Wednesday, September 21, 2016
Keohane, Capital and the Common Good
We have witnessed a horrendous example of how financial engineering, by creating deceptive financial products, can encourage people to let their aspirations outstrip their means. But if financial innovation can get the world into serious trouble, innovative finance can help solve its problems. With “a kind of creative and ‘visible hand’ … that corrects for market failure and provides for the public good,” innovative finance can be a powerful social force. What is new here is “not the engineering, but the application.”
In Capital and the Common Good: How Innovative Finance Is Tackling the World’s Most Urgent Problems (Columbia University Press, 2016) Georgia Levenson Keohane looks at climate change, healthcare, financial inclusion and access to capital, disaster finance, and U.S. community and economic development.
Innovative finance is definitely not charity. Firms that engage in innovative finance expect a return on their investment. For instance, LeapFrog, a private equity firm, has invested in “companies providing insurance, savings, pensions, and payment services to customers earning less than $10 a day. According to the company, the current portfolio showed a 40 percent increase in operating revenue and a 39 percent rise in profitability in 2013.” Admittedly, these figures aren’t especially meaningful in isolation, but I assume that LeapFrog is, as they say, doing well by doing good.
Keohane gives example after example of how finance can be applied creatively for the public good. For instance, “an expert in securitization who translates future development aid pledges into vaccines today; an entrepreneur who turns a mobile phone into pay-as-you-go solar electricity; the conversion of pay-for-success contracts from bridges and roads to affordable housing, early childhood education, and maternal health.”
This book may not be an antidote to the constant barrage of attacks on the financial industry, but it shows that finance can be, and often is, allied with the interests of the public good.