This paper is about 6000 words long, and was done in March 2017. It is (c) Ronnie Horesh
Most people agree on the challenges that humankind faces, the biggest and most pressing include: war, terrorism, nuclear proliferation, environmental depredation, climate change and poverty. Yet, while there is almost universal consensus that these challenges need to be addressed, there is very little agreement about how to do so. Meantime, much human ingenuity is devoted to relatively trivial tasks: devising and promoting new brands of dog-
Meantime, our most effective way of allocating scarce resources – markets – have been subverted and manipulated to favour interest groups at the expense of society and the environment. The benefits arising from self-
Social Policy Bonds aim to deploy market forces in the service of wider society. They are a new financial instrument designed to inject self-
My proposal is to issue non interest-
Take for example the goal of nuclear peace. We can define this as a sustained period during which the detonation of nuclear device that kills more than 100 people does not occur. That period could be fifty years or longer. Assume that a fixed number of bonds is issued, redeemable for $1million only when that fifty years has expired. These bonds are floated, nationally and overseas, on open tender as at an auction: those who bid the highest price for the limited number of bonds available will be successful. Importantly, all bonds would find a buyer: the opening market price might be very low, but the bonds will all be sold. What factors will determine the opening price of these bonds? Most obviously, the market's assessment of how likely and when the objective will be achieved. (Interest rates on alternative investments will be a factor.) The bonds could initially sell for as little as $100 if people thought there were virtually no chance of this particular social goal being achieved in any forseeable future. People will of course differ in their assessment of the value of the bonds, and their views will change with time as events make achievement of the targeted objective a more or less likely prospect. The bonds, once issued, would be transferable at any time; market prices would be publicly quoted just like those of ordinary bonds or shares.
Assume now that the bonds targeting nuclear peace have been issued and that their opening value is, in fact, just $100. People, or institutions, now hold bonds that can multiply in value by a factor of 10 000 once the fifty-
Some might buy the bonds with no intention of doing anything to help achieve the targeted goal.
casual purchasers, who might buy bonds in the same way as they would a raffle ticket;
speculators, who believe that the likelihood of the targeted objective being achieved is greater than the rest of the market thinks it is; and
hedgers, who stand to lose if the particular objective is actually achieved. They might buy bonds as a form of insurance against this possibility.
All these passive investors would want to become 'free-
Active investors in the bonds would comprise:
people and organisations working to achieve a targeted goal, whose anticipated gains from bond-
investors or brokers who would use their own capital, or borrow on the strength of the increased value of their bond holding, in order to support projects aimed at helping achieve the targeted objective.
Active holders, in the nuclear peace example, could be expected to reduce the chances of nuclear conflict by using part of the present value of their expected above-
Prospective holders of Social Policy Bonds have an incentive -
Bondholders would, in effect, be a coalition of interests who might decide tacitly to co-
How could such a protean organisation of bondholders work to solve problems that necessarily require a long time to solve? Consider the actions that people buying Social Policy Bonds targeting a long-
The important points are:
That there need be no formal organisation set up to achieve a targeted goal.
That the composition and structure of any organisation that is set up will be entirely subordinated to achieving that goal.
That any organisation will have to be efficient to survive.
That it will have the same long-
All this makes for a completely new type of organisation, and avoids the bureaucratisation of large organisations with the all-
Some of the initiatives that would be stimulated by, for example, Social Policy Bonds targeting nuclear peace, are taken by governments and other bodies nowadays, but the critical difference is that, under a bond regime the initiatives are stimulated by the self-
Many social and environmental problems are currently neglected because of their slow-
Key criteria for policy areas within which Social Policy Bonds would show the most marked improvement over current programmes are:
existing policies have objectives that are unstated, obscure, and uncosted;
existing policies are failing;
our knowledge of the problem, its causes and solutions, while incomplete, is improving all the time;
financial rewards to those involved in achieving objectives are uncorrelated to their effectiveness in doing so; and
a particular problem requires a wide array of diverse, adaptive approaches for its solution.
Many national and global social and environmental problems satisfy these criteria, especially those that are currently the responsibility of governments or are not targeted at all. So, for instance, health care or crime prevention are largely dependent on government-
Social Policy Bonds could allow the targeting of such problems, each of which probably requires diverse, adaptive approaches, of the sort that cannot be organised by any government nor, indeed, any conventional institution. Long-
Some examples of goals that are ideal for targeting by the Social Policy Bond model at global or national levels include:
In many cases priorities for health services are strongly influenced by groups of medical specialists with little incentive or capacity to see improvements in the general health of a country or the world as an objective. So funding of medical specialities depends on the strength of their lobby groups. And what is arguably the most efficient way of spending the taxpayer's health dollar -
No single measure can encapsulate all the variables that make up human wellbeing. But, at the low levels of wellbeing prevailing in many developing countries, the United Nations Human Development Index (HDI) is an excellent indicator of a society’s achievement and one that a Social Policy Bond regime could target for improvement worldwide. The HDI comprises three basic components: a long and healthy life, as measured by life expectancy at birth; knowledge, as measured by the adult literacy rate and the combined gross enrolment ratio for primary, secondary and tertiary schools; and a decent standard of living, as measured by Gross Domestic Product per capita in purchasing power parity. The index is constructed from indicators that are readily available, using a methodology that is simple and transparent.
