Impact Investing: The Challenge of Job Creation

This is the third post in a series by Morgan Simon on the trends, challenges and opportunities of impact investment, focusing on an exploration of the mechanisms which allow affected communities to lead and shape investments.

What is impact investment? This might be the most important, and simultaneously, most overplayed question of our industry. Forgive me for repeating it; however, it is critical we return to the conversation to consider how communities can better engage in, and benefit from, impact investment.

What should count or not count, and who gets to make that decision? What types of activities deserve subsidized capital in a capital-constrained universe, and which financial institutions should receive your investment dollars? So far, impact investment has been largely defined by investors themselves—the Global Impact Investment Network (GIIN) has put out a general definition, “the intention to generate measurable social and environmental impact alongside a financial return.”  There exists a myriad of investment activities that attempt to generate such impact and return.

One of the primary impact investment activities pursued has been job creation to address worldwide poverty. The World Bank estimates we will need 600 million jobs by 2020 to keep up with population growth globally—and 200 million of these jobs will be needed in developing economies.[i] Small and Growing Businesses (SGBs) , the preferred instrument of impact investors to encourage job creation after microfinance, have been shown to be critically linked to GDP growth and overall poverty reduction in developing countries.[ii]

SGB growth is therefore supposed to help poor people through two mechanisms—it creates jobs, which provide much-needed income, and it encourages GDP growth, which, in theory, supports the overall economic health of a country and reduces poverty.

These arguments have a few fatal flaws that need to be addressed before we can wholeheartedly support job creation as a strategy for global poverty reduction:

1. We live on a planet of finite resources. By design, GDP cannot grow infinitely.  While in the short-term it’s nice to show impact investors graphs that trend up, you can’t rely on short-term fixes for long-term global solutions. This is particularly important for those of us with a regional agenda, given that one country’s success may mean another’s ruin in the context of a global race to the bottom on wages and environmental standards. It’s imperative that people focused on poverty reduction rethink GDP as a benchmark. It simply doesn’t take in to account all of the variables for truly positive social and environmental impact.

2. GDP and poverty reduction might grow in tandem; but evidence is inconclusive on its correlation to inequality. Certainly, there are many examples of countries like India and Brazil, whose miraculous growth in GDP did not change the fact that they are ravaged by inequality and host the greatest number of poor people in the world.To take the extreme case, the US has the highest GDP in the world—and in 2012, the top 1% of the US population received 93% of the income growth. Often, SGB development is ultimately an attempt to replicate the US model of a free-market economy internationally. Should we promote a model that enables such extreme inequalities? As one International Money Fund economist commented recently in the New York Times, “When a handful of yachts become ocean liners while the rest remain lowly canoes, something is seriously amiss.”[iii] Indeed, focusing on job creation without an equal focus on equality just reinforces this dichotomy.

3. Most importantly, poverty is not caused by a lack of jobs; it’s primarily due to the proliferation of low-paying jobs.  Gary S. Fields provides several striking statistics in the great book Working Hard, Working Poor. He notes that globally, 85% of the poor are in fact working.  The International Labour Organization defines a “working poor household” as one in which at least one member is working but the household lives on less than $2 per person per day. The working poor constitute 39% of total employment in the world, and 80% of total employment in South Asia and Sub-Saharan Africa.[iv] Millenium Development Goal data for 2011 shows that 61.2% of people in developing regions were working—and that 18.2% of those working people were still earning less than $1.25 a day, with percentages as high as 38% of workers in sub-Saharan Africa and 35% in South-Eastern Asia.

   Is this employed person better off than his self-employed, equally poor counterpart? Or does he run a higher risk of income uncertainty given that he’s more likely to be an economic migrant with limited access to productive means such as land? I will leave this question to the statisticians, but let’s just assume for the sake of argument that living under $2a day is quite challenging whether you have been paid that $2 or generated it yourself. And I would assume that in both scenarios, your opportunities for advancement are minimal. To borrow a phrase from Fields, indeed, we don’t have a global unemployment problem—we have a global employment problem; in that the jobs we create are precisely what are keeping people poor.

   This is why organizations like the Aspen Network of Development Entrepreneurs have put an emphasis on defining “quality” jobs—and others argue that we should not focus on jobs at all. Recently I sat on a panel with indigenous leader Winona LaDuke—who shared with us, “Lots of people come to the res[ervation] to talk about job development. We don’t want FTEs. We don’t want to leave the res to work for Walmart. We want the preservation of our historic ways of generating our livelihood.”

4. Employment and assets are very different and critically important. Assets (items of ownership convertible into cash) are based on a variety of factors beyond employment, such as inheritance, home ownership, and education.[v]  While a job may provide a short-term income boost to a household, it would take generations to make up for the asset short-fall that family is facing. Furthermore, assets are better indicators of inequality, including limits to economic, social, and political mobility. For example, the average wage for an African American man in the US is 25% percent lower than their Caucasian counterpart—but the more frightening statistic is that African American families in the US have twenty times less assets than Causasian families. So while a job may provide a short-term income boost to a historically disadvantaged group, it would take generations to make up for the asset short-fall that family is facing; even if incomes are relatively equal in a society. In this context job creation might help address income distribution, but would do little to address asset distribution.

Let’s take a step back from job creation to consider what it means to be poor. I define poor as a lack of choice to live life in a way that respects your physical needs, cultural values, social and political context, and familial obligations. This of course varies country by country, region by region, which is why as impact investors I invite us to rethink how we consider poverty reduction to be more than just a simple economic equation.

Let us consider:

-     Rather than income, what if we focused on asset-building for individuals and communities?

-     What if we focused on culturally-appropriate livelihoods, rather than limiting our viewpoint to wage employment?

-     What would it look like if we focused on equality just as much as growth?

Perhaps we would still consider job creation to be an important cornerstone of impact investment. My hope would be that we feel a greater level of confidence that our impact investment dollars were really leading to global poverty reduction and more autonomous communities.

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