Investing for Social Inclusion

Dal and Wular Lakes, India
Dal and Wular Lakes, India
1 – Introduction

Social inclusion is a challenge facing most economies across the planet. Emerging countries in places such as sub-Saharan Africa struggle to end extreme poverty, malnourishment, and the lack of access to clean water and sanitation. Meanwhile deprived communities in the US and Western Europe are also faced with millions of citizens who lack access to nutritious food, transportation, internet access as well as good schools and hospitals. It is no wonder that improving the living standards of half the world’s population to a basic level is a focal point of the UN Sustainable Development Goals.

Addressing the universal challenge of social inclusion requires a transformation of the global socioeconomic system–a change in social attitudes; the adoption of inclusive policies and institutions; and the penetration of new technologies. 

Sustainable investments are an important part of the solution but will need to be targeted at grass-roots level to drive rapid impact. According to the Global Sustainable Investment Review, $34 Trillion had been deployed into sustainable investments by the end of 2020. However, $33 Trillion of this amount had been placed into ESG funds targeting large, publicly-listed corporations in developed markets. Notably, very little was invested into emerging economies, and even less into innovative growth companies and community projects with social inclusion as their primary objective. Furthermore, sustainable investments of any kind will not realize the full impact unless they are supported by policy and catalytic financing from the public sector. 

Therefore, to address the intimidating problem of social inclusion, I find it helpful to start with the individual citizen before zooming out to the broader community, region, or nation. The key to launching an individual’s development journey—through public and private sector interventions—by building up her personal assets, her skills and capabilities, and her access to infrastructure so that she can take up increasingly productive work and increase consumption.

To participate in the 21st-century economy, the key personal assets that individuals need include a home, a source of clean electricity like a rooftop solar-panel, a mobile phone, and a means of clean transportation such as an electric scooter. These physical assets need to connect to essential municipal infrastructure such as a clean water supply, a sanitation and sewage system, well-paved roads, mobile-communication towers, and internet services. And finally, to participate productively in private enterprise or the public sector, the individual needs to be in good health and to be armed with reading, writing, numeracy, and computer-literacy skills, as well as a working knowledge of personal finance and small business. If these “development basics” are in place, an individual gains a foothold on the socioeconomic ladder. But today, most of the world’s population is locked out of this fundamental opportunity.

In this article, I put forward a three-part model for delivering social inclusion that engages both the private and public sectors in a collaborative manner. The first part of the model is the Graduation Approach—a formula to lift people out of extreme poverty to a sustainable livelihood. The second part is to invest in the enablers of socioeconomic mobility: affordable housing, infrastructure, and key social services such as education and healthcare. The third and final part is to reap a sustainable demographic dividend by maintaining a high proportion of the population in the workforce.


2 – The Graduation Approach 

Let’s start by looking at the Graduation Approach—a strategy that has been shown to have a sustainable positive impact on economic mobility in many parts of the developing world. First designed and implemented in Bangladesh by BRAC, a large Bangladeshi NGO, graduation programs provide a holistic set of services to the poorest households in some of the most deprived regions of the world. The centerpiece of the program is to transfer a productive asset, such as livestock, to a household to initiate a sustainable livelihood through private enterprise. Households participating in graduation programs have begun enterprises as diverse as pig farms, shoe-repair shops, and convenience stores. 

In 2015, Nobel Laureate Abhijit Banerjee and Esther Duflo (henceforth BD), along with their research colleagues reported the results of a major study to measure the impact of graduation programs in the prestigious journal Science. BD study had investigated the outcomes of graduation programs involving 11,000 households across six countries: Ethiopia, Ghana, Honduras, India, Pakistan, and Peru.
In each case, the programs had offered the following support to each household: 

• A one-time transfer of a productive asset

• Technical-skills training on managing the productive asset

• A regular transfer of food or cash for a few months, up to about a year, to support consumption

• Access to a savings account and in some instances a deposit-collection service 

• Some health education, basic health services, and life-skills training

• High-frequency home visits to reinforce the skills transfer.


As BD reports, the key idea was to provide the participants with a “big push” over a two-year period, which would allow them to begin productive self-employment and sustainably increase their level of consumption. When the research team checked in on the participating households one year after the programs had been completed, they found that the impact had been transformational in nearly every country. In one program conducted in the Northern and Upper East Regions of Ghana, households had experienced a 91 percent increase in non-farm income, a 50 percent increase in livestock revenue compared with households in the control group, and three times more savings than the control group. 

Some observers have criticized the Graduation Approach as expensive. In the programs analyzed by Banerjee’s team, the total costs for the full duration of the program ranged from PPP US $1,455 per household in India to PPP $5,962 in Pakistan. But since the benefit-to-cost ratio ranged from 133 percent in Ghana on the low end, and an astonishing 433 percent in India on the high end, the programs were unquestionably good value for the money. 

