India should refuse UK development aid

India recently decided to declare the French Rafale as preferred bidder in its long-running order for 126 multi-role fighter jets. In doing so, the Rafale has trumped the only other fighter in the race – the Eurofighter Typhoon.

One would think that this decision would be received in the UK (one of four partnership in the Eurofighter consortium) with some reflection on why the bid lost out? Rather, it is leading to some fairly childish complaints emerging from the once great colonial power that suggest the UK hasn’t entirely gotten used to its new place in the world.

For one, comments from Britain’s politicians suggest that the Typhoon is actually the far better aircraft and the Indians are essentially idiots to pick the Rafale. It is hard to comment on which of the two are technically superior, but someone should tell David Cameroon that calling your prospective client an idiot is not the best way to get back in the game. Moreover, even the UK’s own analysts suggest the Typhoon may eventually be the better aircraft, but one that the Brits themselves don’t support at the moment. Then why should India?

The Brits go one further, asking how India has the temerity to accept millions in development aid and not reciprocating by giving the UK defence contracts worth several times as much.

Here’s why. For one, a little bit of aid does not a true ally make. The Calcutta Telegraph has an excellent article that highlights how, over the past several decades, it is the French and not the Brits that have stood by India in its time of need. Whether politics was a consideration in the final decision is hard to say, but again the Brits would do themselves a favor by looking at their own actions rather than blaming India for poor judgment.

Second, the question of development aid is, in general, irrelevant to the fighter jet order. It cannot be denied that India can use help in poverty alleviation but to my knowledge, has never asked Britain for aid money. Indeed, it is India that does Britain a favor by allowing it to assuage its colonial, developed world guilt. Indeed, this may be a good time for India’s Prime Minister to preempt the British debate by banning aid from the UK. You keep your aid money, we will keep our freedom to make our own decisions, which we gained when you left the country in 1947. Fair trade.

Should taxpayers subsidize philanthropists?

David Morris has an excellent piece in the Huffington Post decrying the increasing influence of private charitable players in public policy. In a system that is often bereft of any self-critique and usually celebrates the rise of philanthrocapitalism as an unequivocally good thing, the article raises two very important points.

First, it decrys the increasing influence of philanthropic institutions backed by private individuals in public policy. Two examples:

In 2008 Koch, or rather the Charles G. Koch Charitable Foundation, entered into an agreement with Florida State University to support the school’s economics department. The catch, according to the St. Petersburg Times was that Koch would have the authority to approve who ultimately filled the positions.

Gates (The Bill and Melinda Gates Foundation) financed the New Teacher Project to issue an influential report detailing the flaws in existing evaluation systems. The National Governors Association and Council of Chief State School Officers developed the standards and Achieve, Inc., a non-profit organization, coordinated the writing of tests aligned with the standards, each with millions of dollars from the Gates Foundation. The Alliance for Excellent Education received half a million dollars “to grow support for the common core standards initiative.

Concerns have been raised previously, including by the NYTimes and BMJ, that philanthropists may today have undue influence over public priorities and spending in ways not previously imaginable. A recent study found that giving by UK foundations for international development was just under half that of the DFID. Relying on philanthropy to solve public good challenges is simply a delegation of public responsibility but increasingly philanthropy is seeking to not just complement but change public financing, and this is not without consequence.

Morris, however, adds another critical argument. That such big ticket philanthropy is actually being subsidized by the state – and by extension the taxpayer.

We should bear in mind that what is reported as charitable giving by the 1% significantly overstates the actual private sacrifice, as economist Uwe E. Reinhardt points out. If the wealthy donate $10,000 and are in a combined 50% federal, state and local tax bracket their effective sacrifice is $5,000 and society as a whole, without its advice and consent, subsidizes the rest.

In the last few years a growing number of billionaires have established their own private foundations. They receive an immediate tax deduction for the full value of their contribution even though the foundation is only required to give away 5% of that endowment each year. Which means that for every $1 million contributed, which can mean a $500,000 loss to the public sector, the foundation must give away only $50,000.

