Social bond idea would incentivise welfare spend

By Rob Hosking

If everything from Mexican debt to 1970s rock star David Bowie can be securitised, why not social problems?

Wellington economist Ronnie Horesh says the massive securitisation over the past decade, which has made many individuals wealthy, is an approach that could be applied to social problems like the environment, healthcare and poverty.

Over the past few years he has developed and refined the notion of social policy bonds, to be issued by central and/or local governments, which are tied to specific social objectives. He has just published a book on the subject.

The idea was inspired by possibly the most unlikely source possible: the fatwa placed on author Salman Rushdie by Iran's Ayatollah Khomeni following the publication of Rushdie's novel The Satanic Verses.

If theocratic societies could place such incentives on religio-political assassination, reasoned Mr Horesh, why could other societies not put similar incentives to attain more secular and less violent goals such as environmental cleanliness and full employment?

As well as being used to help finance these initiatives, the approach could mean far better incentives for tackling social problems, as well as better targeting of outcomes, Mr Horesh said.

The overall aim is to use the bonds to inject market incentives into the achievement of social goals: lower unemployment; a cleaner environment; better health services and, indeed, any other quantifiable social objective.

The bonds would be issued by a government, and would be redeemable for a fixed sum only when the specified social objective has been achieved. "Most government initiatives are focused on particular activities, or agencies, or spending targets, and the means becomes confused with the goal. With this approach, the government sets the outcomes and is the ultimate source of finance, but how they are achieved is left open."

A good example is the issue of global warming.

"I actually think the Kyoto Agreement is a complete waste of time," Mr Horesh said yesterday. "It targets greenhouse gas emissions, but there is at this stage no definite linkage between those emissions and what we really want to achieve, which is a stable climate."

Instead of targeting those emissions, he said, governments should set stable climate as a goal, clearly define what it means by that, sell bonds to the highest bidders and then leave them to get on with the job.

"It might mean cutting back on greenhouse gases but it could mean using other methods as well which haven't been thought of yet. For example, reducing the albedo the reflectiveness of light into the atmosphere is one possible way of solving global warming. And it could be a lot cheaper, but it hasn't been seriously looked at."

Another method identified under the Kyoto Agreement is helping countries and businesses set up carbon sequestration plantations, "but it is being done in a way which predetermines the numbers of plantations and the relationship between them and global warming instead of targeting the outcome."

Another example [suggested by The National Business Review, not by Mr Horesh]; would be the government's now-renamed closing the gaps programme. However, he notes that a key factor in making social policy bonds work is to clearly define the social policy goals at the outset.

"Some politicians might have a problem with that," he observed.

Social policy bonds would typically be initially sold at a very low price, Mr Horesh said, and the bonds would increase in value as the social policy target nears completion.

"If people buy the bonds and do nothing, their value will go down, which builds in an incentive for bondholders to do something to achieve the goal."

Which is why the typical bondholder would be a large company or other entity with the ability to do something about the particular problem.

"Individuals would probably not be able to do much about such problems, although there might be things they can do in a small way."

The other side of this aspect is that there is little or no scope for free-riders. Too many of them and the value of the bonds goes down.

Apart from providing better incentives for dealing with social problems Mr Horesh believes his proposal cuts through a lot of the ideological rhetoric about the size of government. "This idea has no pre-conceived notions about how big government should be, or what it should do."

To the Social Policy Bonds homepage