A fundamental question, which is rarely posed in policymaking circles or indeed anywhere else is whether we should be more concerned about climate change, or about its negative impacts on human, animal and plant life? There seems to be a pervasive assumption that the most efficient way of mitigating the negative impacts of climate change is to try to influence the climate, either by reducing that which current science suggests are one of the major causes of climate change -
Another advantage of the Social Policy Bond approach is that, simply because bondholders would not be acting as direct agents of government, they can be more discerning as to the type of projects they promote and the cities or regions in which to promote them, and can consider factors that lie outside the purview of legacy institutions.Targeting crime efficiently, for instance, does not necessarily mean allocating funds to crime-
encouraging parents to monitor their children’s activity more closely;
opening sports facilities or youth clubs in deprived regions;
encouraging neighbourhood watch schemes; or
subsidising the recruitment and employment of unemployed young men in certain cities or regions only.
Unfortunately, many of the new problems arising from denser, more linked, populations and complex technology are difficult even for a well-
Education and other policy areas
What educational outcomes should a Social Policy Bond regime target? Key criteria for any Social Policy Bond targets are:
that they can be quantified accurately and
that they be inextricably linked to social well-
At low levels of income, nutrition or, literacy, there is a strong correlation between indicators that we can measure easily and robustly and societal well-
Social Policy Bonds need not aim for global or national goals: we could, target for reduction conflict in certain regions of the world, like the Middle East. And rather than, or at the same time as, targeting global and nationally averaged levels of water or air pollution, we could also target the pollution levels experienced by particular regions or cities within a country.
For the Social Policy Bond mechanism to work it is essential that active investors purchase the bonds and help to solve social problems. So long as there are sufficient funds available for the bonds’ redemption, there would be no need artificially to boost investor interest in the bonds: the anticipated supernormal profit arising from early redemption of the bonds generates the required self-
There are several reasons for this:
Tradability encourages the targeting of broad social goals that might require a long time to be achieved and for that reason might otherwise never be explicitly targeted, as with our nuclear peace example. People would buy the bonds only if they expect to make a profit on them. If the bonds were not tradable, people would have to hold them to redemption to profit from their investment. That in turn means that would-
Another important reason why the bonds should be tradable, is that the identity of the people best placed to achieve a targeted objective will change over time. Most social and environmental goals will require multiple steps before they are reached. The people who are best at step one will not necessarily be those who are best at step two and all subsequent steps. We cannot specify in advance what step one, or indeed any subsequent step, will entail; still less can we identify those best placed to take them. Tradability would ensure that the bonds are always in the hands of the most efficient operators. The market for Social Policy Bonds would favour the most cost-
If the bonds weren't tradable, there would be no would-
Advantages of Social Policy Bonds
Clarity of policy goals
Social Policy Bonds impose a useful discipline on policymakers. They oblige us to be very clear about what we want to achieve. We saw this with climate change (above), but it applies also to other policy areas. A Social Policy Bond regime would demand answers to critical questions before policy can be made and goals targeted. These questions are meaningful to all of us, and so all of us can participate in trying to answer them, rather than, as now, ignore them or sweep them away from public scrutiny. Take for instance the questions of whether gross inequality, large-
Social Policy Bonds make the achievement of social and environmental objectives more efficient by injecting self-
Social Policy Bonds guarantee stability of policy objectives. Policy instability is an important reason why people do not undertake projects or activities that could benefit society. If objectives with a necessarily long lead time are targeted by government-
Also, note that explicit targeting of objectives is likely to lead to an estimate of the approximate value of their achievement -
The market for Social Policy Bonds will generate extremely valuable information for policymakers. They will do so even as the bonds are issued: the price they fetch will be an important indicator of how remote the market believes is the targeted objective. Thereafter bond prices, and the way in which they change, will supply continuously updated information on which policy programmes and events are, in the market's view, likely to be most effective at achieving the targeted goal.
The Social Policy Bond principle is superior to existing budgetary mechanisms in that the funds devoted to the achievement of a social goal would be limited in advance by the amount of funds raised by the backers and deposited into escrow. If no progress is being made toward a targeted goal, the backers can deposit more funds into escrow. (Unusually for a financial instrument, if the supply of bonds is so increased, the value of the bonds already in circulation would rise.) They would know that, even if they had to do so, they would be getting the best return for their outlay, in terms of maximum progress toward the targeted goal per dollar spent.