This has long been the elephant in the room that no philanthropist will acknowledge. Most large foundations do not operate as charities – which spend all of their money each year. Rather, they operate as investment funds with large grantmaking teams, that spend only modest amounts on actually charitable causes. The rest goes to preserve the institution.

Charity enthusiasts also claim that philanthropy supports the public good and in many cases that is indeed the case – responding to humanitarian disaster, feeding the hungry, and supporting the local community. But the largest philanthropists are not content with those modest goals and are targeting more challenging issues – reforming public education, improving health systems, addressing the global AIDS epidemic, encouraging entrepreneurship.

These more ambitious objectives often tread on the public space. This would be good, if it led to a debate on how these challenges should be addressed. In reality, however, the wealth of these groups mean they not only advocate a particular viewpoint but also can finance its implementation. And the general popularity of philanthropy implies organizations, and viewpoints, not affiliated with them get short shrift in public opinion. The net result is not to increase, but decrease, debate.

This may well be unavoidable until philanthropists become more self-critical but does the taxpayer have to subsidize Bill Gates’ view on how education should be offered to people? Particularly when people are not even motivated by the tax incentive?

The OLPC (should be) Dead, Long Live the Aakash

Engadget and a number of other technology blogs are rife with coverage of the imminent launch of the OLPC XO 3 tablet at the Consumer Electronics Show (CES) starting today. Unfortunately, this attention to this third iteration of the 100-dollar-computer-that-never-was could not be more misdirected and misses the real story – that technology has moved on from the OLPC and will evolve even faster in the future.

Over at the WSJ’s Speakeasy blog is a story much more relevant to technology for the masses – about the Aakash Ubislate 7+. This 7-inch table runs Android, has support for 2.5G GPRS and wifi (the OLPC did not have both), is currently shipping, and one month after launch has pre-orders for over 2 million units – essentially more than the OLPC has delivered in its either 6+ year lifetime.

This obsession with a project that failed long ago is unhealthy for a number of reasons.

First, it encourages the disc0nnect between the real world and the development community – represented by the OLPC organization and those that comment on it. Much of this community believes it knows best how to help the poor and what technology developing countries deserve. Meanwhile, the poor (or the aspiring middle class in this case), are busy helping themselves to technology that is good enough.

Second, (and this doesn’t happen often), it vindicates a decision taken by the Indian government years ago to refuse rolling out the OLPC in India. Back then critics claimed India was reinforcing the digital divide amongst its citizens. In hindsight, it seems, the Indian government may have saved the taxpayer billions and seems to have had a better grasp of how to incentivize the private sector to deliver a more functional product for less. This is a useful lessons to governments – if they must support such initiatives it is not by subsidizing purchases but by ensuring a large enough market exists for the private sector to do what it does best.

Finally, and perhaps most important, it allows Mr. Negroponte to hog more money and media attention. The founder of the OLPC has a long history of failing to achieve his own constantly downsized objectives. The OLPC  has  captured the attention of millions of do-gooders in its lifetime and has helped raise the profile of many. But even if it now reaches the USD 100 target, lower priced alternatives already exist.

In any darwinian system, a project that failed so completely and spectacularly would have been shuttered long ago. So it is a sad commentary on the non-profit sector that the OLPC plods along. It is time this relic too went the way of the dinosaur.

Coordinating emerging donor aid – a nonstarter?

The development aid universe has, over the past several years, been disrupted by the emergence of countries such as Brazil, China and India – that both receive substantial ODA and are building their own foreign aid programs. As these new programs have grown, in line or sometimes ahead of the country’s actual global influence, they have threatened the monopoly of traditional donors. This has raised concern that new donors risk undermining the influence of traditional agencies and simultaneously undoing the work done in improving ODA effectiveness over the past several years.

The move towards collaboration amongst donors followed heavy criticism of how aid works. Recognizing many of the problems, some of which were pointed out by influential insiders such as William Easterly and Dambisa Moyo, traditional donor agencies have done much to improve transparency and coordinate their practices.

New donors have, however, stayed away from this debate and have worked with traditional donors only when convenient. Rather than participate in existing coordination mechanisms such as the DAC, for instance, India has chosen to create its own frameworks – such as the G-NEXID and the Development Cooperation Forum. The only case where India consciously coordinated its practices was for emergency relief as part of a “Group of Four” following the Indian Ocean tsunami in December 2004.

