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Sustainable growth in developing countries, it is possible!

Written by Peter Heijen on August 31, 2020
 
All major global problems can be traced back to these two: (income) inequality and climate change. That was the fascinating conclusion with which Wim Hart (the former CFO of ICCO) made me think, a few years ago. We were discussing the strategic cooperation between ICCO (now Cordaid) and Lendahand. Later, at a conference organized by Solidaridad, that conclusion was confirmed by one of the speakers.
 
Both of these core problems are in themselves destructive forces: from 2030 onwards, climate change will likely cause an additional 250,000 people to die per year, and 6 million children to die annually from poverty alone. In this blog post, I want to take a look at how these problems relate to each other and what we can do to contain disaster scenarios.
 
The consequences of climate change for poverty
Climate change is exacerbating the world's poverty problem, say scientists and experts from the World Bank and the United Nations. Especially in developing countries. In fact, climate change threatens to undo decades of development work, as this European Parliament report shows.
 
"Climate change aggravates the effects of population growth, poverty, and rapid urbanization. Without serious adaptation, climate change is likely to push millions further into poverty and limit the opportunities for sustainable development and for people to escape from poverty."
 
Below I will briefly explain, step by step, how that works.
  1. Climate change causes increasing temperatures and extreme weather is more common.
  2. The land on which millions of small and medium scale farmers work is deteriorating. And therefore harvests fail; not just in 2030 or 2050, but already now. This will lead to higher food prices.
  3. These agricultural businesses are the main source of income for many of the approximately 750 million people and 1 billion people currently living in poverty. If crops fail, this has a direct effect on the income of the poorest.
 
The effect of the change in the global climate is therefore that food prices rise while the already poor part of the population earns even less. One of the main consequences of climate change (see IPCC report) is thus that food security is at stake and poverty is increased.
 
In a conversation with Professor Ruerd Ruben of Wageningen University, he clearly outlined how the growing world population and the trend of urbanization are increasing the problems for food security: “The more people there are and the more of them go to live in cities, the more important it is that the agricultural sector not only produces for itself, but also for the food supply of the urban population. Growing food for the market is therefore becoming increasingly important".
 
The consequences of poverty on climate change.
Scientists and experts are less in agreement about the consequences of poverty for climate change. But there are logical conclusions to be drawn. For example, we know that birth rates in countries correlate with income. Low-income countries have a high birth rate and countries with higher incomes have lower birth rates. A variety of studies show that high birth rates can fall rapidly if low-income groups gain better access to care and education.
 
Another influence on the climate has to do with priorities. When you live in poverty, you have other priorities than sustainability and the climate. I mean, if I had to raise my three sons in extreme poverty, I would also worry a lot less about recycling plastic or buying solar panels. If I can keep them alive by clearing forests to work a piece of land for our own food, I will. Without any doubt. This is the reality for millions of parents in developing countries. Every day. In Zambia, 250,000 hectares per year are deforested, for charcoal and for agriculture. In the West, we speak of this as shameful, but do we understand the influence of their hopelessness on their actions?
 
A third influence has to do with the dependence on agriculture, as I have outlined above. Forests often suffer, so that farmers can farm there. Cutting down forests reduces biodiversity. Unsustainable agriculture makes the soil less fertile. As a result, new land is needed and more deforestation is required. A vicious circle, which is a direct effect of poverty. So: climate change leads to poverty and poverty leads to climate change.
 
How do we break this circle?
 
First of all, it is wise to pay more attention to the poverty problem in addition to the climate problem. Next, we will have to combine the fight against climate change and poverty as much as possible. It is possible for prosperity in emerging countries to grow sustainably, killing 3 birds with one stone:
 
  1. Less urgent and dire poverty
  2. More food security
  3. Climate change mitigation
 
A deficit of EUR 144 billion
 
I myself founded Lendahand almost 10 years ago, a crowdfunding platform to reduce economic inequality in the world. Scientists and experts say job creation is one of the most effective ways to combat poverty in developing countries. We also know that jobs are best created in SMEs, as the engine of the local economy.
 
