think about giving time or a check to the government?” Source
A story from the current Economist reinforces the sentiment behind that question: 
Harlem is a neighbourhood in upper Manhattan that was once a byword for poverty, crime and urban failure. It was a place where, as recently as 1980, black men had a lower life expectancy than in Bangladesh. Large parts of it look different today. Life expectancy has soared, and the neighbourhood has improved dramatically. Although a considerable share of children there—35%—remain poor, their life chances still look much better than a generation earlier.
That is in no small part because of the efforts of the Harlem Children’s Zone (HCZ), a non-profit group which has “adopted 100 blocks” and set itself the goal of breaking the intergenerational chain of poverty by providing good parenting advice, healthy food and education. New parents who attend the zone’s Baby College learn about proper nutrition and reading habits for their infants. Older children can attend free, full-day pre-kindergarten and some go on to attend the HCZ network of charter schools. Their impressive initial results are seen as a national model. The zone serves 14,000 children and 14,000 adults at a cost of just $4,600 per person per year (raised from a mix of public and private sources). That is not a large sum of money, points out Anne Williams-Isom, the zone’s boss. “We spend $167,000 on an inmate in Rikers [jail]. How much can enterprise and philanthropy help alleviate American poverty?, 'Economist', 26 September
When I first came up with Social Policy Bonds I thought that government bodies, at any level, would be the issuers. They have far more resources than private charities, non-governmental organisations and philanthropists.

It's true that they, along with other donors, back most of the Social Impact Bonds currently being issued in about 25 countries. But they have shied away from issuing SIBs that target long-term, large-scale goals like raising life expectancy or universal literacy. Imagine the possibilities if government funded such bodies as the Harlem Children's Zone, with their ambitious goals that can be reached only after many years.

I think the main reason Social Policy Bonds haven't been issued is that, unlike SIBs, they are tradeable. This means that the bodies that would receive funding for their projects need not be the same throughout the lifetime of the bond, which could be decades for remote goals such as the elimination of poverty or the achievement of universal literacy. A government that issued Social Policy Bonds would therefore be relinquishing its power to choose the recipients of funds. Under a bond regime the allocation of funds would be up to the market, which would have incentives to choose only the most efficient operators and to terminate failed projects. Bodies currently favoured by government would, if they were inefficient and incapable of adapting, lose their funding under a Social Policy Bond regime. That is a contrast today's funding arrangements. In conventional policy, outstanding failure is rarely penalised (and often rewarded). Even under a SIB regime, inefficient operators, while they wouldn't maximise their returns, wouldn't see their existence be threatened.

Under both conventional policy and SIBs there is the possibility that even bodies as the HCZ well-meaning, hard-working and idealistic as they are at the beginning of their mission, become inefficient. The tendency is for any organisation, be it a trade union, religious body, university, public sector body or monopolistic private sector corporation, to become inefficient or corrupt; forgetting its ideals and devoting most of its energies to self-perpetuation. Examples abound: only today for instance, we read of the huge salaries being paid to top charity employees. Just one recent example:
Former Labour Foreign Secretary David Miliband is being paid almost $1 million a year to run a humanitarian charity that receives massive sums from British taxpayers. His astonishing pay package as chief executive of International Rescue Committee has soared to $911,796 (£741,883) ... according to the US-based organisation’s latest tax return. Million-dollar Miliband!, mailonline, 1 October
Social Policy Bonds would eliminate that risk. They would generate a new type of organisation - one whose survival would depend absolutely on its efficiency, and whose composition and structure would adapt to changing circumstances. This organisation would be a formal or informal coalition of bondholders, whose every activity would be devoted to achieving society's targeted goal with maximum efficiency. It's unlikely that governments will take the lead here; they are far more comfortable dealing with established players. What about philanthropists? I haven't made much headway there - they probably filter out messages from unconnected members of the public. However, I did publish this article in one of their journals last year. I'm not aware of any follow-up....

For more about Social Policy Bonds see my main page here. For why I am ambivalent about Social Impact Bonds see here and here.

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