India, like other emerging donors, shows no enthusiasm for embracing the developed world’s coordination efforts for two reasons.

First, the goals of these two sets of donors are substantially different. Traditional donor aid is meant to trigger socio-economic development in the recipient country and is supposed to be apolitical (whether it is actually so is open to debate). Foreign aid by new donors, by contrast, has explicitly political and economic goals – such as increasing political influence or ensuring access to resources such as oil. For them, foreign aid is often a zero sum game with competition, rather than collaboration, the natural mode of operation.

Second, new donors operate outside the scope of existing frameworks because till recently they have been excluded from many global multilateral institutions. That balance has yet to be corrected in the eyes of some countries. India, for instance, has long been calling for a permanent seat on the UN Security Council and greater representation at the IMF. Till these countries see themselves treated as equals, even when they are not, they are unlikely to reciprocate respect.

It should be mentioned that not all aid by traditional donors is coordinated. Explicitly political aid such as by the USA to Pakistan is seldom subject to any discussion within the DAC. It can also be argued that at present coordination is not in the interest of new donors. They gain little by working with traditional donors but risk undermining their political objectives by limiting their rules of engagement. Therefore, coordination will only happen when new donors’ giving practices start to collide, or when they start to make the same mistakes that traditional donors have already made.

Another view is that aid by new and traditional donors is already coordinated, if not explicitly. Money spent by China, for instance, often goes to build basic infrastructure such as roads and ports, assuming this will give Chinese companies a head start in new markets. India’s aid program has an explicit goal of improving economic and political links with recipient countries – with the assumption that such links and greater trade are mutually beneficial. New donor aid is therefore, often first-loss risk capital for private enterprise and does not overlap in its target and delivery mechanism with traditional aid.

This dynamic is important given that private investment is increasingly more important than ODA. FDI flows to Africa have outstripped ODA since 2005 and governments, particularly in Africa, are increasingly looking to the bond market to supplement expected reductions in aid. Despite high volatility such flows are increasingly attractive for the more successful emerging and frontier markets.

Where the two groups can work together, therefore, is to understand the dynamics of each type of foreign aid model – supporting social service provision, civil society, and private enterprise and trade.

The current debate on collaboration ignores that not all aid is coordinated, nor recognizes the different objectives of new versus traditional donors. Most important, it ignores that traditional donors want coordination but offer nothing in return. Till they can do so, the debate on coordination will go nowhere.

This article has been reposted from The Broker Online.

In India, an attempt to outsource the fight against corruption

If there is one issue that India is associated with right now, it is corruption. First came a series of scandals over the past months involving both politicians and high profile business leaders. Then, with  fortuitous timing, veteran social activist Anna Hazare launched a highly publicized “fast unto death” to force the government to draft an anti-corruption Lokpal bill. That was followed by an “awakening” of support from and demonstrations by the middle class, complete with campaigns over Twitter and Facebook. Earlier this month the government finally caved in to constitute a committee to look into the matter.

Commentators have compared this victory to the “freedom movements” in the Middle East. But there are few comparisons and this may well prove to be Pyrrhic victory. For while battling the corruption endemic in India’s political and administrative systems is certainly laudible, the way by which Anna Hazare and his supports plan to do so will only undermine India’s political freedoms and the faith the majority of Indians still hold in the system.

To control widespread corruption, the proposed Lokpal bill forsees the creation of an independent ombudsman consisting of representatives selected through a “participatory process.” Such an ombudsman would have widespread powers to investigate and prosecute anyone, yet be neither representative nor accountable to any branch of government.

Middle class Indians will probably say that all branches of government have failed them and they will be at least partly correct. The average middle class Indian today prefers to avoid any contact with the public sector. This apathy also extends to elections, where the middle class rarely participates. For them, the easiest solution to corruption in the system is simply to create an independent ombudsman.

Yet, only utopian naivete can explain why Hazare and his supports expect that an independent ombudsman would be any less corrupt than a system that has at least some checks and balances. Rather than fixing corruption and rent-seeking, it would simply move the problem from one place to another.

