Capital & Ideology (Thomas Picketty) : Book review

About the book :

French economist Thomas Piketty published Capital and Ideology in French (September 2019) and then in English (March 2020). The book is somewhat an updated and enriched version of Picketty’s great success, Capital in the Twenty-First Century (2013), which focused on wealth and income inequality only in Europe and the United States.

After exploring historical and contemporary justifications for inequality, Piketty outlines, in his new book, potential means of redistributing wealth.

Key insight #1 : Inequalities are never “natural”

Inequalities are never “natural”: any regime justifies them by an ideology and builds them by laws, taxation, organization of property, education system… The system of inequality that prevails in a given country is first of all the result of political and ideological choices

The central message of Picketty is that behind every inequality is a system of justification that ensures its perpetuation. However, there is no determinism: a bifurcation is possible, if the right political and ideological mobilization is there.

“Every human society must justify its inequalities: unless reasons for them are found, the whole political and social edifice stands in danger of collapse.” 

Key insight #2: Inequalities have been growing since the 1980s after entering in the post-communist and hyper-capitalist word

After the fall of the Soviet Union, the world has entered a new unequal regime, which the author describes as “neo-proprietarist”, reviving the sacralization of private property in force in the 19th century. This regime glorifies the “society of winners “and justifies the explosion of inequalities by the fact that the most talented people deserve to enrich themselves by reward for their exceptional productivity.

Interpretation. The share of the top decile (the 10% highest incomes) in total national income ranged between 26% and 34% in 1980 in the different parts of the world and from 34% and 56% in 2018. Inequality increased everywhere, but the size of the increase varies greatly from country to country, at all levels of development. For example it was greater in the United States than in Europe (enlarged EU, 540 millions inhabitants), and greater in India than in China.

Sources and series: see piketty.pse.ens.fr/ideology

Interpretation. In 2018, the share of the top decile (the 10% highest incomes) in national income was 34% in Europe (EU+), 41% in China, 46% in Russia, 48% in the United States, 54% in Subsaharan Africa, 55% in India, 56% in Brasil and 64% in the Middle East.

Sources and series: see piketty.pse.ens.fr/ideology

Interpretation. The bottom 50% incomes of the world saw substantial growth in purchasing power between 1980 and 2018 (between +60% and +120%). the top 1% incomes saw even stronger growth (between +80% and +240%). Intermediate categories grew less. In sum, inequality decreased between the bottom and the middle of the global income distribution, and increased between the middle and the top.

Sources and series: see piketty.pse.ens.fr/ideology

Interpretation. The share of the top decile (the top 10% highest incomes) in total national income was about 50% in Western Europe in 1900-1910, before decreasing to about 30% in 1950-1980, then rising again to more than 35% in 2010-2020. Inequality grew much more strongly in the United States, where the top decile share approached 50% in 2010-2020, exceeding the level of 1900-1910. Japan was in an intermediate position.

Sources and series: see piketty.pse.ens.fr/ideology

Interpretation. The top marginal tax rate applied to the highest incomes averaged 23% in the United States from 1900 to 1932, 81% from 1932 to 1980, and 39% from 1980 to 2018. Over these same periods, the top rate was 30%, 89% and 46% in Britain, 18%, 58% and 50% in Germany, and 23%, 60% and 57% in France. Fiscal progressivity was at its highest level in the middle of the century, especially in the United States and in Britain.

Sources and series: see piketty.pse.ens.fr/ideology

Key insight #3 : Picketty’s recipe to tackle rising inequalities

  • Granting employees voting rights in (fairly large) companies with capping of large shareholders voting rights
  • Putting in place a progressive tax on income (all income), inheritance but especially on wealth (all wealth) so that capital circulates more
  • Creating a Capital endowment for any young person entering working life: A cash payout of two hundred and thirty-one thousand dollars—the equivalent of sixty per cent of the average adult’s net worth. (Piketty has called this system of capital endowment “inheritance for all.”)
  • Creating of a basic income and education capital for everyone, up to the education expenses of the privileged groups, to be used throughout life
  • Extending the carbon tax to all carbon emissions so that it takes into account the realities of climate change, with a great contribution from polluting companies
  • Renegotiating treaties and trade agreements, which force countries to compete with each other for who has the lowest taxes on wealth and income, starving national social systems and increasing financial inequality

Good Economics for Hard Times : Book review

The book was first published in November 12, 2019. The authors, Abhijit Banerjee and Esther Duflo, were jointly awarded the Nobel Prize in economics in 2019 (Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel).