Complementary and gradual
Social Policy Bonds can be issued without any need to attenuate existing efforts to solve the problems they target. Efforts undertaken by bondholders can complement existing efforts. Or bondholders could look at existing organizations and their approaches and choose to replicate or enhance their most successful activities. At all times, bondholders or would-
A less obvious distributional benefit would arise from the existence of a means of acquiring wealth with which private gain is inextricably correlated with public benefit. Many bondholders would be rich and, if their bonds were redeemed early, they would become richer. But this would be a socially acceptable way of acquiring wealth. And the existence of such a way of accumulating wealth would allow other, less socially beneficial ways to be taxed more heavily.
Social Policy Bonds would target urgently and aggressively the ending of war and other large-
Freed from the burden of achieving our social goals, government bodies could concentrate on overseeing, and ensuring the success, of the Social Policy Bond model. In the first place, they must ensure that goals are capable of being accurately and robustly quantified, or that be a strongly correlated proxy for the objective, whose targeting would inevitably result in the objective being achieved. This is easy enough with goals like nuclear peace, but more thought will have to be given to the definition of other goals. As well, bond issues will require reliable and accurate monitoring of the targeted problem so that progress toward its solution can be reliably and unambiguously assessed. This surveillance must also be seen to be independent of the government or interest groups, both of which could benefit unfairly from dubious data collection. The nature of the monitoring would depend on the objective being targeted and, to some extent, on the amount of funds at stake.
The biggest potential problem of Social Policy Bonds is probably the incentive they will give bondholders to achieve specified objectives at the expense of other societal goals. For instance, assume that the concentration of atmospheric lead is targeted in a bond issue. It might be that targeting lead in this way would cause people to increase their use of substitutes -
A better approach though would be to target, more comprehensively, atmospheric pollution. This could be expressed, perhaps, as an index of atmospheric pollutants weighted according to their lethality and other factors. In general, objectives that are complementary and that, if not pursued jointly, could conflict, should be targeted by a single bond issue.
Another safeguard against legal, but negative activities undertaken in pursuit of a targeted objective, could be provisos on the bonds specifying indicators of social welfare which, while not explicitly targeted by the bond issue, must be satisfied for the bonds to be redeemed. Thus Social Policy Bonds targeting unemployment could embody provisos to the effect that the bonds would not be redeemed if the inflation rate exceeded a certain limit.
Illegal activities could, of course, be dealt with by existing laws, possibly backed by a system of bondholder registration, which would identify those with the biggest incentive to commit them.
Another possible problem arising from the integration of the bonds into the current policymaking system arises from the government's role as creator of statutes. Laws affecting the bond price could be passed. For instance, government could come under great pressure not to increase unemployment benefits from holders of bonds targeting unemployment. Note though, that the source of the pressure, and the motivation for it, would be easy to identify. In any case, the threat of such pressure has a positive aspect: for bond issues to be as successful as possible, governments would have to give assurances as to their future behaviour. This could be another means by which Social Policy Bonds stabilise political objectives.
These problems should not be overstated. Existing laws, careful choice and specification of targeted objectives, and tighter rules on investments and declarations of interest by lawmakers would probably circumvent them.
And the question of how well Social Policy Bonds would achieve societal goals needs to be considered alongside current policymaking methods. In today's environment policymakers can escape or deflect censure because the adverse results of their policies are difficult to relate to their cause. If the bonds were to lead to negative effects, the relationship between these effects and their cause would be identifiable, and the filtering out of negative effects would be a simple matter compared to the methods available to today's policymakers.
Resources are always going to be limited and Social Policy Bonds will not change that. At least for the foreseeable future, most resources for the achievement of our social and environmental goals will remain in the hands of government, mainly at the national and local levels, but also at the supranational level. But while democratic governments are good at representing and articulating their people's wishes, they are not so successful at working out the most efficient ways of achieving these goals, particularly when such goals require diverse, adaptive approaches. This achievement is really a matter of allocating scarce resources: in economic theory, and on all the evidence, markets are the best way of allocating scarce resources to achieve prescribed ends. Social Policy Bonds allow governments to do what they are best at -
Even at the national level, the surrendering of policy instruments to the private sector, even with the aim of achieving social objectives, will be politically difficult. But the potential benefits should not be ignored. Western governments' spending on education, health, the environment and other items continues to grow, despite all efforts to restrain it. Even relatively small gains in efficiency in this spending could greatly benefit those who are most in need.
In the longer run the widespread acceptance of the fact that self-
(c) Ronnie Horesh 2017