Kinky development - impact investing edition

Lant Pritchett has written about kinky-development, which involves focusing on solutions which are marginal to addressing important development challenges. See also this. 

Sample another example of kinky development from Jacqueline Novogratz, the founder of Acumen, 

Take chocolate. It's a hundred-billion-dollar industry dependent on the labor of about five million smallholder farming families who receive only a tiny fraction of that 100 billion. In fact, 90 percent of them make under two dollars a day. But there's a generation of new entrepreneurs that is trying to change that. They start by understanding the production costs of the farmers. They agree to a price that allows the farmers to actually earn income in a way that will sustain their lives. Sometimes including revenue-share and ownership models, building a community of trust. Now are these companies as profitable as those that focus solely on shareholder value? Possibly not in the short term. But these entrepreneurs are focused on solving problems. They're tired of easy slogans like "doing well by doing good." They know they have to be financially sustainable, and they are insisting on including the poor and the vulnerable in their definition of success.

Let's try to understand the problem. I have a graphic here (and here) which decomposes the distribution of income shares in the $100 bn chocolate industry along the value chain. 

Farmers get just 6.6% of the value of chocolate sold. Processors, manufacturers and retailers, all based outside of Africa, capture nearly 90% of the value. Whatever impact investors and entrepreneurs do in terms of "revenue-share and ownership models", in the absence of local manufacturing (or even processing), any incremental gains are tiny. And local manufacturing demands large capital investments, which require the mainstream capitalism of the big multinational companies. 

The publicity and feel-good factors associated with the efforts of impact investors and young western entrepreneurs (the Novogratz video is a great example) detracts attention from the more serious issues of development - structural transformations, persistent unfavourable agricultural terms of trade, grossly disproportionate value capture by western companies, and so on. These efforts end up giving the impression that a lot is being done to address the problem of poverty in Africa.

In fact, when Ivory Coast and Ghana (which make up 60% of global production) decided to add a $400 per tonne "living income differential" (LID) to the price of cocoa harvested this year, "the US Group Hershey took the rare set of sourcing cocoa beans from the futures market in New York", instead of traders sourcing it from the two countries, so as to avoid the LID. The same Hershey conducts high publicity sustainability programs in these countries on issues like deforestation and child labour, in partnership with international NGOs. Compared to the higher cost LID, these programs are low cost and gives the likes of Hershey an after-glow of responsible corporate citizenry. 

The Ivorian and Ghanian governments did the right thing by cancelling these initiatives of the big companies. The irony cannot be missed,

By cancelling the initiatives, they wanted to hold more cards “when we sit down and solve this big problem: why do countries who produce 60 per cent of a commodity have no real power in setting its price?” But ultimately, said a Ghanaian official speaking on condition of anonymity: “Your negotiating position is not that strong, so you’re entirely dependent on public sentiment, environmental sustainability concerns, child labour concerns, income inequality concerns, to make the other party feel a little guilty so they contribute more.”

In the end Hersheys agreed to give the surcharge. 

In these contexts, the local investor who can invest in building a local processing, much less manufacturing, facility, creating productive jobs and an associated eco-system, retain profits in the country and pay local taxes is the biggest impact investor of them all! The likes of which Ms Novogratz points to are merely virtue signalling and distracting attention. 

On similar lines, I am inclined to argue that efforts like Fairtrade, while certainly laudable in drawing attention to a problem, may actually have done more long-term harm than good. It may have had the effect of avoiding addressing fundamental inequities in the commodities market and global trade, and more proactive measures to support private investments in Africa.

As I blogged earlier here, I cannot imagine impact investing (as it stands, with its venture capital based approach) contributing in any significant manner to addressing serious and persistent development challenges and poverty alleviation.