Billionaire Pledges: The Innovative Financing We Need?

August 20, 2010

Forty of the richest individuals in the U.S. recently signed “The Giving Pledge”, an initiative started by Bill and Melinda Gates and Warren Buffet for the wealthiest individuals in America to commit the majority of their wealth to philanthropy either during their lifetimes or after their death. The founders see this pledge as a way to get wealthy people to think more concretely about their philanthropic activities. “The Giving Pledge” is not a legal contract, but rather a moral commitment to distribute at least half of one’s wealth to charitable causes. There is no pooling of money by these individuals nor do the pledges support a particular cause.

“The Giving Pledge” fanfare was met with both enthusiasm and critique. For example, Forbes estimates that the net worth pledged so far totals upwards of $200 billion.[1] The momentum of these pledges could have a significant impact on individual philanthropy, which last year totaled approximately $227 billion in the U.S. alone.[2] And society will certainly benefit since some money will be directed to charitable causes sooner than previously planned. Another positive impact will be a message to think more about philanthropy and what the general public can do to support social causes.

However, critics argue that the surge in philanthropy places significant power over charitable priorities in the hands of a select few and creates tension between the role of government and philanthropists. One critic suggests a more efficient pledge would be to pay taxes “on time and in full,” stop lobbying against tax regulations and provide better wages for employees.[3] None of these arguments are new. In fact, they date back to the days of philanthropists Andrew Carnegie and Peter Cooper, who each took a contrasting view on their roles as philanthropists and wealth distribution.[4]

A Cursory Analysis of “The Giving Pledge’s” Philanthropic Focus

At the request of Warren Buffet, each billionaire making the pledge wrote a letter explaining his or her approach to the pledge. The letters vary with some simply stating their commitment while others providing background on their motivations and philanthropic endeavors. The week following the announcement, 35 pledge letters were made available on the initiative’s website.

The letters offer one means of analyzing how high net-worth individuals in the United States think about philanthropic activities. Many letters mention that their pledge is a public statement of what they are already doing in philanthropy, meaning no “new” money is being pledged. And while the letters do not necessarily contain the information that may be gleamed from publicly-available literature on family foundations or charitable activities, the letters act as high-profile public statements about the philanthropy of each donor.

Nearly all the letters mention at least one cause that would be supported through the pledge.[5] And while not an absolute science, this may indicate the degree of importance these high net worth individuals place on different philanthropic causes.

Based on a simple text analysis and frequency counts, our investigation indicates that the majority of the pledges will be directed toward domestic issues; fourteen letters make a specific reference to charitable giving directed primarily in the United States. Twelve of the letters either unclear about the geographic focus or do not provide sufficient details to infer either a domestic or international focus.

A quarter of the letters mention giving to international causes, ranging from nuclear non-proliferation and Middle East peace to combating climate change and disaster relief. Of the 35 letters, only six, approximately 17%, mention making direct contributions to global development issues such as health care, water, humanitarian aid or education. And while 17 letters – nearly 50 percent – specifically mention making philanthropic contributions to education, only two suggest a direct or implied reference to education in developing countries. Of those two, neither was directly pledging money to tackle issues of access and quality education in developing countries.

Where is Global Education on the Philanthropy Agenda?

The first thing that emerges from our analysis of these letters is the lack of commitment from high net worth individuals to provide educational opportunities for the 72 million out-of-school children and to ensure those children enrolled in school acquire skills they need to improve their life opportunities.

$13.5 billion is needed annually beyond national government resources and current aid levels to adequately fund the Education for All (EFA) goals by 2015.[6] Earlier this year, Head of the EFA Global Monitoring Report Kevin Watkins proposed a scenario for filling the estimated education financing gap that tasked philanthropic sources with donating $500 million annually. He stated that while private foundations have played an important role in international health initiatives by mobilizing resources and galvanizing political support, they have had fragmented and project-focused approaches to education.[7]

Given that the total amount pledged by the billionaires reaches over $200 billion dollars, an average of more than $5 billion per donor, it is reasonable to ask what would it take to get them to tackle the global education challenge?

Assuming the traditional donor community could collectively mobilize the $7.9 billion in new sources of EFA finance, one high net worth individual could finance more than two years of the needed additional financing from new donors, philanthropic sources and innovative means if the contributions were made today. Three high net worth individuals could collectively meet this portion of the pledge to reach the EFA goal by 2015.

Gates and Buffet plan to travel to China and India over the course of the next year to expand the circle of pledging billionaires internationally. Given that supporting domestic education was the listed cause of 50 percent of first 35 pledge letters, the wealthiest individuals in China and India may pledge their money to education in their own countries. With 7.1 million out-of-school children in India alone,[8] a commitment to education from billionaires within India could significantly change the tide for filling the EFA financing gap and moving toward a focused effort beyond enrollment.


Billions of Drops in Millions of Buckets: Are We Missing the Point?

The current focus on billionaire donors is one example of a growing emphasis on international development assistance that stretches beyond official development assistance (ODA). The failure of the G8 countries and other traditional donors to satisfy the global development needs has turned the spotlight to two new issues. First, is the inclusion of “new donors,” which includes emerging economies like China, India and Brazil as well as private philanthropy such as corporate social responsibility, foundations and individual giving. Second, is the emergence of new mechanisms to leverage additional funds, many of which are loosely gathered under the label “innovative financing”.

The addition of one or two billionaires as private donors will not transform global financing for education. However with the lack of priority currently given to achieving universal education, an argument can be made for championing money from any additional sources. Focusing on too many potential forms of financing may exacerbate challenges with aid effectiveness principles. Billions of dollars going to millions of sources by hundreds of uncoordinated donors does not provide the bang for the buck that global education needs. But billionaire donors can have a significant role to play in the larger education financing strategy, including bringing much-needed attention to the often-overlooked education of disadvantaged children worldwide.