Let’s also put the costs in the context of global annual spending on Overseas Direct Aid (ODA). If we assume that the median cost of the Graduation Approach per household is around $4,000 over the full two-year period, and that each household has on average four people —perhaps an underestimate for some developing countries, but it simplifies the estimate —the graduation cost per person works out to be about $1,000. On this basis, it would cost $650 billion to graduate all 650 million people currently in extreme poverty worldwide. This equates to $65 billion per year, spread out over ten years, which is about 40 percent of the global annual spend on ODA.

While that’s a big chunk of current ODA, the sustainable impact would suggest that it’s a good way to deploy these precious funds. Fundación Capital, an international development organization, has been working with governments in Colombia, Paraguay, Mexico, Honduras, and Tanzania since 2018 to implement the Graduation Approach as national policy. Instead of using in-kind asset transfers, Fundación Capital makes cash transfers and uses technology to deliver education. By doing so, it has reduced two of the biggest costs of the program: the seed capital for the productive asset as well as the coaching cost of home visits. If, as expected, graduation programs continue to succeed in their goal of lifting communities out of poverty, it will be further evidence that they would be a smarter way to spend ODA money. 

Using ODA more effectively to graduate people from poverty is a good start, but is there a way to scale-up and accelerate the Graduation Approach while breaking free from the dependence on ODA altogether? 

Enter the idea of “market-creating innovations.”  put forward by the late Harvard Business School professor Clayton Christensen and his collaborators Efosa Ojomo and Karen Dillon. Distinct from “sustaining innovations” which incrementally improve product performance or “efficiency innovations” which enable products to be made more cheaply, “market-creating innovations” activate new consumers by making new products and services which are more affordable and accessible. Consumption is made possible for people who were previously “non-consumers.” Latent demand is unlocked which ignites economic growth. 

Unlike “sustaining innovation” which creates few jobs and “efficiency innovation” which destroys jobs, “market-creating innovations” are a factory for new private sector jobs, especially since they lead to the creation of a “whole system that often pulls in new infrastructure and regulations.” Furthermore, market-creating innovations tend to be relatively inexpensive to scale, since they “leapfrog” older technology or ways of doing business. 

Let’s take a look at some examples of market-creating innovations in action. BBOXX, a London-based company that is deploying rooftop solar power and associated consumer devices across sub-Saharan Africa. They provide households with two affordable packages. The first package contains a light, a phone charger, and a radio, while the second includes all these items, plus a TV. Households pay in the range of $10 to $20 per month for the package, with no down payment due up front. After three years, the household owns the BBOXX system outright. BBOXX already sells its products in Rwanda, Kenya, Uganda, Colombia, and the Philippines and is rapidly expanding its footprint. 

Taking a page out of the Graduation Approach playbook, BBOX empowers bottom-
of-the-pyramid (BOP) consumers by providing them with access to energy and vital economic assets. A source of electricity in the home frees up enormous amounts of time spent in collecting kerosene or firewood for fuel, often by women or girls in the household.
A powered mobile phone opens up whole new worlds of information and transactions. Farmers can check weather reports to help with crop care and harvesting decisions, participate in auctions for their crops, and make payments through mobile-banking services. 

As one customer of BBOXX, an African woman, concisely explains: “I have saved money with BBOXX. I no longer buy paraffin or dry cell batteries. I use the money for my children and buy bran for my pigs. When swine fever came many pigs became sickly, but my pigs had good food and good health.” As well as freeing up time and money, BBOXX products allow poorer consumers to build up a credit history, which becomes the gateway to bank loans, to investments in small businesses, and ultimately, to increased consumption. 

The broader ramifications of innovative business-models such as BBOXX are very profound. First, BBOXX is helping developing countries to leapfrog a centralized electricity-generation model, especially in more remote rural areas, with a paradigm of decentralized energy generation. Second, the company is “consumerizing” infrastructure. It is offering electrification as a consumer product, sold in household-sized units by a private company with a long-term financing solution. Villagers no longer need to wait for government to fund a power scheme or to create a regulatory framework that enables private power companies to provide electricity as a utility. They can simply sign up for one of BBOXX’s packages. Third, BBOXX is creating a whole new set of markets– not just for the solar panels and devices it is selling today, but for additional goods and services that households will be able to buy as their credit history builds up.

Another example of the private sector creating a new business model that is helping to graduate people out of poverty is M-Pesa. Launched in Kenya by Safaricom, and now operating across Africa, M-Pesa is transforming lives through mobile banking. M-Pesa enables poorer consumers to receive, save, and transfer money using a cheap SMS-enabled mobile phone. M-Pesa has network of 110,000 agents throughout Kenya, where customers go to put money onto their phone or withdraw funds in cash. M-Pesa agents outnumber ATMs in Kenya by a factor of forty! The service is now used by 96 percent of Kenyans, and transactions made on the service represent about 40 percent of Kenya’s economy. 

