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November 4, 2005

Capitalism, rising

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Pierre Omidyar, the founder of ebay, and his wife Pam, have donated $100 million to their alma mater Tufts University. While such philanthropy is admirable, even more praiseworthy are the conditions surrounding the gift. In essence, Mr. and Mrs. Omidyar are investing in fostering capitalism as a means of helping the world's poor. The Boston Globe reports:

All the money will be invested in microfinance, which involves tiny loans as low as $40, designed to help poor people in the developing world start small businesses, such as selling hand—woven cloth or goat's milk.

Pierre and Pam Omidyar intend the gift to generate healthy returns for their alma mater and in so doing to demonstrate to other investors that microfinance deserves a hefty infusion of private capital, not just charitable and government dollars. Tufts and the Omidyars believe that the gift is the largest private allocation of capital to microfinance by any individual or family.

Tufts is not to undertake charity with the hundred mil. It is to invest the money in expectation of a return, just as it invests the other funds in its endowment. But Tufts is required to invest in micro—loans in less—developed economies, where a shortage of capitalism impoverishes the people.

This is a very clever arrangement, indeed. Mr. and Mrs Omidyar get all the tax deductions any such gift would earn them. But the money will be used by Tufts, a non—profit charity, in a business—like manner. The green eyeshade guys and gals who invest large university endowments are as hardcore capitalists as walk the earth. There will be no wild—eyed spending, improbable schemes, or starry—eyed kumbayah singers handling this money. Endowment managers are judged by their results.

And that is precisely what the ultimate third world beneficiaries need: not charity, but help in becoming capitalists.

This is a wonderful example. Now, it is up to Tufts University. All of us should watch carefully how this program works, and draw lessons for the future.

In the meantime, congratulations to Mr. and Mrs.