In the book, Abhijit Banerjee and Esther Duflo address controversial topics such as immigration, trade, economic growth, technological disruption, universal basic and climate change. To do so, the authors rely on various experiments (randomized controlled trials) to test the effectiveness of specific policy interventions, in the same way clinical trials are performed in medicine (cf. figure below).

Thanks to its experimental focus, the book is written in an easy-to-understand style, which makes it accessible for readers who are not well versed in economics.

Some of the findings that caught my attention are as follows:

  • Increased immigration does not negatively affect local people wages
  • Ordinary people like to stay in their place. They don’t want to go to a different sector, to a different location and to a different life
  • Free trade boosts overall growth, but it also produces concentrated pockets of job losses
  • Tax cuts for the wealthy do not produce economic growth
  • Damages from climate change will be much more serious in poor countries
  • Because of distortions in the tax code (taxing humans more than capital) and industry concentration, most of automation today is more about deplacing workers than raising overall productivity
  • There is no evidence that cash transfers make people work less
  • Universal basic income is a good idea but it is very expensive. However, in the case of the US, it would require eliminating all existing welfare programs and raising the US tax level to the level of Denmark’s

Selected quotes from the book :

“Economics is too important to be left to the economists.”

“Economists are more like plumbers; we solve problems with a combination of intuition grounded in science, some guesswork aided by experience, and a bunch of pure trial and error”

“The focus on income alone is not just a convenient shortcut. It is a distorting lens that often has led the smartest economist down the wrong path, makers to the wrong decisions and too many of us to the wrong obsessions”

“We clearly don’t have all the solutions, and suspect that nobody else does either. We have much more to learn. But as long as we understand what the goal is, we can win”

“If the world warms by a degree centigrade or two, residents of North Dakota will mostly feel perfectly happy about it”

“The bulk of R&D resources these days are directed towards machine learning and big data methods designed to automate existing tasks rather than the invention of new products that would create (…) new jobs”

Covid-19: It is time for Impact finance to act now!

Sustainable development is more than ever relevant

The Covid-19 challenges are not only sanitary but also economic. The crisis has already plunged the world’s economy into a recession with negatives consequences on jobs and social stability. Low-income countries, particularly, face tremendous pressure to deal with the externalities of this crisis. In such a context, sustainable development goals have become more than ever critical (as shown in the following table). Moreover, a prolonged crisis would adversely influence the implementation of the 2030 Agenda and might wipe out the progress made in recent years in many SDGs.

SDGImpact of the crisis
Poverty (SDG1)Loss of income leading vulnerable segments of society and families to fall below poverty line
Health & wellbeing (SDG3)Devastating effect on health outcomes
Education (SDG4)Schools closed; remote learning less effective and not accessible for some
Decent work and economic growth (SDG8)Economic activities suspended, lower income, less work time, unemployment for certain occupations
Sustainable cities and communities (SDG 11)Population living in slums face higher risk of exposure to Covid-19 due to high population density and poor sanitation conditions

With all this economic mess, is impact finance pertinent now?

Impact finance is far from being immune from the current systemic crisis aside from very few sectors like technology and biotech. However, times of uncertainty and hardship create new opportunities for financiers to make an impact. Indeed, the necessity of finding solutions in providing healthcare supplies, ensuring continuous access to food and supporting small and medium-sized businesses can be a catalyst involvement in impact finance. Furthermore, it is fair to say that public sensitivity to social issues, and to a lesser extent, environmental issues will be stronger when things normalize. Islamic financial institutions will be obliged to deal with this new reality, especially that they mostly operates in low and medium income countries. Relying on isolated and sporadic social responsibility initiatives (donations, interest free loans…) will not be effective nor sustainable in the medium and long terms.