Research by Billy Jack of Georgetown University and Tavneet Suri of the Massachusetts Institute of Technology, which surveyed thousands of Kenyan households over a six-year period, suggests that M-Pesa has helped to lift an estimated 194,000 households out of poverty. Crucially, in households with access to mobile money, women were more likely to move out of agriculture into higher-value business activities. This is probably because mobile money makes it easier for households to put aside savings—households with easy access to M-Pesa put away 22 percent more in savings than those without it. As savings build up, women become more empowered to use the capital to start their own businesses and widen their occupational choice. 

To help entrepreneurs start and grow small and medium size businesses, we need to close the yawning $2.6 Trillion SME credit gap worldwide. Lidya is a private sector fintech platform trying to improve access to credit across frontier and emerging markets starting with Nigeria. Since its launch in 2016, businesses looking for $500 USD to $50,000 in working capital have been able to apply online or via their mobile phone. To assess credit risk, Lidya uses close to 100 data points to evaluate businesses, build a credit score unique to each business, and disburse loans in 24 hours or less.


3 – Investing in Socioeconomic Mobility

The second part of my model for provisioning “development basics” involves investing in the enablers of socioeconomic mobility, such as affordable housing, large-scale infrastructure, education, and healthcare. Let’s look at how many citizens lack access to these basics, and how they can be provisioned for more effectively.


3.1 Housing and Infrastructure

There is no personal asset more fundamental than a home. Unfortunately, we seem to be in the middle of a global crisis in affordable housing, which has left hundreds of millions of people without adequate shelter, making it very difficult for them to participate in economy. 

In developing countries, 881 million people, or 12.5 percent of the world’s population, live in slums. Unsurprisingly, sub-Saharan Africa is the worst afflicted region, with 59 percent of urban dwellers taking refuge in shantytowns. But the scourge of homelessness afflicts developed countries as well. Many of us have witnessed the alarming rise of homelessness in American cities in recent years. And even in Western Europe, 6 percent of the population lives in “extremely precarious conditions,” according to UN Habitat.

By 2025, it is estimated that the global gap in affordable housing will affect 440 million urban households, or 1.6 billion people. In virtually all major South American and Asian metropolises, the cost of housing is above 150 percent of net average monthly incomes. And in almost all metropolitan areas with more than two million people in North America, UK, and Australia, the median housing cost is three times higher than the gross annual median income. Why is this happening, and what can we do about it? 

In both the poor and rich worlds, the solution for affordable housing lies in fixing the market for land. For example, only 10 percent of the land in the African continent is registered and marketable. Due to restricted supply, land prices in Africa are grossly inflated, which in turn makes housing less affordable. Even in places like Ethiopia, where the government has been building social housing at an unprecedented rate for the last decade, the cheapest units are out of reach for most of the population. To complicate matters further, land rights are not well protected across the continent. Not surprisingly, the added risk of land expropriation turns off investors, choking the supply of capital to build further housing stock. The elevated risk also increases the rate of mortgage interest, making it even harder for citizens to purchase homes.

To solve the housing crisis in Africa and other poorer regions, improved land registration and enforceable land rights are required for the sector to take flight. 

In addition to affordable housing, large-scale infrastructure is a critical driver of human development and empowerment. Access to electricity, clean water and sanitation, mobile telephony, internet services, and transport links are essential to a citizen’s quality of life and his or her ability to earn income. As with all socioeconomic inputs, we have made progress over the last thirty years, but there’s still much to do. 

Recent figures show that 1.1 billion people—or 14 percent of the global population—do not have electricity in their home, 0.7 billion people lack access to clean water, and 2.4 billion people suffer from inadequate sanitation facilities. Since most of these citizens are concentrated in sub-Saharan Africa, South Asia, and Latin America, it highlights the staggering degree of basic development investment still required in these regions of the world.

One impact investment backed company trying to bring electricity to remote areas is Husk Power Systems (HPS). HPS provides end-to-end renewable energy solutions in India, Nepal, Uganda, and Tanzania by installing 25-100 kW “mini power-plants” that deliver solar and biomass-based electricity as a “pay-for-use” service to villages of up to 2,000 inhabitants.

India suffers from a serious shortage of electricity with 100,000 villages lacking grid power and 25,000 villages declared by the government as unviable to connect to the grid. Even where the grid extends, supply is unreliable and does not reach all households.
Companies like HPS can help to ensure that these villages do not miss out on the 6.5% annual growth being experienced by the rest of the country.

Mobile telephony is a critical aspect of modern infrastructure, since it is the point of entry to the digital economy—an essential source of information and services in the 21st century. Once cellular networks are installed, even the poorest citizens can use basic mobile phones to access mobile payments systems like M-Pesa and other text-based services. Unfortunately, 30 percent of people in low-income countries —or around 300 million people—still did not have a mobile subscription as reported in the latest figures from 2017. And although there has been rapid growth in access across these countries, 55 percent of people go without internet services and over 70 percent of people do not have mobile broadband. 

