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Misfortune and Misery as New Asset Classes

It may not be widely known looking at the embarrassment of riches on Wall Street, but the world’s best hope of reining in the modern era’s four horsemen riding on steeds of climate change, extreme income inequality, pandemic threats and the erosion of institutional trust, largely depends on financial engineering, technological innovation and political will. In development circles the case for financial leverage, or the billions to trillions narrative, is widely understood, representing a critical path to achieving the UN’s Sustainable Development Goals (SDGs). Now it is time for business and the asset management community to realize their double-jeopardy, which is betrayed by buoyed short-term returns – namely, we are living in an invest now or pay later world. Either way, someone is going to pay, and the misery and misfortune of others can no longer be treated as externalities.

Well before the great deleveraging of 2008, official development assistance (ODA) has largely flatlined around $100 billion globally. Overtaken by remittances by a factor of 6 as a stable (recession-proof) form of peer-to-peer cash transfer, the limitations of rich country largess and foreign direct investment (FDI), which continues to flow through well-trodden paths, are revealed. As advanced economies grapple with domestic unrest in their labor markets and the rise of economic nationalism, it has become politically expedient to focus capital at “home” making hollow promises to revive moribund industries, rather than in developing countries. This is very much a false narrative, as the concept of fortress nations hiding behind walls will find little comfort in Thomas Friedman’s hot, flat and crowded planet. The best way to arrest the decline of global order and slow the march of massive upheaval, is to engage and begin investing in the preconditions of global stability for which rich nations have the most to lose and large asset managers require in their business models.

As a share of advanced economy income, financial aid delivered through multilateral agencies and the coterie of development organizations that form a veritable development industrial complex, is less than 0.3%. This sum of capital alone is insufficient to reach the SDGs, let alone promote market growth and broad-based private sector and labor force participation in developing and emerging countries. Add to this the effect of many advanced economies such as the U.S. and the UK, which have been traditionally generous donors, pulling the handbrake on globalization due to populist pressure, and the development agenda may be facing its direst challenges yet. It does not help the case that the financial models and investment yardsticks applied in the business world are largely out of whack and slow to embrace new forms of capital formation and efficiency provided by emerging technologies, such as blockchain and cryptocurrencies.

It would stand to reason that a displaced world, with more than 240 million people living outside of their home country according to the International Organization for Migration (IOM), that peer-to-peer capital flows would find a path of least resistance. This figure represents 3.3% of the world’s population, but does not capture the more than 740 million people who have migrated inside their home countries or are internally displaced due to conflict, climate change or our unrelenting search for economic opportunity. Indeed, much like the Hurricane Katrina diaspora from Gulf states or the Hurricane Maria diaspora from Puerto Rico, who have relocated to every state in the U.S., anywhere else in the world these communities would be identified as internally displaced persons (IDPs). This demonstrates that disaster displacement, like Zika-carrying mosquitoes, does not respect borders or fortress nations.

If according to President Trump the media is public enemy number one, then the postwar international system, including the UN and other development agencies, are public enemy number two. The argument broadly hinges on the notion that the U.S. has been unfairly carrying a disproportionate financial, military and economic burden to keep a turbulent world at bay. This argument, however, smacks of convenience and misses the broad value the development agenda represents, for which the U.S. and the world’s advanced economies are in many ways its greatest beneficiaries. The postwar international system was established as a prevention mechanism for great wars and a means of promoting a peaceful and coordinated world. For the past 80 years rich nations have profited from unchecked carbon-hungry economic growth, where up until recently the negative effects were externalities. Additionally, these institutions have been established to help pre-invest in the conditions of global stability, including equal rights, market access, economic development, and good governance. All items that appear to be lacking not only in many developing countries, but across the planet making the whole world look like an emerging market – a place where politics matters nearly as much as economics.

To capture a positive return on development activities and to counter the narrative that the development agenda is a zero-sum proposition, the world’s governments, investors, businesses, and civil society need to begin formulating an entirely new investment thesis and horizon. More importantly, citizens of countries that enjoy an embarrassment of riches need to realize that a new investment yardstick is not a form of altruism, but in fact a great way of promoting peace and stability, while at the same time making positive returns. In short, it is our best form of protection. When famine-inducing droughts were considered a Horn of Africa problem, development aid was largely a charitable activity with no expectation of a financial, social or environmental return. Today, however, this narrative arc has changed, as extreme climate events, pandemic threats, and societal polarization at the hands of income inequality and eroding institutional trust are no longer isolated to developing and emerging countries but are bringing even fortress nations and unions to their knees.

While the developing world still carries a disproportionate amount of the human and physical burden of these and other global threats, it has become increasingly clear the whole world is in peril. Against this backdrop, the calculus on making long-term investments supporting the SDGs needs to be weighed against the alternative, costlier model, which is that rich nations are increasingly relying on their military as a first line of defense, rather than the last. This vicious cycle is making the world a much more dangerous place, as evidenced by the Ebola outbreak in West Africa, in which the response needed to be militarized before we could get the upper hand on this dread disease. Against this complex and interconnected backdrop, investing in an ounce of prevention will be worth more than a pound of cure, for against the world’s direst challenges there may be no cure at all.

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