The role of digital technology going forward

The crisis has forced us to review several paradigms including the integration of digital technology in our daily life. It is true that before this crisis we had already entered the era of the fourth industrial revolution, in which the fusion of technologies blurs the boundaries between the physical, digital and biological spheres.  In the finance sector, technology has become a positive enabler to deal with the crisis’ impacts. Examples include mobile-first banking, digital currencies, crowd funding and blockchain-driven supply chain finance. For Islamic financial institutions, the crisis is, therefore, an opportunity to embrace technology at a larger scale and to roll out new tech-driven business models that address critical sustainability issues in countries where they operate. The digital transformation challenge lies in the organization’s ability to evolve its business model, to transform its processes and finally to conduct change.

This article was first published in IFN

Green financing : Turkey’s first Sukuk issuance

On 3 June 2020, Zorlu Energy made history by becoming the first green Sukuk issuer in Turkey. Zorlu Energy, a subsidiary of Zorlu Holding, operates in electricity generation, electricity and gas distribution, wholesale and trade in the energy sector. More specifically, the company has projects in sustainable infrastructure, clean transportation and renewable energy. The green Sukuk issue, which targeted qualified investors, is part of 450 M TL issuance program. The first issue has a one-year term and quarterly variable income payment. The issue’s proceeds will be directed to finance sustainable infrastructure and clean transportation investments.

Industrial Development Bank of Turkey (TKBB), the investment bank that structured Zorlu Energy green Sukuk, applied a sustainability framework aligned with the standards of the International Capital Markets Association (ICMA). Escarus acted as the external reviewer that provided the second party opinion on Zorlu Energy’s Sustainable Sukuk Framework.

Issuance elementsDetails
Program amount450 million TL
Issuance amount50 million TL
NatureDomestic
MaturityOne year
ReturnCorresponding Government Bond Yield + 4.5%
StructurerTKBB
Second opinionESCARUS
Nature of the placementPrivate
Underlying assetsSustainable infrastructure and clean transportation
Underlying contractIjara

Zorlu Energy green Sukuk : Technical details

Zorlu Energy green Sukuk is definitely a good news for impact finance for the following reasons:

  • Door opener to other Turkish green and social Sukuk issuances:  After this successful maiden assurance, other Turkish companies may be interested to issue Sukuk to finance their sustainability projects in the future either in local or foreign currencies. Sustainable Sukuk allow particularly issuers to broaden their investors base to include both conventional and sharia compliant investors
  • Confirms Turkey’s ambition as a center for sustainable finance: It is true that the country has already issued several green bonds since 2016. However, the ambition of positioning Istanbul international center has a hub for sustainable and Islamic finance supposes first a diversity of structures (Sukuk, bonds, equity, REIT…). Second, a diversity of local and international investors and finally a variety of the underlying sustainable assets in sectors such as renewable energy, healthcare, education, water and transportation.  
  • Triggers sustainable Sukuk momentum globally: The first half of 2020 has been very calm in terms of green and Sukuk issuance compared to the same period in 2019. This performance is understandable as most issuers have been busy struggling with COVID19 crisis.  Now that the economic activity is slowly kicking off, Sukuk can play an important role in closing the financing gaps of government and business to offset Covid-19 aftereffects. To illustrate, the Indonesian Government raised recently $2.5b through global Covid19 Sukuk offering to address the pandemic deficit

This article was first published in IFN Volume 17 Issue 26 dated the 1st July 2020 

Covid-19: What implications for the future of the banking sector?

Source : Velvet Chainsaw

With a large part of the world in forced confinement, the damage from the COVID crisis19 is mainly economic. This unprecedented situation has forced us to review several paradigms including the integration of technology in our daily life. It is true that before this crisis we had already entered the era of the fourth industrial revolution, in which the fusion of technologies blurs the boundaries between the physical, digital and biological spheres. However, the current crisis will have an accelerating effect on the generalization of this trend to all sectors of activity because, on the one hand, several psychological barriers related to digitalization will vanish. On the other hand, technology will be leveraged to prevent the effects of an upcoming crisis. We are already seeing the beginnings of these changes with examples such as the generalization of distance education, the use of telemedicine, teleworking and the distribution of public aids by smartphones. Changes that should take years (if not decades) happen now in a matter of days!

