Steve Hutcheson

In terms of finance and financial instruments, venture capital is the provision of funding that enables pilot industries to get started and the investors take a calculated risk on its success or failure eventually withdrawing their funds and profit within a specified timeframe.

Social venture capital (SVC) should have a similar framework. The difference however is that with SVC the objective of the investment is to assist social programs to create sustainable employment or public utility for people at the lower socio-economic levels of developing economies. At the same time, the original investment should be returnable to those that make it along with a profit.

In almost every country there are people at the bottom of the social-economic ladder who need some form of assistance. Often that takes the form of social welfare in developed countries to international donor funds and charity delivered though the United Nations and international non government organizations in less developed countries. Looking at it more closely however, most if not all assistance to the poor is largely unsustainable. The need for funds continues year in year out and where there is no development these lower social groups are exploited and kept poor for generations on end. It is akin to a beggar in the street. He was there yesterday, he is there today and he will be there tomorrow. Putting ten dollars into his cup merely solves his problems today and at the same time creates a level of dependency that is not sustainable unless that is you are prepared to do the same thing day in day out.

Most people are not and so the beggar relies on finding new donors on a daily basis.

That said, there is a need to help the beggar resolve his problem. Sometimes the beggar opts to continue his existence as a beggar for very sound commercial reasons. In many third world countries for instance, a field worker might earn two dollars a day for his labor in agriculture. A beggar located in a busy city location for instance can draw two dollars an hour if not more. Why would he work in the field? In other instances, they are forced to work as beggars and receive a “salary” from those that command them.

In terms of venture capital or technical assistance for the poor, little is made in the way of direct business intervention that will enable a sound idea to germinate and create an economic independence that can stand on its own two feet. In most countries, capital is held in the hands of a few. There are no banking systems to speak of and when there is, they are again limited to conventional lending standards that exist all over the world and available to very few in the community.

On the other hand, each year the world through its many donor agencies and private donations, contribute some thirty billion in aid funding that has no possibility of a return primarily to address the immediate needs of the very poor. Each succeeding year the demand for the same level of funding and assistance is the same and in largely the same areas of operations. We don’t solve the problem. We simply contain it and often we contribute to the continuation of the problem by doing so.

What is not happening is a stabilization of the problems to arrest the constant need for support. In the US the banks recently needed propping up to continue operations with a massive injection of funds through the US federal government. The same scenario happened in a dozen countries around the world. At the very bottom of the social tree it is exactly the same situation except they have no alternatives.

Economic stimulation at these lower levels can bring about change. The very poor in developing countries are equally as industrious and capable within a limited skill set to undertake numerous enterprises that their counterparts in developed countries take upon them self. What are lacking are available risk capital and the technical knowledge that is required to change their present situation.

It is with this in mind, that I am seeking to develop a mechanism that will enable donors to invest rather than donate into a pool of funds that builds economic development at the almost micro level. A similar program currently exists in micro finance however I have issues with this program but for different reasons. It does not go far enough.

Many people are not inclined to be a business owner not withstanding that they are self employed. They want the regularity of a stable income that gives them a surplus to make choices on how their earnings are spent.

Social venture capital is intended to provide small to medium level enterprises establish in areas where the industry has not been in existence before. For instance, in Afghanistan, cotton is grown in areas where irrigation is plentiful however the crop is sent to Pakistan to be processed into cotton fabric and bought back into Afghanistan. The value added difference of the finished product can be fifty times the value of the cotton crop itself. This is a major loss in revenue to these communities. What is necessary is the establishment of a small cotton processing plant located within the region of cotton growing.

To get to that point their needs to be an entrepreneur identified who can build upon any assistance. He will need financial assistance and technical support until he can become established. He will need management guidance and constant monitoring of the investment funds. However, once established, he will be in a position to employ numerous workers, he will retain funds within the country. If he gets to be wealthy as a consequence then that is to be lauded. It is exactly the principle that the people of the US demand for them self yet those that administer international funds have lost sight of that ideal when it comes to dealing with developing economies.

At the end of a period of time, the investors will be returned their investment with a profit that is negotiated up front.

There will be failures. That is to be expected. It happens in all economies. It is the nature of venture capital. There will however be profit and the business will be sustainable and people will be employed and that is something that does not happen with charity or international assistance programs that simple distribute aid.

There is considerable angst amongst international circles regarding the corruption of the recent Presidential elections and the lack of capacity that is available within the Afghan government.  But what is it that they are wanting?

Presumably they want to see good government however what they have is an administration that is wracked with corruption, staffed by untried criminals, lacking all manner of administrative capacity and a litany of other failings. It simply begs the question as to what is it that they are suppose to provide in the big equation that is Afghanistan?

From the perspective of the average Afghan, their lives would in many cases be better off simply by eliminating all local government intervention. Governance as it exists is a matter of favors and rampant nepotism all managed by incompetent and corrupt officials. It is of parties playing off other parties, be they of a different tribe, ethnic group or gender. 

There function is marred by an unrealistic desire. A desire to emulate good government such as it might exist in pristine environments of the west. That is not going to happen. Much of the present intervention is to provide these agencies with new tools, new infrastructure and new skills without addressing what purpose they serve in the long run. It provides computers to people in government who for the most part cannot read, have no electricity to drive the processors and comes before the ability to affect an administrative system that cannot even operate on a manual system since almost none exists. If seventy percent of the public servants in Afghanistan were dismissed, there would be almost no affect on the functioning or well being of the Afghan community.

Government is necessary but it has to arrive from a position of demand. Afghanistan as it is possible has the most laborious bureaucracy in the world. The administrative process is rife with incompetence and payoffs. It is simple not needed. It is proposing to address the problems of a fully functioning economy and social system when there is no economy and the social systems is more in tune with the local mosque than it is with the warlords.

The US and the west would do better to reconsider what it is they are proposing to build in Afghanistan.

Afghanistan is not going to advance simply because it has good government. It is going to advance if it has an economic activity that provides every one with a basic income and life support. Everything else will be or at least should be a flow down process from that. Inventing laws or holding up activity until the laws are drafted is the thinking that Lewis Carrol may have been considering when he drafted Alice. Allowing local officials unfettered power to dictate terms and conditions of projects has been the greatest stumbling block in developing a working economy and social reform.  

Afghanistan has traditionally had a socialist styled administrative system with hundreds of inefficient public departments, utilities and state owned enterprises controlling major sectors of the economy. The public service is increasingly large and cumbersome with multiple layers of bureaucracy at a national, provincial, district and village level, each sucking relentlessly on the public teat. So far through Afghan history, it has failed to function realistically. The international assistance program however continues to build on that failed model. Coincidentally, this flies in the face of a demand by the main providers and backers, the US where its domestic population is demanding smaller government and smaller government regulation enabling the market to sort out its own problems as part of whatever is perceived to be enshrined in its two hundred year old constitution.  

Where the west can assist Afghanistan is not in continuing to protect its failed government. It has an obligation at this stage to build a credible economy allowing market forces to regulate unfair practices as they evolve and not spend billions on creating a corrupt preventative environment before they even start. Hundreds of industries have stagnated waiting for the legislation to be introduced that in part will provide the legislators with unfettered access to the benefits that might flow out of them.

Afghanistan needs what might be termed “social venture capital”, funds and technology backed up with technical support to get the population and the economy moving forward and not simply allowing the unrepresentative government to control and restrict that process as it does.