Transportation links in the form of roads, rail, ports, and airports are essential cogs that make the economy turn by enabling individual mobility as well as the movement of goods. The chronic lack of transport infrastructure presents a major barrier to development in poorer nations. For example, 70 percent of the rural population in Africa lives more than two kilometers from an all-weather road, making it very difficult to send crops to market or to bring supplies to these rural settlements. Meanwhile, on the developed world, more than 70 percent of the urban population does not have access to rapid mass-transit. The only exception to this phenomenon is Europe, where 90 percent of urban citizens enjoy easy access to public transport.

So, what is the global investment required to meet the global demand for housing and infrastructure? McKinsey estimates that we will need to construct affordable housing for 440 million households, based on the current stock of housing and the expected rates of urbanization and income growth. To fill this gap, the land purchase value and construction cost will require $14–$16 trillion in investment, which amounts to $1.4–$1.6 trillion annually over a ten-year period. In addition, according to figures from the United Nations Conference on Trade and Development (UNCTAD), we will need to spend an extra $1.3 trillion on economic-infrastructure development per year, up to 2030, for developing countries to meet their Sustainable Development Goals (SDGs).

Fortunately, the entire burden need not fall on public money. On average, developing-country governments are funding only about 20 percent of housing projects, 50 percent of power infrastructure, 60 percent of transport, 20 percent of telecommunication, and 80 percent of water and sanitation. With the appropriate regulation and licensing, private sector investors and infrastructure operators can be attracted to participate in the build-out and operation of large-scale housing and infrastructure projects. 

At the other end of the spectrum, micro-finance platforms are also becoming an effective tool for funding community-scale infrastructure. Take, an NGO championed by the award-winning Hollywood actor Matt Damon and his business partner, Gary White. Damon and White’s platform has helped to mobilize $1.8 billion in capital to support small, affordable loans for water connections and toilets that help bring safe water and sanitation into millions of people’s homes. More than 87 percent of the borrowers are women, who are often freed up from the chore of spending many hours every day collecting fresh water as a result of the installations. reports that their loan repayment rate is 99 percent, allowing the organization to recycle its capital to future projects.


3.2 Universal Education and Healthcare

The talents of hundreds of millions of individuals will never be realized because they lack the basic reading, writing, numeracy, and computer-literacy skills required to participate in the 21st century economy. Being concentrated among the world’s poor, these individuals also suffer the most from ill health—yet another barrier to capturing the economic opportunities on offer. The idea behind “universal” education and healthcare is to make basic services freely available to everyone so that nobody is excluded from economic opportunity because of a lack of access. However, in some developed countries, “universal” social services have become confused with bloated entitlement systems with offerings that are outdated or surplus to requirements. Let’s look at the global gap in education and healthcare provisions and begin to calibrate the public investments required to address the problem. 



We are failing to educate a significant proportion of the world’s citizens. In the developing world, over one billion adults are illiterate and 263 million children of secondary-school age are out of school (ninety-three million in sub-Saharan Africa and one-hundred million in South Asia). 

The fundamental problem in education facing poorer countries is the lack of schools in rural areas. It’s safer, less costly, and less time-consuming for kids to go to school in their own village rather than crossing over to a neighboring town—but unfortunately, most villages do not have a school of their own. A study conducted in 2013 by Dana Burde and Leigh L. Linden on thirty-one villages in Afghanistan found that the construction of a school in a village that previously didn’t have one, increased enrollment for girls by 50 percent and for boys by almost 35 percent. Attendance for girls is further boosted by introducing “girl-friendly” provisions, such as separate latrines. According to a study by Harouna Kazianga of the BRIGHT school construction program in Burkina Faso, the introduction of separate female toilets increased female attendance by over 20 percent. 

But even in the areas of sub-Saharan Africa and South Asia that have enough schools, attendance can still be quite low. This is usually because parents believe that sending kids to school is not worth the effort if they could be contributing to short-term household income instead, by working on the farm or in some other local business. Creating the economic cushion that allows poorer families to send children to school seems to change the equation. Conditional cash-transfers (CCTs), which are given to mothers on the basis that their children regularly attend classes, were found to be particularly effective in increasing school attendance. In addition, school programs that provide meals, vaccines, employment counseling, and other “utilities” have also proven to be powerful motivators for parents to send their children to school. For example, the Oportunidades Program in Mexico, which began in 1997, grants CCTs for schooling, nutrition, and health-center attendance, as well as facilitating access to higher education, formal employment, and financial services. It has been responsible for a 20 percent increase in female attendance at secondary schools and for a 10 percent increase among boys. Male beneficiaries received ten additional schooling months on average and female beneficiaries eight additional months. The program, now called Prospera, has been replicated in fifty countries with great success. 