These conclusions apply to the banking sector as well. Digital channels are already emerging as the preferred distribution alternative especially with restrictions in terms of movement and in terms of staff availability. While ensuring continuity of service and addressing customer expectations, banks should take advantage of this opportunity to experience a radical overhaul of their operating models in order to adapt them to the new market reality when the crisis ends. The reliance on digital technologies and the limited use of physical branches currently will fast track the transformation of the banking landscape in the future by favoring banks with stronger digital capacities. Other external factors may further accelerate this trend. During this pandemic, banknotes have become a burden because facilitating virus transmission (some central banks disinfect banknotes). It is for this reason that the World Health Organization recommends the use of contactless payment. On the other hand, regulators could relax their requirements for Fintech during this period such as in South Korea.

Contrary to what one might think, the transition to digital and agile banking is not primarily a technological challenge because digital solutions are available on the market and, above all, have already been successfully implemented in several contexts. The challenge lies rather in the bank’s ability to evolve the business model, to transform processes, to adapt the organization and finally to conduct change.

Six takeaways from the event « Impact investing for SDGs: A new chapter for participative finance »

Al Akhdar Bank and The Islamic Corporation for the Development of the Private Sector (ICD) in partnership with UNDP Istanbul International Center for Private Sector in Development and Al Maali organized a conference and a series of master classes on « Impact investing for the Sustainable Development Goals (SDGs): A new chapter for participative Finance » on February 20th and 21st in Casablanca (Morocco).  The event saw the participation of national and international experts in impact finance and was attended by more than a hundred national and international professionals.

The main takeaways from the conference, the master classes and the interactions with the participants are presented below:

  • Closing the gap between finance and sustainable development 

According to the Sustainable Development Solutions Network, 1.5-2.5% of the global GDP may be needed to finance the achievement of the SDGs in all countries. The public sector alone will not be able to close such important gap especially in developing countries. The active contribution of the private sector is contingent upon the availability of effective impact investing tools. Hence, there is clearly a timely opportunity for participative finance. It will allow the industry to clarify its genuine value proposition based on its core values, serve customers’ expectations and channel funds to address social and environmental challenges especially in OIC countries. In the context of Morocco where the government has an ambitious strategy in sustainable development, the need for financing is more than ever critical to achieve the set targets in energy, health, education, youth empowerment to name a few. It is true that flagship sustainability projects have easily secured financings (nationally and internationally), but this is not the case for most small and medium size initiatives.

  • Leveraging conventional impact investing experiences

Participative impact investing does not need to start from a white sheet. In fact, impact investing has been successfully applied in various sectors (green energy, education, health, food…), in both developing and developed countries and with diversified financial instruments.  Such a rich conventional impact investing experience has to be leveraged and, if needed, adapted to the participative finance requirements.

For instance, the Global Impact Investing Network (GIIN) has developed a toolkit designed to help investors navigate the landscape of impact measurement and management tools. This open source knowledge, which comprises systems, methods, data and indicators, can be easily used in the participative impact Investing context.

  • Thinking globally and acting locally

Relying on international best practices is important but adapting them to the local context is critical. For instance, copy pasting a Malaysian social sukuk structure in Morocco may not necessarily work because the social, economic and legal contexts are not identical. 

  • Empowering Waqf through blended finance mechanisms

Morocco prides itself on its rich millennial Waqf heritage whether it be in education, health and poverty alleviation. Thereby, Waqf can definitely bring value to the impact-investing field. For example, directing cash Waqf funds (which is now possible under a new Waqf law) to support social entrepreneurs can generate a much higher social return compared to simple cash donations. Cash Waqf use include co-financing, subsidizing or guaranteeing equity investments.

