NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Friday, December 21, 2018

By Thomas Dichter

The growing impact investment industry (II for short here) is entering hype territory, a sign that less is going on than meets the eye. The language of II promotion is buoyant, breathless, boosterish, and in some cases un-believable. “We have helped create 30,000 jobs and improved 96 million lives,” says one private equity firm that invests in emerging markets (Bamboo Capital Partners). A non-profit, also focused on developing countries says it “helps break the cycle of poverty for millions of farmers around the world” (Root Capital). A $350 million private equity firm that works in Sub Saharan Africa suggests that impact investment is “a paradigm shift” in the way we intervene to solve poverty (Vital Capital Fund). The Omidyar Network, calls itself a “philanthropic investment” firm. Its impact investing “seeks to generate both social change and a return on capital. It ends the old dichotomy where business was seen solely as a way to make a profit, while social progress was better achieved only through philanthropy or public policy.” As for the world’s largest philanthropy, the Bill and Melinda Gates Foundation, involved in many areas including II, they describe themselves as “Impatient Optimists.”

Based on my experience over the last 50 years in poverty reduction in the developing countries, the high expectations of impact investment are at best unreasonable. The history of poverty reduction interventions contains countless cautionary tales that should dampen the II movement’s enthusiasm. The chances are slim that poverty and profit can produce a lasting and happy marriage, or that infusing start-ups with capital will create growth, or that people can be trained to be entrepreneurial, or that small promising cases can be scaled up to large nation-wide successes.