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Social policy bonds

August 20, 2011

Whatever happened to that good idea?

Some years ago an economist named Ronnie Horesh came up with the idea of social policy bonds.  The idea was for anyone who wanted to achieve a particular good outcome, say eradication of malaria, peace in the Middle East, an end to the deforestation of the Amazon, whatever, to issue a bond redeemable when the outcome was achieved.   Let’s say you’re the government of Brazil and you want to stop deforestation.  You could pass laws and pay policemen to enforce them, but you might spend millions and still end up no nearer to your goal.  Or else you could issue a bond valued at say £10M payable when some objective criterion for deforestation stopping had been met.  Let’s say when satellite images had shown no reduction in the forested area for 10 years in a row.

We’ve no idea what people would be willing to pay for such bonds. I guess reversing deforestation is pretty unlikely at the moment so they might only be willing to pay a small amount, perhaps £10,000.   The principle works even if no-one is willing to pay anything.  In that case you just give them away.   So long as you get them into someone’s hands, that person immediately has a financial incentive to stop deforestation.  

The idea is that they will start working to bring it about.   Perhaps they will set up their own private police force, (I doubt it)  invent an alternative to mahogony furniture, start an advertising campaign, or plant trees.   They don’t have to succeed, to make money.  They just have to bring success a bit nearer.  The  bonds can be bought and sold, so as deforestation slows and the £10M repayment gets nearer, their price will rise.

The advantages are enormous.   You’re paying for success, not for failure.   If the outcome never happens the bond issuer has not wasted a penny.   You don’t pre-specify how to achieve success.   Anyone with a good idea can buy the bonds and do their best.   Rewarding only those who succeed, stops wasting money on do-gooders who talk but never achieve anything.   There are enough of them in the world!

It strikes me as a brilliant idea.  I wrote about a special type, climate stability bonds, on iGreens nearly nine years ago http://www.igreens.org.uk/climate_stability_bonds.htm.     But not much seems to be happening.   Horesh’s original site and my little comment still come up top when you Google them.  

I’m puzzled.  Why haven’t billions of pounds of bonds been issued, and why aren’t millions of people working to bring them to maturity?  Come on Obama and Cameron.  Or if they’re too dumb, come on Gates and Buffett.   I’d be happy to chip in a few quid to support a bond for halving maternal mortility worldwide.  I’m sure I’m not alone.

Jim Thornton.  Nottingham.  21 August 2011

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One Comment leave one →
  1. October 30, 2016 1:20 am

    Hi Jim, there has been progress of a sort: Social *Impact* Bonds (http://en.wikipedia.org/wiki/Social_impact_bond) are now (Oct 2016) being issued in about 15 countries. I’m a bit ambivalent, because these SIBs are not tradeable: I’ve written about my reservations here: http://www.socialgoals.com/why-the-bonds-must-be-tradeable.html (and elsewhere). I think SIBs could be better than existing policy, where existing policy is hopeless, and they might be a necessary first step toward the tradeable bonds. But there is a chance that, especially if they become so common as to avoid public scrutiny, these SIBs could be corrupted and discredited the entire Social Policy Bond idea.

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