Since most jobs in developing countries are often in the agricultural and food sectors, it also makes sense to stimulate this sector. There are approximately 450 to 500 million small and medium-sized agricultural businesses in the world, about half of which are in developing countries. They need about 180 billion euros in credit, of which only a quarter is actually available. This concerns, for example, financing for seeds, fertilizers or working capital. There is a shortage of about € 144 billion in funding.
 
Most of these companies are small and informal. They do not have a stable turnover and no good administration. 95% of the farmers have less than 2 hectares of land. Local banks and international investors are ignoring these companies. Too risky. They prefer to look for investments where they can invest relatively large amounts with an efficient risk-return ratio. The agricultural sector, on the other hand, has high risks and it is difficult to make a stable return on large amounts invested here. That's what we call a problem.
 
The solution
 
The solution is to make financing accessible to these small and medium-sized agricultural businesses. This specifically concerns agricultural companies that produce in a sustainable manner: an environmentally friendly and climate-neutral way of producing food that contributes to food security and that provides jobs for people living in poverty.
 
This requires non-traditional investors who mainly look at how they make their money useful instead of sitting on it in the bank, to use it in a way that benefits the world. It also requires a proposition in which the financial return is minimized and social return is maximized, disconnected from risk. Simply because these small and medium agricultural businesses need money that is not expected to yield a financial return for investors. The companies are too small and unstable for that. The money they want to use to build their businesses is needed to make an impact, not to distribute financial returns. These investments are therefore optimized for impact. In order to involve investors in this, it is important that these risks are limited.
 
2 NGOs join a crowdfunding platform ...
It is a good thing that ICCO (now Cordaid) and Solidaridad - 2 global development NGOs - have taken the initiative to set up exactly this! Both organizations met up with Lendahand (winner of the IEX Gouden Stier in 2018 and 2019) to set up a new crowdfunding platform where non-traditional investors can provide loans to small and medium-sized agricultural companies in countries with a relatively low income. This initiative is called PlusPlus. In retrospect, Wim Hart's insight, with which I started this blog, was the impetus for setting up this new crowdfunding platform!
 
PlusPlus focuses on financing small and medium-sized agricultural companies, which are not financed by the market (local banks and international investors). PlusPlus works closely with the local offices of Cordaid and Solidaridad in order to limit the repayment risks. In addition, thanks to the Dutch Postcode Lottery and P4G, a reserve is available to partially offset losses. Today PlusPlus opens its impact doors, with great ambition!
 
 
6 reasons to join this movement
 
  1. PlusPlus is effective: creating jobs is the way to contribute to less poverty. And the great thing is: you can lend your money over and over again, creating more and more impact.
  2. PlusPlus is additional: via PlusPlus you reach agricultural entrepreneurs that no one else can reach. This way, together we can reach the poorest people who live in rural areas and who are dependent on the agricultural sector.
  3. PlusPlus is impact-driven: at PlusPlus we ensure that your money delivers as much impact as possible. Instead of letting it sit in the bank, you can give your money meaning. We do not optimize according to financial returns but according to impact: less poverty and more food security.
  4. PlusPlus is a continuous circle: with money from our partners to reduce investment risks and with local supervision by Cordaid and Solidaridad, we try to maximize the chance of repayment.
  5. PlusPlus is committed: we do our best to involve the investors very closely in every step we take. Also with the agricultural entrepreneurs in which we invest.
  6. PlusPlus is ambitious: we want to scale up considerably and contribute to the EUR 144 billion deficit. By joining the movement during this phase, you also support the PlusPlus organization.
 
Welcome to PlusPlus
 
Private investors can contribute to the sustainable development of small and medium-sized agricultural companies in emerging countries through PlusPlus. These companies have the potential to lift hundreds of millions of people living in rural areas out of poverty by providing jobs and improved incomes. Strengthening local food systems also increases food security. It makes people more resilient and better able to cope with the consequences of climate change. Moreover, investing in more sustainable production methods can result in less damage to the environment. So: more sustainable food production + more jobs = less poverty and better for the climate. Welcome to PlusPlus!