Where the Market and Morality Intersect: A New Approach to World Poverty
May 24, 2010
In April the Tokyo Foundation was proud to present Acumen Fund CEO Jacqueline Novogratz as guest speaker at our 32nd Forum. Sharing Ms Novogratz's commitment to leadership development, the Foundation has partnered with Acumen Fund since 2008, working in Japan to publicize the Acumen Fund Fellows Program and encourage potential applicants. At the recent event, Ms. Novogratz discussed her work and the practical and moral imperatives that drive it in an inspiring speech, excerpted below.
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When I was ten years old, my Uncle Ed gave me a blue sweater that I adored. It had a design of mountains right across the chest, and I wore it up into my freshman year in high school. By then, my adolescent contours were interacting with the design of the sweater in a way that one day inspired my high school nemesis to yell across the hall that the boys need not travel to the mountains to ski any more; they could just ski across the mountains on my chest. I think every teenage girl experiences a moment of intense humiliation that she never forgets, and this was mine. I ran home to my mother, who ceremoniously dumped the sweater in the Goodwill bin, and I assumed I would never have to lay eyes on it again.
About 10 years later and 5,000 miles away, I had abandoned a career on Wall Street and was working with a small group of Rwandan women to launch their country's first microfinance bank. One day I was jogging through the streets of Kigali, when I saw a boy about 10 meters in front of me, wearing a sweater that looked exactly like the one I had thrown away. I ran up to the child, grabbed the collar, turned it over, and sure enough—there was my name, written on the collar of his sweater. It was a kind of revelation for me, and ever since then, I have cherished this story as a metaphor for human interconnectedness, a vivid example of how our daily actions—or inaction—can impact people we may never meet, all around the world.
From Rwanda to Acumen
In this and other ways, I trace my journey to Rwanda. Living and working there was an extraordinary experience that taught me what a small group of people can do if they put their minds to it. We built the country's first microcredit bank, and today, 21 years later, it is still the largest such institution in the country. It was not always a heartening experience; returning to Rwanda after the genocide, I found that the women with whom I worked had been both victims and perpetrators. But in the end, I came away with three vital lessons that have informed all my efforts since then, particularly my work with Acumen Fund.
The first lesson is that markets, left to their own devices, will not solve the problem of poverty. The market is efficient, and it can function as an excellent listening device, but it is not by nature a force for equality or inclusiveness; to the contrary, left unhindered, it tends to exacerbate the gap between rich and poor, a tendency we have seen not only in the United States but all around the world in recent years. The second lesson is that the traditional top-down approach of charity or grant aid cannot solve the problem, either. Too often it fosters dependence and undermines human dignity. And if I have learned anything over the past 25 years, it is that dignity is more important to the human spirit than material wealth. That was the third lesson.
I founded Acumen Fund in 2001 in the belief that the key to breaking the cycle of poverty was to treat people with respect, as human beings and agents of change eager and willing to improve their lives through their own efforts. I felt there had to be a better way than laisser-faire capitalism on the one hand and top-down charity on the other.
The idea behind Acumen was to enlist the market and its tools to achieve long-term social change. For this, we would need "moral imagination," and we would also need what we call "patient capital." Patient capital is in it for the long haul, and it takes risks that traditional capital would shun. Patient capital makes it possible to adopt and build on promising innovations and best practices even if they offer no prospect for short-term profits. Our plan was to raise patient capital and use it for philanthropic investments in the form of equity or debt, to support promising enterprises committed to building solutions for their poorest customers. We were convinced there was a niche for such investment because of the billions of dollars that go toward philanthropy each year—$250 billion in the United States alone. Instead of just donating money, Acumen Fund proposed to invest it. We would be honest with our investors, sharing our failures as well as our successes, and we would measure success both in monetary terms—because we would need financial returns in order to reinvest—and in terms of social impact.
To date, Acumen Fund has invested approximately $40 million in projects oriented to basic services—water, healthcare, housing, alternative energy, and agricultural inputs—primarily in Pakistan, India, Kenya, and Tanzania. Locally, these investments have created about 25,000 jobs and delivered services to tens of millions of people. Moreover, we have seen more than $1.2 million come back to Acumen Fund this year alone, and we expect that to rise to $2.1 million by the end of the year. This is money that we can reinvest in the future.
Case Studies in Change
Of the 40 projects in which Acumen Fund has invested to date, I would like to present two that I regard as particularly instructive. One of our most successful investments has been carried out in partnership with a major Japanese corporation, Sumitomo Chemical. The company had developed a mosquito bednet impregnated with a long-lasting insecticide that could protect people from malaria for five years. Initially, the product was manufactured in Vietnam and China, but then Sumitomo had the idea of transferring the technology to African entrepreneurs, so that they could address Africa's problems themselves. The company linked up with Acumen, as well as with UNICEF, Exxon, and the Global Fund. We located an African entrepreneur in Arusha, Tanzania, who was willing and able to undertake a long-term project with significant risks—a venture of the type that traditional banks are generally unwilling to finance.
Using our patient capital, we extended a loan of $350,000 in 2002. At the time, my hope was that the investment would lead to the creation of 105 jobs and the manufacture of 150,000 nets per year. As of now, the company has created some 7,000 jobs, making it one of Tanzania's largest employers, and it manufactures 20 million bednets that protect 40 million Africans every year. This is a huge success story for Africa and an inspiring example of how entrepreneurship can bring about positive change.
