I would like to thank Mr James Fierro, CEO of ECO Capacity Exchange for writing this article with me.
Last Friday (25th September) UN heads of state adopted the Sustainable Development Goals (SDGs). Marking the beginning of the end of the Millennium Development Goals (MDGs), governments, aid agencies and business leaders have been reflecting on what has been achieved and the task that remains to end extreme poverty. These same leaders have also been contemplating how the world can best tackle the global challenges of sustainability and inequality that have become pronounced since the MDGs were set.
The MDGs' pledge was to halve the proportion of people living in extreme poverty by 2015, using the poverty rate in 1990 as its baseline. At this time, 43% of the population of developing countries lived in extreme poverty, then defined as those living on less than US$1 a day. By 2010 it was 21% with a new daily poverty line of US$1.25. The global poverty rate had been cut in half in 20 years! This still leaves over 1.2billion people living in extreme poverty, however; which is why the SDGs will pledge to end extreme poverty by 2030.
Growth and Inequality
The fall in the global poverty rate owes a lot to the MDGs, but owes even more to the opening up of markets and trade liberalisation. Countries that realised sustained economic growth have done so through maximising the opportunities from open markets. From 1990-2010 growth and trade were the primary reasons for the reduction in worldwide poverty.
Eliminating extreme poverty, however, cannot be measured by GDP alone. It has to be measured by an assortment of factors such as income and inequality as well as health, safety and the environment. According to Martin Ravallion, Edmond D. Villani Professor of Economics at Georgetown University and previously director of research at the World Bank, a 1% increase in incomes cuts poverty by 0.6% in countries of greatest inequality but by 4.3% in the most equal ones.
To tackle inequality and allow the benefits of trade liberalisation we need empowered individuals and agencies to guide our efforts in achieving the SDGs. We need to work with governments, leverage the innovation and global reach of the private sector as well as the ability of civil society to convene communities ensuring participatory development.
An Absence of Finance
Business was largely absent when the MDGs were authored. This time round the UN, through its High Level Panel for the SDGs, conducted an ambitious private sector engagement exercise. In part, this was in recognition that economic growth played a key role in achieving the MDGs and that the private sector will be vital in delivering the SDGs that have an even greater global reach.
We need to move from billions of dollars of aid to trillions of dollars of investment. According to the OECD, the finance needed to fund the SDGs is nearly 20 times official international aid flows for 2014. UNCTAD has also estimated that an additional US$2.5trl will be needed annually for least developed countries to transition to sustainable development. Whichever way you look at it, aid cannot achieve the SDGs alone. Private sector finance is crucial.
Experience suggests, however, that getting private sector finance to where it is most needed remains a challenge. In developing economies, in particular in rural communities, it is not possible for many smaller producers and traders to access financial service providers. So much trade is not monetised, accumulation is therefore difficult and as a result many are excluded. According to the International Finance Corporation, less than one quarter of adults in sub-Saharan Africa have access to formal financial services. Moreover, SMEs and especially smallholder farmers, many of whom are women and heads of households, have been perennially denied affordable access to private and even public sector finance for many decades.
To improve trade, foster a dynamic SME sector and ensure finance gets to where it can do the most good to advance the SDGs we need to rethink financial services. The traditional banking model alone is not likely to meet the needs of the people who sit at the bottom of global supply chains. Disruptive technologies and new models of finance offer a chance to access finance for those who were previously unable to. They are changing the status quo and bringing vital services to the world's poor; those who have been shut out from trade, finance and the dignity that comes with earning a living and improving your family's wellbeing.
Collaborative Finance
Developments in the Sharing Economy, the Non-Bank Trade and Finance Economy space such as collaborative finance, capacity trading and peer to peer exchange, are proving benignly disruptive and much more inclusive in rich and poor countries alike. These breakthroughs are hinting at our ability to provide cheaper access to alternative finance and greater control over its use by the bottom billion. For example Bangla-Pesa, a non-profit initiative designed to strengthen and stabilise the economy of informal settlements in Kenya, has achieved impact through organising small-scale businesses into business networks and cooperatives utilising a non-monetised, community currency to enable trades. Community development in Kenya facilitated by inclusive, collaborative finance and others cases like it represent highly innovative forms of best practice that we hope to see spread more broadly.
For collaborative finance and new exchange formats to make a material contribution to lifting 1.2billion people out of poverty, scale is required. The Eco Capacity Exchange is a B2B trading platform for the value of productive assets (aka available capacity) that responds to this need, offering a trade and investment financing solution that reduces the friction and costs associated with global commerce. It is underpinned by a social mission and vision "to improve global economic and social conditions through better utilisation of the world's available capacity". Most importantly, the flexibility, applicability and cost advantages of the Exchange's trading solution, gives it the potential to achieve the scale needed to make a significant contribution to ending poverty.
Members of the Eco Capacity Exchange use a special purpose currency, known as the ECO, which incurs no finance or foreign exchange costs to facilitate trades. This and other features of the Exchange and its trading environment allow low cost finance to be channelled to credit constrained companies and countries, opening up new markets and sources of demand while helping members buy and sell goods or services at better margins than they could secure when going through conventional markets. The competitive advantages associated with trading via the Exchange is attracting attention from mainstream international companies and their supply chains and important institutional actors such as the UK government and the City of London.
What's important from an SDG perspective, however, is that the ECO Solution can be commercially deployed in emerging and poor economies in ways that could make a direct contribution to advancing key SDGs. For example, an ECO Solution can be engineered to help energy and natural resource rich but credit starved countries in Sub-Saharan Africa and South Asia secure maximum national value from their resources. It would allow them to acquire, at lower cost and with greater control, the finance and capabilities to sustainably get these resources to market quickly and with higher margins. The surplus generated can then be reinvested in developmental and infrastructure projects much earlier than if the country had to rely on costly, time consuming (to organise) conventional project financing arrangements.
The ECO Solution can also be used in more direct, more visibly inclusive pro-poor applications. It could be harnessed, for example, to help subsistence farmers in Sub-Saharan Africa and elsewhere spring their poverty trap by giving them access to affordable finance, technical assistance and stable contracts that allow for their equitable integration into commercial agricultural supply chains. This potential has been modelled against an on-going, charitably financed pilot scheme with contract farming groups involving up to 20,000 formerly subsistence farmers in Zimbabwe and Mozambique.
The Eco Capacity Exchange plans to work with civil society and the public sector to pilot and then scale up parallel versions of this intervention in other agricultural supply chains in emerging economies. This alternative, collaborative and inclusive capacity-based financing route could be used to generate, on a self-financing basis, lines of lower cost credit. This can then lead to more appropriate and sustainable productivity investments which ultimately improve incomes for many millions of subsistence farmers enhancing welfare for their families - all major SDG aspirations.
Leading development agencies, such as UK's DFID, now talk about "beyond aid" development approaches needed to sustainably overcome poverty. "Beyond aid" strategies seek innovation and collaboration between the private sector, government and civil society to create a bedrock that can lift 1.2billion people out of poverty and into a life of hope. We believe that innovative solutions such as those illustrated by the Eco Capacity Exchange and Bangla-Pesa, and other disruptive, pro poor technologies, will be essential to achieve the challenging goal of a sustainable and stable post-2015 world and are the embodiment of "beyond aid". After all, when trying to end poverty, the traditional model of trade and aid will not be enough. Innovation, scale and collaboration are key!
Mr. James Fierro is an international businessman and social entrepreneur with over thirty years of experience as the Founder and CEO to a wide range of start-up ventures. His latest venture is the ECO Capacity Exchange, a unique global mechanism that allows corporations to convert their unused capacity into a unit of exchange.