Worse this approach highlights, and will likely broaden, the rift between the middle class and the rest of India.

For while the middle class may have tuned out of participating in India’s politics, the majority of Indians continue to believe in the political system. They participate in elections and regularly reward or punish their politicians with amazing acuity. It is this majority that kicked out the BJP for suggesting India was shinning, when they were not; and this very majority that re-elected the Congress with a strong majority last time around, for proposing the motto of “inclusive growth.” It is this political vitality that has led to a competition amongst the states to grow faster, and that has taken Bihar from being a basket case to a success story.

So while the political system may not be working for the middle class, it is working for the many that continue to believe in it. Therefore, this middle class revival should not be compared to the protest movements in the Middle East. Rather, it is a tamer version of the yellow shirt protest movement in Thailand in 2008, which split Thai society apart. And it is a reflection of the middle class’ desire to blame someone else for their own failures.

Middle class Indians tend to see themselves as victims of corruption. Yet, they have done little about it. Facebook, Twitter, and the efforts of a Gandhian make it easy for them to let their anger be known. But Gandhian ideals require personal engagement and sacrifice, which is lacking from this movement. If Indians opt out of the political system and condone corruption in broader public life, they should not be surprised when it becomes endemic. And without a change in that apathetic attitude, it is only a matter of time before the ombudsman itself becomes a source of corruption, rather than a solution to it.

Microfinance backlash underlines contradictions of social business

The NYTimes is carrying a compelling article by Mohammed Yunus arguing against what passes today for microcredit. Trying to distinguish between Grameen Bank’s social benefit-first model, and that of commercial microcredit institutions that have caused such a massive backlash, he says:

In 1983, I founded Grameen Bank to provide small loans that people, especially poor women, could use to bring themselves out of poverty. At that time, I never imagined that one day microcredit would give rise to its own breed of loan sharks.

Commercial microcredit has given microfinance a bad name and suffered for it. Following on a political backlash against MFIs in India, shares in SKS Microfinance have plunged to less than half of their peak in Sept-Oct 2010. The industry has seen collection rates fall to 20%, from the enviable 99% it enjoyed previously. The state of Andhra Pradesh, where much of the lending is concentrated, has passed a new law substantially restricting the activities of MFIs and the national government and central bank are likely to come up with new nationwide regulation as well.

To believe industry pundits much of this has to do with political convenience. Asking the poor not to pay their debts is a populist measure to score easy political points. MFI proponents have also indicated that the industry itself needs to be better at elaborating on the benefits it provides.

Is commercial microcredit an illustration of mission drift?

Yet it cannot be so simple. If MFIs do provide an irreplaceable service to the poor why are those same people happy to see MFIs go out of business? Perhaps the backlash is simply a reaction to what we know is wrong with microcredit, and to how far it has drifted from its roots:

Commercialization has been a terrible wrong turn for microfinance, and it indicates a worrying “mission drift” in the motivation of those lending to the poor. Poverty should be eradicated, not seen as a money-making opportunity.

We have known for some time that microcredit may not be a panacea for poverty. Neither the impacts nor mechanics of poverty alleviation through microcredit are obvious. Microcredit, as a business, is immensely successful. Microcredit, as a tool for socio-economic development has been of questionable effectiveness.

Rather than address this obvious disconnect MFIs in India have been busy growing big. And some have been busy cashing in. Little thought has been given to fixing what does not work or explaining what we do not understand.

What is clear is that the industry, which emerged with the express purpose to help lift people out of poverty, has simply neglected the most basic of infrastructure requirements such as a credit bureau. If the backlash has been politically convenient for bureaucrats and politicians, the lack of any emphasis on development has been economically convenient for the industry.

What happens in microcredit will happen in any social business

No doubt the industry will be forced to address these shortcomings and may move closer to the social roots from which it had drifted. However, this backlash exposes a fundamental contradiction most social businesses face.

A growing view in western thinking has been that for-profit business models can serve as a complement or alternative to philanthropy and public spending. Failing public schools can be replaced by (or have been replaced by) cheap private ones; ineffective health systems can be replaced by private clinics; lack of electricity, water, and other basic necessities can all be addressed by private providers.