In line with the general principles of the Graduation Approach, Prospera relieves the burden on the poorest in society to cover basic necessities and frees up their time and energy to invest in their own future—in this case, through education. In fact, Banerjee and Duflo report in their book Poor Economics that non-conditional cash transfers are as effective as CCTs in increasing school attendance. Education seems to be a top priority for parents once they escape the confines of the poverty trap.

Beyond increasing attendance, it’s vital that schools offer good-quality education that is relevant to the modern workplace. Evidence suggests that young people who attend vocational schools in developing countries fare particularly well, since they gain actionable skills for employment, not just basic literacy and numeracy skills. Recent research by Nobel Laureate Esther Duflo analyzed a ten-year program in Ghana in which 682 pupils (aged seventeen, on average) were awarded scholarships to academic or vocational schools, which they could not have otherwise attended due to a lack of funds. Duflo and her fellow researchers found that those who attended vocational school ended up earning 24 percent higher wages than academic-track awardees. It seems that practical workplace skills were valued much more highly than “book-smarts.” 

In keeping with this observation, the impact investor Actis has introduced vocational training programs in some of its portfolio companies. Shami Nissan, Head of Sustainability at Actis, noted that its Latin American investee company Atlas Renewable Energy trained 800 women trained last year on solar panel installation to boost economic empowerment and employability. The initiative gained tremendous support from the EPC contractor responsible for the installations, and NGO to recruit and train the women, and funding from the InterAmerican Development Bank.

In developing economies, a particularly serious problem in education is that two-thirds of the children not attending school are girls. Not only does this disproportionately close off doors to opportunity when they reach adulthood, the evidence irrefutably shows that increased education of girls leads to greater awareness of family planning, health, and gender-equality issues. This, in turn, leads to a variety of other positive outcomes, such as lower birth rates, healthier families, and higher female participation in the workforce. 

The connection between the level of women’s education and the national fertility was put forward the economic models of Gary Becker. His central idea was that the opportunity-cost of having children is higher for educated women. This simple insight has tremendous ramifications in both youth-bulge countries and aging societies. 

In developing countries with youth bulges, educating women is a primary lever for bringing down population-growth rates to manageable levels. This, in turn, allows more resources to be invested in bringing up well-educated and healthy children with brighter economic prospects. 

And what of the cost of basic education?
A review of reports by the IMF and the UN Education for All (EFA) suggests that the incremental investment to extend basic education to the entire developing world population is approximately $670 billion per year. This would require a 7 percent increase in government expenditure on average in those countries. By contrast, when it comes to developed countries, the IMF points out that improved educational outcomes could be achieved with an equal or lower budget in most cases. In other words, educational resources must be spent more efficiently and must focus on building practical skills for the modern workplace.



In order to understand how healthy people are around the world, it is helpful to consult a map of Disability-Adjusted Life Years (DALYs), as in Figure 1. One DALY can be thought of as one lost year of healthy life. The higher the average DALYs for a given population, the unhealthier it is. Armed with this definition, the map of global DALYs immediately shows the severe blight on human health in sub-Saharan Africa, the Indian subcontinent, and parts of Southeast Asia. 



The tragedy is that much of this suffering could be prevented with relatively modest investments. It is widely recognized in health-policy circles that countries can dramatically improve healthcare outcomes if they focus resources more on primary care and basic surgeries. For example, a study by health economist Dean Jamison has identified about 200 interventions, which if available globally would reduce premature deaths by a quarter. These interventions include various preventative measures such as immunizations, as well as surgical procedures for basic injuries, obstetrics, and cancers. Astonishingly, Jamison estimates these provisions would only cost an extra $1 per person per week and could be carried out by a GP and general surgeon, supported by a community pharmacist. 

Florian Kemmerich of impact investment firm Bamboo Capital points to its portfolio company Family Doctor—a chain of 42 clinics targeting middle to low-income people in India—which is following this exact model. Each family doctor clinic offers experienced General Physicians and Specialists supported with quality Diagnostics and a fully equipped Procedures Room to facilitate ECG, Suturing, First aid, Injections, Stabilization, Short Stay observation and Emergency care including Oxygen, IV administration, and Nebulization. Almost half the clinics also have a pharmacy, adjacent to the clinic. The primary care market in India is hugely underserved. The family doctor serves patients from lower and middle-income segments where healthcare access is poor. The family doctor clinics are neighborhood clinics, committed to providing high quality cost-
effective comprehensive healthcare services to all family members.

Countries that have focused on implementing universal primary healthcare through platforms like Family Doctor have reaped high rewards. Health outcomes in middle-income Thailand have soared with only $220 per capita spent on healthcare. This represents only 4 percent of GDP compared with just over 17 percent of GDP spent on healthcare in the US. Rwanda is leading the way among low-income countries. Its success lies in expanding health insurance coverage to 90 percent of its population and focusing its scarce resources on a limited set of the most essential treatments. As an example of the scheme’s success, the mortality rate for tuberculosis fell from fifty to fourteen per 100,000 people between 2000 and 2011. 

