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Bill Gates on “Creative Capitalism”

10.13.08

As part of the Harvard Business School (HBS) centennial celebration (see "Financial Crisis: Confidence—and Some Cautions"), Microsoft founder and chairman Bill Gates (’77, LL.D. ’07; access his Commencement address), now co-chair of the Bill & Melinda Gates Foundation, joined in an armchair conversation with Robinson professor of business administration emeritus James Cash [see video]. Highlights follow:

On the current financial crisis. Gates referred to his friend Warren Buffett (whose fortune is passing to the Gates Foundation, for philanthropic use), who spoke of the "incredible" danger of high leverage, the "primrose path" of unrealistic financial and investment models, and the sheer complexity of current financial instruments. Investment bankers' balance sheets, Gates said, should be footnoted, "None of us are smart enough to understand this." The U.S. government, economy, and consumer had all been living on borrowed time. The crisis began in good economic times; now, with financial leaders sending a "very powerful signal" of distress to consumers, the country faces a deep recession, with the unemployment rate perhaps exceeding 9 percent. The $700-billion financial rescue package is, in this context, a "downpayment."

On Gates's transition to philanthropy. Given Microsoft's "super successful" record and his own age, it was time for younger people to set the company's technological direction. He wanted to give back to society in a timely, planned way, and did not want the huge wealth that Microsoft had afforded him to pass on to his children, because wealth is very "distortionary."

Given the power of capitalism, he was interested in areas where it had fallen short. For instance, many people in the world are plagued by diseases, but too poor to buy medicines, so the market fails to provide incentives to develop cures for them. We spend 10 times more on male baldness (“Painful, I know—I've talked to Steve Ballmer [’77, Gates’s Microsoft successor] about that") than on malaria, which kills one million children and sickens 200 million people annually, undercutting their education and economic progress. Nor do governments fund drug discovery, per se.

The foundation's agenda. The foundation spends $3.3 billion annually: one half on global health (20 infectious diseases, five of which—TB, malaria, HIV/AIDS, diarrhea, and respiratory illnesses—account for the majority of the health gap plaguing the world's poor); one quarter on other aspects of global poverty; and one quarter on U.S. education (particularly high schools and community colleges). That is enough to raise expectations high, Gates said—for instance, ridding the world of malaria in 15 years: "If we can't do that, we're stupid—we should be fired."

The public sector's role. Asked whether the foundation undercuts government efforts or capabilities, Gates said that rich and poor countries had similar health outcomes 100 years ago (roughly 400 deaths for every 1,000 children under five years old). Today, in rich countries, that death rate has been cut by a factor of 40 (10:1,000) and in poorer countries, the death rate has been cut in half. Advances in medicine and public health have made the difference. Since the middle of the twentieth century, while some poorer countries have progressed strongly (China since 1979, for instance), reducing the number of the abject poor to two billion, others are lagging. Better health contributes to stronger government, and vice versa—a virtuous circle. The foundation has only 700 staff people, and works by making grants, often to governments—he cited success in cutting Zambia's malaria mortality in half in three years. No one has figured out how to replace the truly horrible governments (like Nigeria), but the foundation works well with some weak governments (Pakistan, the northern states of India, Bangladesh). Ultimately, governments have to take over, delivering vaccinations, providing primary healthcare, building roads, sustaining agriculture, developing savings. But whereas companies merge, streamline their divisions, and rationalize themselves, he said, troubled governments, drawn up in bad ways (the Congo, for instance), are not susceptible to similar improvements so far.

Evaluating philanthropic success. Gates said this was hard work, not easily translated from the business realm, but essential. The grants themselves have specific goals: double these farmers' incomes by the target date, reduce malaria deaths by this number. (The foundation publishes these goals and its progress in meeting them.) The most resistant realm is in improving U.S. education, where the metrics simply are not agreed upon, where it is not known why successful teachers succeed, and where their techniques are not captured on video and replicated. Even establishing minimal national math standards (multiplication is multiplication on the East and the West Coast) is tough because "Republicans don't like 'national' and Democrats don't like ‘standards.'"

The foundation as a learning organization. Gates cited internal surveys as a source of intelligence, supplemented by outside reviewers' vetting of the foundation's work, and the published metrics on the goals for each grant and progress in meeting them.

Developing-world philanthropy. Gates said there is not equivalent traditional wealth or philanthropy in China or India, but he sees signs of its development in India. However, the foundation is working with China to help in Africa, given Chinese expertise in areas such as agriculture, where Africa lags (1 million Chinese experts versus only 10,000 for all of Africa). India and China, he said, are teetering on the balance between European, government-focused traditions, and the American model of large philanthropic involvement.

The business challenge. Gates challenged businesses to go beyond giving cash or matching employees' charitable contributions. Instead, he said, companies should devote 5 percent of their innovative people resources to solving the problems of the world's poor—who are their future customers. Drug companies, cell-phone suppliers, banks, and food companies all could do something by tapping their "innovation power," and in so doing would become much more attractive to their prospective young employees—an element in creative capitalism from which everyone could gain.