This view, that difficult social issues can be addressed by businesses “at the bottom of the pyramid” has been propogated by many and has led to a rush of professionals from investment banking and management consulting to the sector. The logic is that since public money is insufficient to tackle these issues, profitable approaches will encourage the trillions of private wealth to enter this field. JP Morgan even went so far as to call impact investing an “emerging asset class.”

Yet, this entire movement can trace its roots back to microcredit. And if microcredit hasn’t proven to be particularly successful at balancing social impact with business returns, can impact investing do better?

We expect that social businesses (to use the term loosely) provide social impact as a direct corollary to the business objectives. Thus, microcredit helps people out of poverty through provision of loans. Yet, the two impacts are rarely in alignment – more loans to an individual does not translate into a faster climb out of poverty, just to indebtedness. Private education may be better than public education and help empower a generation. But a private provider, once entrenched, would be encouraged to maximize profits to the point acceptable to customers – yet, it is hard to imagine how higher fees could possibly benefit the poor. The same can be said for healthcare providers. They, like private schools, would be encouraged to provide the lowest level of service acceptable to customers, so long as it beats that of the public school.

If we are to ensure this does not happen in the broader universe of social business and impact investing we must first be intellectually honest about one thing.

Social businesses are essentially businesses. Private capital may help them grow but it brings with it a strong tendency to turn social businesses from being social to being businesses.

For investors, this means if we wish an organization to remain true to its social objectives we can ask it to operate as a charity. Alternately, we can require it to meet its social objectives either through regulation or incentives. But to expect that social businesses will, without being coerced, somehow not drift from their social objectives towards their business imperatives is naive.

For businesses themselves, it means they must acknowledge this dichotomy and be clear about where they position themselves. Being seen as social comes with a responsibility to live up to that promise, or risk a subsequent backlash when the disconnect between promise and reality is exposed.

Is their a better dream than the American Dream?

On the NYTimes, David Carr provides Wall Street a lesson on failure. Speaking of “The Company Men,” he asks if we live in an age where the “game is rigged?” But that is a question that applies not just to Wall Street but to America in general. And it is one that holds much relevance for Asia, and India in particular as it seeks to balance an embrace of competitive capitalism with welfare.

Measuring the American Dream

Policy debate on economics has usually focused on economic inequality – which has been growing in America, together with many Asian countries, including India. The financial crisis has brought home this point in very simple ways, as reported in a Pew study:

Between 1979 and 2004, the real after-tax income of the poorest one-fifth of Americans rose by 9 percent, that of the richest one-fifth by 69 percent, and that of the top 1 percent by 176 percent.

That may not, in and of itself, be unfair. But it does become so if only a few people ever have a chance to be in that top one-fifth or top 1 percent. That is where socio-economic mobility becomes important. Americans believe they live in a particularly meritocratic society that allows its people to move up the ladder – the quintissential American dream. Ben Bernanke called it thus:

Although we Americans strive to provide equality of economic opportunity, we do not guarantee equality of economic outcomes, nor should we. Indeed, without the possibility of unequal outcomes tied to differences in effort and skill, the economic incentive for productive behavior would be eliminated, and our market-based economy — which encourages productive activity primarily through the promise of financial reward — would function far less effectively.

Yet, it is increasingly clear that the twin assumptions therein – that a) there is equality of economic opportunity, and b) effort and skill are the only or even the most important variables to success – are wrong. It turns out that economic mobility depends much more on our birth and our upbringing than our own effort and skill. One measure – the extent to which individual and parental earnings are correlated – suggests that:

…about half of the advantages of having a parent with a high income are passed on to the next generation. This means that one of the biggest predictors of an American child’s future economic success — the identity and characteristics of his or her parents — is predetermined and outside that child’s control.

Malcolm Gladwell called this “accumulative advantage” in his book Outliers – the phenomenon of the rich getting rich and the poor getting poorer. Such accumulative advantage should not be a surprise – even if the extent of its influence is. Yet, if we are to strive for a meritocratic society that offers everyone a chance at success a critical question must be to what extent does a state manage to shield its population from the ravages of destiny?