These examples clearly indicate that spending modest sums on healthcare can generate very good outcomes. In fact, Figure 2 shows that increasing healthcare spending above about $1,000 per capita brings very limited additional gains in DALYs. Indeed, if healthcare costs become too high—as in the US and some other developed countries—it shuts off access for lower-income citizens and the nation’s overall health becomes weighed down. Due largely to this effect, as well as the mushrooming opioid crisis, life expectancy in the US fell for the tenth consecutive year in 2018—a staggering statistic for such an affluent nation. 

As the health priority in both the developed and developing worlds shifts from infectious diseases to chronic conditions like diabetes and cardio-vascular diseases, the focus on primary care and preventative healthcare will become even more essential. The earlier chronic diseases can be detected and managed, the greater the likelihood of preventing acute complications that increase the risk to patients and magnify the overall cost of treatment. 

Telehealth has already become commonplace in many countries. Babylon already operates in Rwanda, and the popular med-tech unicorn WeDoctor is helping to relieve the stress in China’s over-crowded hospitals and clinics. WeDoctor and other digital-healthcare solutions are connecting remote patients to doctors and hospitals, thereby lowering the cost of diagnosis and care delivery. WeDoctor is also helping to increase the reach of scarce medical specialists, especially into distant provincial areas. 

In the case of healthcare, analysis of IMF and World Health Organization figures suggests the incremental cost to provide basic healthcare to the entire developing world population is approximately $530 billion per year—requiring a 5.5 percent increase in government expenditure on average in developing countries. As with education, the report points out that most developed countries could improve health outcomes with an equal or lower budget if the resources were spent more efficiently. 



4. Unlocking the Demographic Dividend

The third major element of my “development basics” model involves managing a country’s demographics to keep the highest possible proportion of its citizenry engaged productively in the workforce. Unfortunately, this is an issue that most countries have failed to tackle. As a result, they now face either of the following acute challenges: youth bulges or aging societies. 

Youth bulges are typically a phenomenon of countries in the early stages of the development cycle, such as India, Egypt, and Nigeria. These nations have brought down their mortality rates due to improvements in clean water supplies, sanitation, and healthcare. However, since fertility rates have not yet moderated commensurately, the cohorts of young people are ballooning. If these youth bulges can be harnessed economically through education and gainful employment, they represent a powerful economic force that could lift national output and generate new funds for critical socioeconomic investments. In short, these countries have the potential to enjoy a “demographic dividend.” If, on the other hand, these countries do not generate enough new jobs, the swelling ranks of idle youth may become a significant drag on the economy, a source of civil unrest, and even a source of migrants, which creates tensions in neighboring countries.

Countries need to adopt a much more proactive approach for maintaining a sustainable demographic dividend, instead of lurching between the extremes. Let’s look at how this might be achieved.


Youth Bulges

Let’s assume a developing country with a sizeable youth bulge has already implemented the measures we’ve discussed: ODA funds and public money have been channeled into graduation programs to combat extreme poverty; companies with market-creating innovations such as BBOXX have gained a berth to bring private-sector solutions to the market; and investments have been made in socioeconomic-mobility enablers such as large-scale infrastructure, education, and healthcare. Even if all this were in place, the country may still be missing a critical piece of the puzzle for harnessing a demographic dividend—a vibrant private sector. 

An underdeveloped private sector is debilitating for any economy, but it’s particularly dangerous for countries with a large youth population. According to Rachel Ziemba, a leading global macroeconomist who has written extensively on this subject, one nation contending with this predicament is the Kingdom of Saudi Arabia. Although it is one of the richest countries on Earth on a GDP per-capita basis, about 10 percent of the country’s thirty-three million inhabitants are thought to live below the Kingdom’s official poverty line of $17 a day. Saudi Arabia’s economy is highly reliant on oil, directly and indirectly and two-thirds of the employed citizens hold government jobs. While the non-oil sector is sizeable, it is highly influenced by government support and the oil sector still accounts for the supermajority of government revenues, as well as the bulk of equity and debt issuance in the last few years. The absence of a strong private sector has contributed to an unemployment rate of 40 percent among people aged twenty to twenty-four. Many other countries struggling to capture a “demographic dividend” from their bulging youth are also being hampered by a disproportionately large, over-regulated, and inefficient state-sector. For example, Nigeria and Egypt have 61 percent and 41 percent employment in the public sector, respectively. 