Another business that is improving people's lives in East Africa is Ecotact, based in Nairobi, Kenya. In Kenya 50 percent of the population lacks access to sanitation facilities, and the problem is particularly serious in crowded, low-income urban areas. The government invested in public facilities in such areas back in the 1970s, but these low-quality facilities had become filthy, dangerous places.
A few years ago, a Kenyan entrepreneur named David Kuria came to Acumen Fund with a nonprofit model for building a high-quality public toilet system. Although we saw the rationale for a nonprofit venture, we decided to work with him to develop it into a public-private partnership that could work with the government while also gaining access to private capital. The plan materialized, and today Kenya has about 26 of these high-quality public facilities, which together serve 16,000 to 18,000 people per day.
Kuria's undertaking is particularly significant because, in addition to an important health issue, it addresses the issue of human dignity. It operates on the assumption that people of all income levels want a safe, clean, pleasant environment and are willing to pay a reasonable fee for it. The toilets cost five cents per use, but they are kept scrupulously clean and even provided with piped-in music. Ecotact plans to build some 200 of these public facilities over the next five years, and the governments of Tanzania and Uganda are studying the possibility of adopting the same model.
The project above illustrates an important lesson we have learned over the last nine years, namely, that capital alone is not sufficient; we also need to build human capacity to make new systems work and change society over the long term. With this in mind, we launched our Acumen Fund Fellows Program about five years back in an effort to identify and develop leadership around the world.
As we see it, leadership requires not only business management skills but also "moral imagination"—being able and willing to envision the consequences of one's actions from a moral standpoint—because that, after all, is what this work is really about. We need leaders with the patience and insight to listen, to understand the needs of low-income people, and to build solutions for and with them. The Tokyo Foundation shares our belief in the importance of leadership development, and it has become a valued partner in this undertaking.
Each year we choose 10 people out of some 600–700 applicants. We introduce them to some of the best and brightest leaders around the world, and we take them through a curriculum that includes not only business management but also philosophy and ethics—great thinkers, from Plato and Confucius to Nelson Mandela and Martin Luther King, who stressed our duty to our fellow human being and the struggle for social justice as part and parcel of this human journey of ours. Acumen Fund fellows come from about 65 different countries and bring with them important skills and outlooks of their own. This past year, we were pleased to welcome Satoko Okamoto, who joined the Acumen Fund Fellows Program with the support of the Tokyo Foundation and contributed her own unique and valuable perspective.
Training such leaders is one of the most difficult things we do, but I believe it is also one of the most important. This is why we take our Fellows Program so seriously, and this is why it has been so gratifying to see the graduates of our program being recognized as promising leaders by major companies around the world.
Vision and Action
My immediate purpose in establishing Acumen Fund was simple enough—to address the problem of poverty. But defining poverty is not as easy as one might think.
Economists tend to define poverty in clear-cut monetary terms. But people in different societies may feel equally trapped and excluded from the mainstream economy even with widely disparate incomes. A person making $10,000 a year in rural South Carolina with no social supports and no prospects may be more desperate than someone in Bangladesh living on $3 a day but with a social network and a sense that things are going to get better. This is why I have come to view poverty fundamentally as a lack of choice. It may be about education. It may be about healthcare. It may be about having a voice.
Of course, when we see people struggling with basic issues of physical survival, our natural and correct response is that we need to find ways to solve those problems. But it seems to me that true moral imagination derives from an awareness that we are all interconnected—the lesson of the blue sweater, if you will. This is why, over the years, I have stopped thinking of the world in terms of developed versus developing, or "my nation" versus "your nation." I feel we have reached a point in history where it is incumbent on us to think in terms of a single, interconnected world.
My ultimate goal for Acumen Fund is to overthrow the prevailing model of development—which veers between pure charity on the one hand and an unfettered free market on the other—and treat the poor as full-fledged human beings, looking at the situation from their perspective. We have a lot of work to do before we reach this seemingly simple goal. But the last 25 years has taught me how much we really can accomplish once we commit ourselves.
In Japan I was told that many young people admire that sort of optimism, but most are realists and reluctant to tackle risky ventures, especially in these economically uncertain times. My answer to that is that every action we take entails risk, but inaction has its risks as well. It seems to me that, particularly when one is young, the risks of not following one's dreams are much greater than the risks of trying and possibly failing.
My own generation is largely to blame for this reluctance, I think. We have defined success in financial terms and equated happiness with security. Perhaps it is time to rethink these assumptions. As I see it, the secret of happiness is a sense of meaning and purpose, and that comes from committing oneself to something bigger than oneself. You can see the difference this makes in people, especially as they get older. Those who are living lives of meaning and purpose sparkle with energy and optimism, even if they happen to be going through difficult times. They have built something inside themselves that no one can take away.
For those who feel overwhelmed by the challenges, who despair of making a difference, I would stress the importance of taking one step at a time. I have spoken with young people who seem to think that they need to become CEOs overnight in order to make a difference in the world—when all they really need to start is to add one tool to their toolkit. Remember, "a journey of a thousand miles starts with a single step." I would urge young people everywhere to take that first step, because the world has never needed you more than it does right now.
As they say, If not us, who? If not now, when?
Thirty-Second Tokyo Foundation Forum
Breaking the Cycle of Structural Poverty
Speaker: Jacqueline Novogratz, founder and CEO, Acumen Fund
Moderator: Yasushi Watanabe, Professor, Keio University Graduate School of Media and Governance
Date: Wednesday, April 21, 2010, 6:30 pm–8:00 pm
Place: Nippon Foundation Building 2nd floor, main conference room AB