On this point there is much evidence within the OECD showing that America falls far behind European and particularly Nordic countries. On the previous measure (earnings elasticity) the USA is just below Italy and the UK, with the least correlation in Denmark, Australia, Norway, Finland, and Canada.

Overcoming “accumulative advantage”

There are, then, two ways to measure a society – to what extent is it equal (more economic equality), and to what extent is it just (providing economic mobility). America hopes to be just, providing equal economic opportunity while accepting higher levels of economic inequality. Europe, meanwhile, believes that economic opportunity will never be truly equal and thus seeks to overcome or protect from hereditary disadvantages. Ironically, Europe’s model proves not only to be more just, but also more equal (with sufficient correlation between equality and mobility).

Ironically, though, as Europe’s model proves to be better, its very existence is threatened for being financially unsustainable. European governments, faced with massive debt, must choose which social programs to cut.

India is thus offered two models – one that fails to sustain itself, while the other that fails to deliver on the goal of an equal and just society. What do the policy choices of Indian politicians reveal about their preferred model?

India has since liberalization in 1991 been trying to seek high growth. Such growth ensures some form of economic mobility – incomes of successive generations increase along with overall growth. Put another way as the pie gets bigger everyone gets a bigger absolute part of the pie.

Yet, policy emphasis on growth itself resulted also in a more unequal society as those with a privileged birth – with at least well-educated parents – benefit disproportionately from the opportunities provided by liberalization. They do better than their parents. Meanwhile, the farmer in the hinterland – without the means to send his children to an English speaking school – must see his children continue to toil the land or seek opportunity in low-paid manual labor. Both equality and relative economic mobility thus go down.

In recent years, however, India has recalibrated its policies to be more welfare focused. In particular, a realization that the country cannot survive united nor compete unless everyone benefits, has brought forth some interesting compromises.

For one, government is starting to accept its welfare role in some areas – as illustrated by the rural employment guarantee scheme. Second, there has been some political pressure on competitive capitalism – this explains the edict of Andhra Pradesh’s politicians to the population not to pay back microfinance loans. And finally, companies and their wealthy seem to be taking some responsibility for good governance into their own hands – evident in the massive philanthropic efforts of individuals such as Azim Premji who focuses disproportionately on strengthening public schools, rather than creating a more efficient, but perhaps more expensive, private system.

Thus, India returns ever so often to the left, while seeking to convince the world it is the future of capitalism, with Ambani’s multi-million dollar mansion a clear reminder to those that may forget.

There is, therefore, hope that the disadvantaged in India will still see the benefits of growth. But a sustainable middle path requires combining two hard to reconcile social preferences – people must be highly motivated for the spoils of success (as in America and Asia), but hold a healthy regard for the welfare of others to allow for the redistribution of those spoils (as in Europe). To date no society has managed to do so, though the voluntary redistribution of wealth by the newly wealthy may provide some temporary relief.

India’s growth over the past several years has certainly raised wealth. But it has also led to a more unequal and a more unjust society. Of course, no society can be expected to completely shed its bias towards aristocratism. That would be against human nature. But the purpose of a state is not necessarily to change human nature, but rather to help those disadvantaged by some elements of it. In that, the American Dream has failed to become reality for too many people. India, looking for a dream of its own, can certainly promise – and ask – better to its citizens.

Non-profit impact: peers as a proxy for quality

Tara Suri at Harvard pointed me to her experience of what, if true, can only be described as gross fraud by an Indian NGO called Apne Aap. Tara says that at least in the one village that she supported through donations, the NGO is not only absent, but in fact sends misleading and patently false updates on its work.

This stands in sharp contrast to the public record of the NGO, which supports survivors of sex trafficking and has received support from many reputable sources. Indeed, the NGO’s website includes prominent endorsements from the likes of Ashley Judd and Shirin Ebadi.

Whatever the truth, it would not be surprising if there were fraud in the NGO world. It has been known to happen before – by one estimate in 2008 an estimated USD 40 billion was lost to misuse in the US. However, it does raise two important questions of broad relevance.