Having realized that even the extraordinary wealth of the Saudi Arabian government balance sheet cannot compensate for the dynamic force of private enterprise in creating jobs, the Crown Prince, Mohammad Bin Salman Al Saud (often referred to as “MBS”), has set about charting a new course for the Saudi economy. Not only are domestic spending needs rising, but the volatility and questions about fossil fuel demand during the energy transition have increased the challenge of supporting the economy – something the Covid19 pandemic only reinforced. Under the umbrella of Saudi Arabia Vision 2030, MBS aims to diversify the oil-dependent economy by stoking private enterprise and attracting foreign investment. Central to this transformational endeavor are a series of critical social, economic, and fiscal reforms. Some have been more effective than others. 

An important early initiative championed by the Crown Prince has been a privatization drive to transfer inefficient public companies into private operatorship, while raising more than $55 billion for the public purse that can be invested in other projects. However, progress so far has been slow. By March 2019, only six deals had been completed (four in water, one in healthcare, and one in transport). Progress began to pick up in 2021, with several privatizations of flour mills and projects in the water and solar sector including the recent large ACWA offering. One concern is that some of the largest privatizations concern the oil and gas sector, whose assets may be devalued as the energy transition reprices assets. Two of the largest privatizations involve the listing of Saudi Aramco and the partial sale of some of the company’s oil pipelines. 

Saudi Arabia has been taking steps to diversify fiscal revenues and reduce reliance on oil income for its budget. It has introduced a value added tax and increased the costs of some critical services. While the VAT has added revenue, such taxes tend to be regressive, hitting lower-income individuals disproportionately as they consume a greater share of their income. The Kingdom is also relying on greater investment income including returns from the PIF and indeed, investment returns and dividends contributed to the 2019-21 increase in non-oil revenue. Looking forward, the Kingdom also anticipates significant investment from the PIF in domestic investment projects, in effect supporting off-central government balance sheet spending on these development projects. 

The Kingdom is also opening up its economy to foreign investment. There has been progress on a regulatory side and in ambitious plans, but the actual flows have been limited. One hundred percent ownership of companies has already been granted in the health, education, and engineering sectors. Foreign investors can also acquire stakes in companies across a broad range of businesses such as recruitment, road transport services, audio and visual services, and real estate brokerage. Foreign direct investment increased in 2020, going against the pandemic global trend of lower investment. Saudi Arabia attracted almost $XX billion in FDI, largely linked to the privatization plans. Some of this reflects a repatriation of Saudi assets abroad. 

After years of talk, Saudi Arabia listed a small portion of Saudi Aramco—Saudi Arabia’s national oil company, on the local stock exchange, allowing local and foreign investors a stake. Aramco holds a series of strategic assets in oil and gas exploration, drilling, and production and has both listed portions of its equity and debt. Concerns about transparency and auditing requirements did lead Saudi Arabia to scale back its global listing plans to list only domestically. This had the side benefit of supporting the local equity market.  In order to make it easier for foreigners to invest in the Kingdom, Saudi Arabia has already begun to reform its capital markets to align with global norms. As a result, the country has won endorsement from MSCI, FTSE Russell, and S&P Dow Jones Indices, which began to incorporate shares of Saudi companies into their respective emerging-market indices as of 2019 instead of their prior listing as a frontier market or not at all. 

Another core feature of Vision 2030 is to build regional economic clusters—even entire new cities—that will diversify Saudi Arabia’s economy into new sectors outside oil and gas. In a strategy with parallels to China’s state-enterprise zones, the Crown Prince is promoting the development of NEOM, a 26,500 square-kilometer (10,232 square-mile) zone that will focus on various sectors, including food technology, advanced manufacturing, energy, and water. The mega-project will be backed by $500 billion in investment from the country’s strategic-investment fund. The Kingdom has also embarked on a huge tourism project to turn fifty islands near the Red Sea coast into luxury resorts and several other initiatives. In October 2021, Saudi Arabia rejigged these some of its incentives and announced new plans to develop special economic zones. It remains to be seen whether these ambitious plans become white elephants or the next economic miracle, but the intention to generate more private-sector champions is a worthy one. 

Economic reforms are being reinforced with vast social programs. The focus so far has been on building affordable housing and dramatically improving education and skill building for youngsters. To facilitate access to housing, the government eased rules on mortgages some years ago, increasing the pool of buyers. In particular, these measures focused access on credit to women who had previously been excluded. The Crown Prince’s reforms have already granted women the right to drive, and several of the guardianship laws, which require women to gain the permission of a male guardian (typically a father, husband, or brother) in order to travel or conduct business, have been relaxed. These are important steps towards engaging this large pool of potential workers. 

The entertainment industry is also taking off as part of Saudi Arabia’s social transformation. For the first time in thirty-five years, public cinemas opened their doors in 2018, and Saudis were allowed to enjoy music concerts featuring international performers like David Guetta and Janet Jackson. Saudi Arabia is also building a 334 square-kilometer “entertainment city” outside its capital, Riyadh, with a safari, theme parks, and sports facilities. Tourist visas are also being loosened up to allow stays beyond two weeks, and beach resorts are being developed to attract visitors. While many of these measures have been sidelined due to Covid-related travel restrictions, internal visitors have begun to appreciate these venues, as well as an expansion of the service sector. Foreign investments of the PIF also are highly exposed to key sectors. 

