Innovative Financing In Education and Development: A Helpful Tool or A Harmful Neoliberal Distraction?

In this blogpost, which is part of NORRAG’s “Financing Education” blog series, Steven Klees offers a critical perspective on innovative financing in international development. A version of this blog will appear in a forthcoming NORRAG special issue on “Innovative Financing for Education” (NSI12).

For the last few decades, there has been attention to, a call for, and experimentation with innovative finance in international development. This attention has been very strong in our field of education (Terway and Mehendale, forthcoming). As an economist concerned with education and international development finance, I have been following this discussion since its inception. Is innovative finance a badly needed set of mechanisms to fill the gap in public resources for attaining SDG4 and the other SDGs as well as to improve the efficiency and effectiveness of education and development efforts? Or is innovative finance the result of neoliberal market fundamentalism that takes attention away from the need to fulfill international and national public sector responsibilities for achieving the SDGs and offers a paltry stopgap that encourages privatization and narrow and wrongheaded approaches to improving efficiency and effectiveness?

For me, there are clear answers to these two questions. The former, positive, view is based on faulty assumptions and reasoning, and the latter critique only scratches the surface of what is wrong with innovative finance (IF). Of course, many disagree. In this short essay, I want to explain my view. To me, this is not an empirical question. It is a question of beliefs—of politics, philosophy, epistemology, ideology, whatever you prefer to call it.

To me, to assess IF requires us to address some of the biggest issues of our times. Its use does not center on narrow technical empirical questions of “what works best?” To assess the value and use of IF, we have to confront bigger questions: What is development? How to get there? How to make the SDGs a reality? What is the proper role for government in doing so? For international aid? I, of course, cannot answer these questions in this short essay, but I do intend to discuss some of them as part of thinking about the big picture that surrounds the use of IF.

Definitions of what is innovative financing vary. For the purpose of my critique, I want to focus on what are usually called impact investments (chiefly social impact bonds and development impact bonds). Much of my critique is about IF and impact investment in general but I will also refer to IF and impact investment uses in education.

Results-Based Finance and New Public Management

The idea that impact investment improves the effectiveness and efficiency of education or other development investments is tied to the frequent use of results-based finance (RBF) to ascertain impact. RBF pays back investors if their investment reaches some pre-specified quantitative targets; in education these are often things like score on a test or increase in enrollment. While attaining these outcomes may be worthwhile, education outcomes are never one- or two-dimensional. Choosing to measure one or two target outcomes ignores other valued outcomes and leads to misevaluating programs. A program that increases reading scores could have a negative impact, for example, on other subjects or on socio-emotional learning.

RBF is one of the approaches that have come out of the (not-so-) New Public Management (NPM) which argues that the effectiveness and efficiency of public services can be improved by applying business knowhow and tools. NPM has been soundly critiqued since its inception.[i] Business knowhow and tools may be useful when there is a clear bottom line and hierarchical management control. They don’t apply well to the complexities of education (or many other public service) outcomes nor to the needs for democratic accountability. Applying NPM and RBF is an ideological choice, not one of “efficiency.” Even the application of tools more comprehensive than RBF, like cost-effectiveness and cost benefit analysis, lead to conflicting results depending on the political ideology of the analyst. In its extreme form, as practiced by Elon Musk and Donald Trump, NPM’s application of a “business model” led to DOGE (the Department of Government Efficiency) where efficiency is an excuse for drastically cutting government services based on political ideology.

Privatization

IF and impact investment are tools of a neoliberal NPM ideology that minimizes or circumscribes the role of government and argues to rely more on the private sector. Impact investing in education not only encourages the privatization of education, it “is” privatization (if the investor is not a government organisation). Such impact investing cedes major decision-making control to the private sector and legitimizes doing so elsewhere. For education and many other public services, impact investment gets around public accountability and participatory, democratic oversight, turning what should be a political activity in the best sense of that word into a narrow technical one.

The critique of government and the privatization of many public services has been increasingly promoted since the onset of a global neoliberal ideology in the 1980s. However, there has been pushback. There is an “Our Future is Public” movement. In December 2022, their conference was attended by a thousand representatives from over one hundred countries, fighting for public services in education, health, water, energy, housing, food, transportation, social protection, and care sectors. The Global Manifesto produced prior to the meeting and the Santiago Declaration produced after are marvelous documents with excellent analyses of the problem and with principles for universal quality public services. The argument that there is not enough money to fund needed public services is simply a refusal to change priorities (e.g., from military and defense spending) and to tax those who are well-off.