  • Building supportive ecosystems

The development of participative impact investing requires a supportive ecosystem that comprises assets owner (Participative finance institutions, high net worth individuals…), assets managers (investment advisors, government investment programs…), demand side players (social enterprises, cooperatives…) and service providers (consultants, auditors, research institutions…). Building the ecosystem will naturally take time but the industry has to start somewhere

  • Embracing Fintech

It is hard to image the emergence of participative impact investing without a strong focus on technology. Today, technology provides tremendous possibilities to make financial services affordable, scalable, customizable and effective (smart phones, peer-to-peer platforms, Blockchain, artificial intelligence…). The recent Fintech initiative in the Moroccan market (Crowdfunding, Digital financial services…) are encouraging and it is fair to expect more traction in the near future.

Points clés de mon intervention lors de la rencontre organisée à la chambre des représentants intitulée « Bilan de la banque participative au Maroc après 30 mois du lancement »

Il n’est pas possible de réaliser une évaluation objective du bilan des institutions financières participatives marocaines car nous ne disposons pas d’une stratégie nationale de ce secteur avec des objectifs mesurables.

Cependant, nous sommes en mesure d’apporter une première lecture du bilan à la base des réalisations commerciales des banques participatives depuis plus de 2 ans. Il est à noter qu’à ce jour, les parts de marché des banques participatives au niveau des dépôts et des financements ne dépassent pas 1% du total du marché bancaire marocain. Par ailleurs, les banques participatives, n’arrivent pas à régler la problématique du taux de couverture des financements par les dépôts non rémunérés, ce qui impacte leur compétitivité sur le marché. Finalement, pour l’instant, le positionnement des banques participatives et orienté vers les particuliers avec une concentration très importante sur le secteur immobilier.

A la lumière des expériences internationales et à la base de l’analyse des résultats des banques participatives marocaines, mes recommandations ont porté sur les points suivants :

  • Il est impératif de développer une stratégie marocaine de finance participative au Maroc et en Afrique.  Cette stratégie couvrirait l’ensemble de l’écosystème de la finance participative (banque, assurance, marché des capitaux et social) et veillerait à la coordination et la cohérence entre ces différentes composantes. Sans une stratégie pareille, le pays ne tirera pas profit du potentiel de cette industrie au niveau national e continental. Il est à rappeler que tous les pays qui ont réussi dans ce domaine disposent d’une vision stratégique de la finance participative
  • Les banques participatives devraient placer les entreprises, en particulier les petites et moyennes entreprises, au centre de leurs intérêts et ce pour deux raisons. Premièrement, les services à l’entreprise génèrent une rémunération plus avantageuse et des encours plus importants que ceux adressés aux particuliers.   Deuxièmement, l’impact économique, social et environnemental de la finance participative ne se réalise qu’à travers le financement des entreprises
  • En continuité par rapport au point précédent, les banques participatives devraient disposer d’un positionnement leader sur la finance éthique dite également durable et responsable. En effet, depuis la crise financière de 2008, les paradigmes fondateurs du monde financier sont remis en question. Par exemple, la finance est-elle un moyen ou une fin en soi ? Quels types d’intégration la finance devrait-elle avoir avec l’économie réelle ? La finance participative dispose des fondamentaux nécessaires pour non seulement répondre à ces questions mais aussi pour être un acteur de premier plan sur ces thématiques
  • Dans un monde marqué par la quatrième révolution industrielle, le positionnement sur les Fintechs (technologies financières) n’est pas un choix mais plutôt une obligation dans un marché financier tiré désormais, notamment, par l’intelligence artificielle, le mobile, les plateformes et la blockchain. Ce positionnement est d’autant plus pertinent pour les banques participatives car elles sont plus agiles car elles sont plus jeunes
  • D’une manière transversale, le marketing reste une pièce maitresse pour la réussite des initiatives présentées ci-dessus

The first ever Global Muslim Philanthropy Fund for Children

On 26 September 2019, UNICEF and the Islamic Development Bank (IsDB) launched an innovative fund that aims at reaching millions of children currently in need of humanitarian support in OIC countries. The idea of the fund was first announced last April during IsDB’s 44th Annual Meeting of Board of Governors in Marrakesh (Morocco).

