Assessments of how governments and international organizations have dealt with global challenges often feature a familiar refrain: when it comes to funding, there was too little, too late. The costs of economic, social, and environmental problems compound over time, whether it’s an Ebola outbreak that escalates to an epidemic, a flood of refugees that tests the strength of the EU, or the rise of social inequalities that reinforce poverty. And yet governments and aid groups rarely prove able to act before such costs explode: indeed, according to some estimates, they spend 40 times as much money responding to crises as they do trying to prevent them.
One reason for this is that complex international problems tend to be dealt with almost exclusively by governments and nonprofit organizations, with the private sector typically relegated to a secondary role—and with the financial sector playing a particularly limited part. Stymied by budgetary constraints and political gridlock, the traditional, primarily public-financed system often breaks down. Government funds fall short of what was promised, they arrive slowly, and the problem festers.
Innovative finance has the potential to transform the way developing countries manage the costs of natural disasters.
In recent years, however, a new model has emerged, as collaborations among the private sector, nonprofit organizations, and governments have resulted in innovative new approaches to a variety of global challenges, including public health, disaster response, and poverty reduction. Instead of merely reacting to crises and relying solely on traditional funding, financiers—working closely with governments and nongovernmental organizations—are merging private capital markets with public systems in ways that promote the common good and make money for investors as well. By relying on financial tools such as pooled insurance and securitized debt, these efforts—which have come to be known as “innovative finance”—can unlock new resources and lead to cost-effective interventions. At the same time, such solutions generate profits and give investors an opportunity to diversify their holdings with financial products
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