The Big Picture

Proponents may argue that IF and impact investment have little to do with these broad issues, but to me they are intricately entangled with how we approach international progress and development. However we define progress and development, we have been doing a lousy job. None of the MDGs were met[ii] and none of the SDGs will be met by 2030. UNESCO estimates that an additional $97 billion/year is needed to achieve SDG4, and the UN estimates that at least an additional $5 trillion/year is needed to achieve all the SDGs. Impact investment, and IF more generally, have no potential to make even a small dent in these shortfalls.

Attention to IF and impact investment are a distraction from what needs to be done, taking up energy, effort, and time in the global policy arena.[iii] But they are more than a distraction, they are wrongheaded. This is especially true if you see the world as I do, dominated by neocolonial patriarchal racial capitalism. From this perspective, development is about so much more than GDP and economic growth. It is about the well-being of all the people on this planet. And development is not only about results or outcomes; it is equally about the process by which we get there.

That process must involve widespread participation in designing, managing, and evaluating education and other public service programs and systems. Impact investment and other forms of IF are based on the wrong model: a technicist, technocratic, results-focused model of running development programs. “Results” of development programs and their processes need to be seen in their complexity, in their quantitative and qualitative dimensions. From this perspective, impact investment, and much other IF, are badly conceived, not oriented to the broad well-being of people and planet.[iv]

Attention to innovative finance is a distraction from the many other important changes needed, such as: revisiting the roles of the World Bank and the IMF; placing the UN at the forefront of global tax reform; abandoning the hope that the private sector will be a substantial contributor to development efforts;[v] making a commitment to the flourishing of public services; and changing from a charity approach to international aid to one of reparations for the many decades of colonial and neocolonial relations.

Systemic changes are needed. Many recognize that patriarchy and racism need to be challenged, but so does our capitalist world system. There is considerable effort being made to do just that (Klees, 2020, 2024; Korten, 2021; Kothari, 2021). I have been fortunate enough to work in many countries, and everywhere there are people who believe in the slogan of the World Social Forum and are working for it: Another World is Possible! In that world innovative finance will not be needed, and in today’s world it is a hindrance to the progressive changes needed.

Author

Steven Klees is Distinguished Scholar-Teacher and Professor of International Education
Policy at the University of Maryland. He is the author of the book and the blog, The Conscience of a Progressive.

[i] RBF is often theoretically justified by economists’ principal/agent theory, which argues that you need RBF-type contracts to make sure agents (like frontline educators) strictly implement the objectives of the principal (the public or private investor). This is a technocratic, top-down idea that subverts the need for democratic participation in defining and reaching objectives by all parties concerned.

[ii] It is claimed that the goal to cut extreme poverty in half was met, but that relies on a poor measure of extreme poverty.

[iii] This distraction is obvious as IF claims attention in innumerable venues such as the just concluded Fourth International Conference on Financing for Development in Sevilla; in organizations like the Global Impact Investment Network supported by multiple Foundations like Ford, Rockefeller, Soros, Omidyar, Visa, and MacArthur; and in the intellectual attention given by organizations like NORRAG.

[iv] Examples of much more sensible approaches can be seen in the work of the Wellbeing Economy Alliance and the Doughnut Economics Action Lab.

[v] The “billions to trillions” framework of the World Bank that was supposed to catalyze private investment to achieve the SDGs has been a failure and was wrongheaded from its inception. More to the point in a sensible future we cannot expect the private sector, with its focus on wrongheaded NPM, to do what is needed to improve education and development efforts. Dutch journalist and historian, Rutger Bregman, at the World Economic Forum in 2019 dismisses ‘stupid philanthropy schemes,’ saying the real issue that needs tackling is tax avoidance. ‘We can invite Bono once more but come on we’ve got to be talking about taxes … all the rest is bullshit.” While this was not a message well-received by the World Economic Forum, to me it is right on the money, as they say. I would add that while tax reform is essential, what is really needed is to challenge our world capitalist system which abhors taxes and deforms development efforts, as this concluding section and its references briefly indicate.