Today, global humanitarian needs are at critical levels and children are especially vulnerable as they face the highest risk of violence, exploitation, disease and neglect. To address this need, the Global Muslim Philanthropy Fund for Children (GMPFC) will mobilize Islamic giving, including philanthropic and Zakat resources, towards humanitarian and resilience development programs that ensure the well-being of children. Projects include support for children in education, health and nutrition, water and sanitation, early childhood development, protection and youth empowerment. The fund will benefit from UNICEF’s on-the-ground presence and experience in all OIC countries.

This move from IsDB did not come as a surprise. It confirms IsDB’s President past commitments to position the bank as a catalyst in the achievement of SDG in OIC countries. The launch of GMPFC is a good news for the Islamic finance industry for two reasons. First, it sends a strong signal about the importance of Islamic finance active involvement in social issues. There no doubt that Islamic social finance has developed during the current decade, however, the industry achievements in the social sphere so far are not enough to address current social issues. Second, the GMPFC initiative confirms the Interest of large international organization such as UNICEF in Islamic finance and demonstrates that synergies with Islamic finance can play an important role in the achievement of SDGs. In the past, UNHCR (United Nations High Commissioner for Refugees) established a Zakat fund to alleviate the suffering of forcibly displaced people in OIC countries.

The fund, that will be administered by IsDB, seeks to raise US$250 million from private and public foundations, Zakat agencies and individuals. Although the fund purpose is clear, operational details have not been disclosed so far. In the coming weeks, the Islamic Finance industry and will be waiting for clarifications on the following questions:

  • What marketing approach will IsDB use to convince individuals to donate to the fund knowing that historically, IsDB has been dealing more with governments and businesses?
  • Which Fintech technologies will IsDB leverage to ensure transparency and efficiency?
  • What would be the fund priorities in the first years and what are the fund commitments in terms of impact (SDGs targets)?
  • What synergies will be built with the impact investing ecosystem in order to make the philanthropic funds more sustainable and more focused on income generating activities for beneficiaries rather than on simple cash transfers?

This article was first published in Islamic Finance news Volume 16 Issue 41 dated the 16th October 2019.

ESG, SRI, Impact investing…: Lost in terminology?

Source : http://www.lupuschick.com/terminology/

Despite all the dire consequence of the 2008 financial crisis, it did help to question the paradigms of modern days’ finance especially its role in addressing economic, social and environmental issues. As a result, multi-lateral development institutions, think tanks, academic institutions, regulators and financial players have undertaken various initiatives aiming at integrating sustainability and finance into a unified business model. The central focus has been to move beyond the “do well and then do good” approach as in corporate social responsibility to a “do well while doing good” approach that views sustainability as a strategic competitive advantage. Nowadays, concepts like ESG (environment, social and environment) investing; Socially Responsible Investing (SRI), Impact investing, mission-driven investing and responsible finance are gaining traction both in developed and developing countries and are even promoted by “traditional / orthodox” large financial players !  However, the finance and sustainability hype brought also confusion to investors looking for “double bottom line returns”. Are these concepts similar? If not, what are the differences between them? These questions are critical because the proliferation of terms related to financing and sustainability creates fuzziness that ultimately leads to inertia among investors and other market players. Therefore, clarifying the different concepts is key to the development of the impact finance industry.

In this post, I will focus on explaining the difference between ESG, SRI and Impact investing terms. Although, there are many others similar concepts used in the financial markets, the chosen terms are the most common.

ESG refers to the environmental, social, and governance practices of an investment that may have a material impact on the performance of that investment. The integration of ESG factors is used to enhance traditional financial analysis by identifying potential risks and opportunities beyond technical valuations. However, the main objective of ESG valuation remains maximizing financial performance.

Socially responsible investing goes one-step further than ESG by actively eliminating or selecting investments according to specific ethical guidelines. The underlying motive could be sharia compliance, personal values, or political beliefs. Unlike ESG analysis, which is valuation-centered, SRI usually uses ESG factors when applying negative screens on the investment universe. For example, an investor may wish to avoid companies engaged in firearms production, child labor or gambling.