To mobilize significant resources for education, we highlight three promising solutions. These initiatives could potentially help turn the tide in global education financing by generating new resources to complement ODA. By focusing on three financing streams, these solutions distribute the onus of education resource mobilization and distribution into the hands of both governments and civil society, including but not exclusively reliant upon a few billionaires.

  • Stop Tax Avoidance by Global Private Entities. Bob Harris, a senior official at Education International, argues that the resources to close the $16 billion education financing gap are already available, citing the growth of the global economy and the proliferation of global entities evading national tax obligations through complex accounting across international borders. The Guardian reports that U.S. corporations that convert local sales into profits in another country where tax liabilities are lower deprive the U.S. Treasury of $60 billion annually.[9] Similarly, in a 2008 report, Christian Aid estimated that the loss of corporate taxes to the developing world as a result of tax evasion amounts to approximately $160 billion per year, which is at least 150 percent of the combined aid budgets of donor countries. If a proportion of the tax revenue were recovered and spent on education in developing countries, the lives of hundreds of thousands of children could be improved through access to high-quality education.[10]
  • Implement a Global Financial Transaction Tax for Development. The financial transaction tax (FTT) has clear promises for generating a large sum of resources for global public goods including education in developing countries. In this mechanism, financial transactions would be eligible for taxation, generating revenue anytime those transactions are undertaken. The FTT globally would be applied to those trading in financial products such as stocks, bonds, currencies, commodities, futures, etc.[11] These instruments affect the individual investors, banks, and other financial institutions that engage in the targeted type of financial transactions. The concept of an FTT is not new, but it has recently received increased attention with the large government bail-outs of the financial sector while commitments to increase development assistance have been delayed or rescinded.[12] The FTT offers a concrete mechanism to finance global public goods while potentially also serving as a financial risk management tool by taxing high risk transactions.[13] The FTT is estimated to generate sufficient resources to fund the achievement of the Millennium Development Goals, including the two addressing education.
  • Make Global Education Relevant to Private Donors. Why isn’t global education perceived as an essential issue to private donors? For private philanthropists, charitable contributions are influenced by personal experiences, of which domestic education is a constant refrain. However, the importance of education for these private donors doesn’t seem to translate globally. Global education barely makes the cut on this list of philanthropic priorities, pointing to a huge failure of the education community to be relevant to private philanthropists. An estimated 2 percent of U.S. private non-profits’ global development expenditures are directed toward education – a statistic the education community should be ashamed of.[14] Between the push for billionaire donors and the generous level of U.S. private giving that already takes place, the education community must become relevant to this private donor community so that education in developing countries is a valuable charitable priority. A strong coalition communications plan could spur this strategy.

The Way Forward in Education Financing

“The Giving Pledge”, while a step forward for some charitable causes, points to the dilemma of winners and losers in philanthropy. When the fate of beneficiaries of large sums of money is in the hands of a few individuals, philanthropic priorities can change direction overnight and have a profound impact. The high-level nature of “The Giving Pledge” announcement illuminates the inequality in the funding of issues and disadvantaged populations that can arise when a few people decide charitable priorities. However, where the pledge may be most successful is in building momentum for causes; one or two billionaire champions could be the tipping point needed in the education community to turn the trickling financing into a watershed moment, leveraging financing from other donors and utilizing new mechanisms alongside the commitment.  

To promote global education as a priority for donors, several mechanisms can be put into place that strengthen overall education financing in developing countries while complementing existing donor assistance. By focusing on global tax reform, implementing a financial transaction tax and capturing the spirit of private donors – global billionaires and middle class alike – education may finally reach the level of resource generation that can make real changes in the lifelong opportunities of children across the globe.

[1]Wealthy Americans Urged to Give Billions to Charitable Causes.” (2010). The Chronicle of Philanthropy, June 10.

[2] Giving USA Foundation. (2010) Giving USA 2010:The Annual Report on Philanthropy for the Year2009. Glenview, IL: Giving USA Foundation.

[3] Wilby, P. (2010). The rich want a better world? Try paying fair wages and tax. The Guardian. August 5.

[4] Carnegie, A. (1889/2008). Wealth. In M. Gasman, A. Walton, F. Huehls, A. Wells & N. Drezner (Eds.), Philanthropy, Volunteerism and Fundraising in Higher Education. Boston: Pearson. (Reprinted from North American Review)

[5] We acknowledge that not citing an issue in a letter does not mean it is not part of planned philanthropic endeavors, but we assume that issues of most passion or importance to the donors are mentioned in the letters.

[6] Watkins, K. (2010). The Funding Gap 1: The G-8 needs to stick to its promises. World Education Blog. March 17.

[7] Watkins, K. (2010). The Funding Gap Innovative financing. World Education Blog. March 17.

[8] UNESCO. (2010). Global Monitoring Report: Reaching the Marginalized. Paris.

[9] Wilby, P. (2010). The rich want a better world? Try paying fair wages and tax.The Guardian. August 5.

[10]Death and taxes: the true toll of tax dodging” (2008) Christian Aid.

[11] One variation of the FTT is the Currency Transaction Levy (CTL), which has been promoted more widely in the United States and which solely on assessing a fee upon currency transactions.

[12] Asthana, A. and Gallagher, P. (2010). “Department for International Development slashes aid commitments.” The Observer. August 15.

[13] Gray, A. (forthcoming, 2010). “Financial Transaction Tax (FTT) and other financial sector taxation mechanisms,”  Policy Briefing for Global Campaign for Education members and Education for All advocates, GCE Secretariat.

[14] Adelman, C. (2009). Global Philanthropy and Remittances: Reinventing Foreign Aid. Brown Journal of World Affairs, XV(II), 23-33.