Saudi Arabia has been boosting investment in renewable energy, partly to avoid overuse of its fossil fuel resources at home which would curb potential exports, but also because of domestic demand and pressure from foreign lenders. Saudi Arabia wants to be a major player on the global stage, including at the G20, and making pledges such as the recent net zero pledge, participation in the One planet group of long-term investors and related pledges are part of that attempt at boosting their role in global governance. The recent pledges of making the domestic economy net zero by 2060 and Aramco’s operations by 2050, rely heavily on the success of carbon capture and storage as well as the kingdom’s planned tree planting initiatives. Saudi Arabia has been a loud voice raising concerns that too quick a transition would lead to energy dislocations, underinvestment and reduced global growth. More efforts to make adjustments will be necessary. 

All these initiatives represent a promising start, but they are unlikely to employ the millions of unemployed youth in the country. That’s because most of the measures mentioned so far stand to benefit the largest companies. But as research by the European Investment Bank (EIB)[5] and many other sources has shown, the largest source of job creation tends to come from small- and medium- sized enterprises (SMEs), run by local entrepreneurs. In this critical segment of the economy, Saudi Arabia still has a long way to go. 

The most essential reforms are those that will make the country a much easier place to do business. Saudi Arabia currently ranks ninety-second out of 190 countries assessed in the World Bank’s Ease of Doing Business 2019 report—marginally above Egypt (120 ) and Nigeria (146), and a little below India (77). If the Kingdom is serious about encouraging SMEs, it needs to relax the red tape involved in starting a private venture, registering a property, getting access to electricity, and sourcing SME financing. 

No plan to grow Saudi Arabia’s private sector, especially the crucial SME segment, will succeed without women’s advancement and empowerment. As I have already explained, providing access to education and an equal role in the workforce is essential to unlocking economic growth while also bringing down the birth rate—two essential ingredients to reap the demographic dividend in youth-bulge countries. As recently as 2018, women constituted only 24 percent of the workforce in Saudi Arabia, which is just above the average of 20 percent in the MENA region. By 2020, there have been some signs of change and women constituted 33% of the workforce—a major increase. At the same time female unemployment dropped from 32 to 24%, suggesting not only that more women are seeking jobs, but that more of them are being employed. In part this reflects the expulsion of foreign male workers, as a part of Saudization goals, and labor market dislocations caused by the pandemic, but it also reflects reforms, including measures to allow female driving and other education. Much of the growth in female labor force participation has been in private sector work, reversing historical trends, where more women worked in the public sector. Female labor participation is up in key manufacturing, accommodation and food sectors. 

 According to a report published by Women, Business, and the Law in 2016, which measures women’s ability to access institutions, get a job, build credit, and more, the MENA region contains eighteen of the thirty countries globally that most disadvantage women through laws and regulations.[6] The 2021 edition highlighted some improvements in Saudi Arabia and some of its peers as the MENA region was labelled the biggest improver. Among the reforms signalled out in the report was the removal of restrictions on women working night shifts, working in construction and manufacturing, both sectors that have not only experienced legal changes, but also have reported an increase in women workers. However, Saudi Arabia continues to lag most other countries in treatment of working mothers and gender disparities over inheritance, assets and access to capital. These persist despite recent reforms aiming to increase women’s access to mortgages and personal credit. Clearly, there’s much more to do on this dimension.

Saudi Arabia has the luxury of vast government resources to build new industrial clusters, invest in sweeping social programs, and keep alive large public bureaucracies. But for countries with more limited resources, the focus needs to be on supporting entrepreneurs and nourishing small business. This is the key to job creation, engaging the youth bulge, and reaping the demographic dividend. 


5 – Conclusions 

This article has outlined a three-part model for social inclusion: (i) the Graduation Approach, (ii) investment in the enablers of socioeconomic mobility, and (iii) reaping a sustainable demographic dividend. At its core, the model relies on the deployment of “market-creating” innovations fueled by capital from the swelling sustainable investing movement. This investment would provide a significant multiplier to public sector contributions in the form of a supportive policy framework (e.g., generous childcare support, infrastructure development, up-zoning for social housing) and catalytic financing. 

However, the vast majority of sustainable investment today is not focused on funding innovative companies like BBOX, M-Pesa, and Family Doctor that address the grass-roots development needed to close the social inclusion gap. Unless many more fund managers focus attention on this segment of transformative companies, ESG investors will be left to rely on large corporations to be the private sector driver of social inclusion. But this will require a much greater focus on the “S” in ESG initiatives than most corporations have delivered to date.