Similar to SRI, impact investing also considers social and environmental effects. However, the difference is that impact investments are only made in companies, organizations or funds where the main purpose is to achieve positive impacts, alongside a financial return. In general, SRI is more concerned with negative screening whereas impact investing is more concerned with positive screening.

As part of the current initiatives to bring finance to its natural orientation, stakeholders (especially regulators) should not omit to take active steps to clarify the different concepts under the impact finance umbrella. Although, this effort looks pretty basic but it is much needed to transform the enthusiasm on impact finance into a more meaningful transformation.

This article was first published in Islamic Finance news Volume 16 Issue 39 dated the 2nd October 2019

Growing Social Impact in Africa: Which Solutions?

Image result for growth africaHow may Africa harness the potential of thousands of its young social innovators and social entrepreneurs in an impactful and efficient manner? Which patterns can be envisaged to expand social impact through sound and informed scaling strategies?

These are the questions I investigated during my participation this September 2nd– 4th to the 11th edition of the International Social Innovation Research Conference (ISIRC) hosted by the Yunus Center for Social Business and Health in Glasgow.

Image result for isirc 2019 think globalAs much as I wanted my contribution to solidly draw on theoretical strands –ISIRC being recognized as the world’s leading interdisciplinary conference on social innovation research, I had the explicit aim of contributing to this collective wisdom by exploring practical solutions with an eye on the peculiarities and contextual specificities of Africa and its local economies.

Today, the African economy does not create enough wealth to meet the pressing needs of its societies in terms of job creation, education, healthcare and human development. Despite the steady economic growth of the continent over the past decade, African governments have failed to translate this growth into positive social welfare based on inclusive and sustainable development. The weight of poverty and unemployment is prevalent in most countries, compounded by civil wars and political instabilities. UNDP experts argue that not only do inequalities deprive the poor of the positive effects of growth, but they also undermine efforts to reduce poverty. It is clear today that such macroeconomic indicators as GDP growth rate usually used to describe the situation of African countries do not faithfully reflect the social reality of the continent or the conditions of poverty in which most African citizens are being trapped. A paradigm shift has become necessary to overcome these structural problems. Social innovation can play a key role in supporting national social policy and adapting it to the new societal challenges.

A new wave of passionate, visionary and impact-driven individuals are bravely entering the space vacated by the two historical players: the State and the private sector. These intrepid leaders, referred to as social innovators or social entrepreneurs, are transforming, every day, the way we approach solution design to pressing social problems. But how might innovative but isolated solutions benefit to millions of populations in need of these innovations in the absence of well-rounded scale-up strategies? Which scale-up mode is most preferred and why?

I argue that scaling-up social innovation “inspirers” in Africa will multiply social impact down the value chain. Thus, I present a conceptual framework for scalability under two modes: concentrated vs. fragmented. In the concentrated (or conglomerate) mode, inspirers collaborate under the auspices of a few regional mega-inspirers that coordinate development activities including incubation, financing and capacity building for the burgeoning social enterprises. The fragmented scenario represents a pattern of multiple small and geographically scattered players working and growing independently. I construct a system dynamics model that simulates the two scenarios and measures the social impact created under each of them.

Results suggest that while fragmented scale-up generates higher impact in the first few years thanks to agility and adaptability factors, this trend is quickly overtaken by the concentrated scale-up strategy which yields the highest impact in the medium and long terms. This is explained by the positive loop created through synergy and collaboration between players under the conglomerate mode. In other terms, when synergistic capabilities are low (due to institutional, legal, or governance constraints), it is better to adopt a fragmented scaling approach. However, as regional integration is becoming a priority in the geopolitical agenda of most African countries, cooperation, co-creation and synergy must and will be a driving force of the next growth patterns. Under this high-synergy pattern, concentrated scaling maximizes social impact and becomes, thus, the most preferred route for scaling up social innovation impact in Africa.

Photo: World Bank