First, how can it be that a charity that could be grossly fraudulent has managed to garner such a good reputation? And more important, should such fraud occur, why is it so hard to uncover and act upon it?

How do donors pick a charity?
The answer to the first question is partially in Nathaniel Whittemore’s assertion that donors have a front-loaded definition of impact – personal impact happens at the time of donation and not later on.

However, there is a further explanation as well. It lies in how donors pick the charity they choose. Simply put, donors choose charities and decide on impact based on the recommendation of others.

I base this assertion not on statistics but merely on my experience as an advisor to philanthropists. Websites such as Kiva, ProPoor, DonorsChoose, Vittana, and CharityNavigator have increased the information available to young, connected, individual donors. Everyone else, however, does not use such platforms. Instead, most donors – especially the very wealthy kind – generally discover charities through personal contact.

This should not be surprising and follows the pattern of deal-making in business. When looking for an investment, investors – particularly the venture capital type – will often learn of potential deals through friends, colleagues, acquaintances, and at investment conferences. The same happens in the non-profit sector – retail donors learn of charities from their real (as opposed to online) environment. Wealthier donors meet NGOs at the Clinton Global Initiative or the World Economic Forum.

What is different in the NGO world, however, is that while the profit motive encourages individuals to subsequently do their own due diligence for investments, there is little need to do the same for non-profits and the effort required to do so is often unreasonably high. Thus, it is not that donors do not care about impact. Rather, peers become a proxy indicator for impact.

Using the word of peers is not bad, per se, but leads to some twisted incentives when it is the sole indicator. For one, it encourages leaders to focus more on the public perception of their work, than on the work itself. In such a world appearing at conferences becomes an end in itself, rather than a means to an end (of raising resources).

That illustrates the other problem – that such a system suppresses diversity within the social sector. A “good” charity with strong recommendations will be seen by more people and will thus receive even more support. Other equally good charities will remain forgotten because they did not make it to the A-list in time. Anyone that has been to multiple global conferences would know this – one is likely to see many of the same speakers repeatedly. Such speakers are often invited based on their presentations at prior conferences, or because of the recommendations they get from within this network.

Of course, change does happen and new charities do emerge. But this does not happen because of competition – rather it happens when donors move on to other issues or get bored of the same organization. Alternately, in a few cases, a charity may well get caught involved in fraud.

What is one to do?
When that happens what is one to do? Unfortunately, there is very little one can do because the system does not at present allow for a feedback loop – in two ways.

First, any system of peer review discourages criticism, except in the early stages of such review. Should Apne Aap be found to be fraudulent today it would be severely embarrassing to the many organizations that support it, to say nothing of Ashley Judd.

Second, acting on the discovery of fraud is made more difficult by the decentralized nature of the civic sector. When the only proxy for quality is the word of peers, the only possible remedy is to change the public perception. Yet, that is not easy to do, particularly given the often closed nature of communities such as the Clinton Global Initiative and the WEF.

Independent ratings, suggested as one solution, do not address the core problem – the lack of a feedback loop. Rather, they simply replace one proxy of quality (the word of peers) with another (the word of an unknown organization). As such, donors have every right to be wary of such ratings, which would hardly take into account the many definitions of impact. Nor are they likely to be infallible – ratings did not prevent, and in fact contributed to, the sub-prime crisis. In short, such ratings will simply create a new possible source of failure.

Fixing the feedback loop
Any fundamental solution to this problem of how donors pick their charity has to be two pronged. First, it must encourage greater due diligence by donors – something that is already happening in the foundation world.

Second, it must allow for a reality check on the word of others by introducing a feedback loop into the perception of peers. For this the communities of donors and NGOs that perpetuate this system – including CGI, WEF, and Ashoka, to name a few – have to become more open. This will not happen overnight, but the increasing diversity of donors will inexorable pull them towards more openness.

Finally, when all else fails, there must be mechanisms such as a charity watchdog mandated – and equipped – to look into malpractice in the non-profit sector. This will also emerge in time, as the sector becomes increasingly important and inevitably receives government scrutiny.

Till then, one can only count on the altruistic desire of most donors to actually do good with their money.