When is it a bad idea to give the poor free stuff?

by: Jacob A. Geller

“I think that giving somebody something for free is always a bad idea.”

Dambisa Moyo, on KUOW

THE above is clearly hyperbole; what about vaccines, shelter for the homeless, medical care for the mentally infirm, etc.?  Yet it must be asked: when is it a bad idea to give away something for free, even to the poor?

The question is not exactly trivial–there is a perennial debate about the economic effects of gifts in kind, better known as “free stuff” to all us lay folk, or “GIK” as it’s known in the foreign aid community.  The debate was rekindled recently thanks to World Vision, a Christian charity, and their plan to ship 100,000 free t-shirts to Africa.  The question also comes up more than a few times in academic journals.

Jeff Fields, senior director of World Vision, holds a t-shirt proudly declaring the Pittsburgh Steelers the winners of Super Bowl XLV (Green Bay beat the Steelers, actually). 100,000 similarly mis-printed NFL t-shirts will be sent to Armenia, Zambia, and Nicaragua, where people presumably don't watch American football.

Common sense dictates that GIK should be a good thing.  If I give you a free iPod, how could that possibly make you worse off?  In the context of the world’s poor, how could sending 100,000 free t-shirts (or 1,000,000 t-shirts) to extremely poor countries possibly harm the world’s extremely poor?  Let me count the ways:

1)    It’s damaging to local industry.  If a Zambian does the right thing and invests in a textile factory so he can create jobs and sell t-shirts, then GIK is his competitor.  If some Western donor dumps hundreds of thousands of t-shirts into his local market, the price of clothing will collapse, his business will suffer, and he may have to lay off workers or even go out of business.  That’s bad.

This is what happens in Haiti, where food prices periodically collapse thanks to large influxes of free or discounted foreign food, as we saw after the 2010 earthquakes last year.  The large, sudden, and unpredictable inflows of foreign food aid periodically impoverish Haitian farmers, who are then unable to invest in their farms (or their education, or their health, etc.), which discourages investment in agriculture and makes the Haitian food supply less secure.

Maria Honorable, a Haitian rice farmer, wasn't directly affected by the 2010 earthquakes. What made her poor was the sudden inflow of free American wheat which followed. She had to sell all her now-cheapened rice just to keep her kids in school, so they are going hungry.

2)  If GIK comes in regularly and predictably, then maybe it won’t be a problem.  If the food or clothing (or whatever) comes in at regular intervals and in predictable volumes, then producers can plan their production quotas according to whatever demand is left.  And if the volume of GIK is so heavy that it puts people out of business, maybe that’s a good thing; once the former t-shirt producer, for example, finds a new line of work, his country will still have t-shirts (same as before) plus whatever he is now producing (a net benefit).

However, this can stifle the long-run development of the manufacturing sector in general.  Many countries begin the process of manufacturing by starting with something small and technologically simple–textiles are the classic example, but small handicrafts were more important in China.  Later, once the simple industries have been established, management skills learned and new technologies developed, manufacturers can move on to more complicated items like cars and computer chips, building on the skills, technology, and infrastructure of an earlier stage of development.

This is very much how Japan and China (among others, including a little country you may have heard of called the United States) went from being staggeringly poor to middle-income.  But Garth Frazer studied the history of Africa’s textile manufacturing, and came to the conclusion that used-clothing donations are a major cause of “the failure of African countries to step onto the bottom rung of the manufacturing sophistication ladder.”  That’s not good either.

3)  Sometimes donors send things the poor just don’t need.  The very-funny SWEDOW (Stuff We Don’t Want) Awards make this pretty clear.  This year’s winners included a British charity called Knickers4Africa which, if you don’t speak British like I do, means they donate used panties, among other clothing items, to Africa (“no thongs, please.”).

Much as the African pantie-less might appreciate this (although most Africans do have underwear), there are certainly better ways to fight poverty than to send used panties to Africa.  Better to sell the panties to creeps on eBay and give the money to Nothing but Nets, if nothing else.

4)  Many GIK are expensive to ship; clothing in particular is very heavy and costly to ship relative to its retail value.

While shipping costs are often negligible to the donor, they can matter a lot to the developing country.  Malawi, for example, a land-locked country which relies on agricultural exports in exchange for manufactured imports (including virtually all of its fuel products), suffers from very high land-transport costs.  Shipping (not to mention “handling,” which I’ve never really understood… can someone explain to me why I should have to pay someone not to break my stuff when they ship it?) comprises about 30% of Malawi’s import costs.

Now if a Western donor decides to ship 100,000 used panties to the Malawian pantie-less, that raises the cost of Malawian exports and imports, harming Malawian producers and consumers, not to mention NGOs delivering the kind of GIK Malawians actually need, like vaccines and bed-nets.

5)  Lastly–although this isn’t exactly a criticism of GIK itself–there is a fact which makes all of the above problems more serious.  Charities are under tremendous pressure by donors to deliver GIK, even if it’s not needed or even wanted.  To understand why, imagine that you are a donor, and you want to donate to a charity with a low ratio of administrative costs to program expenses.  In other words, you want as much of your money to reach the poor as possible, as opposed to paying the mortgage of some employee.

This puts pressure on charities to donate GIK, which a) can’t be counted as administrative expenses and b) can be used to lower the administrative-cost-to-program-expenses ratio by counting the retail price of the GIK plus the shipping cost as program expenses. So while charities like World Vision say they assess the needs of recipient countries before requesting GIK, they do have an incentive to send poor countries free stuff, even where it’s unnecessary.  (About 88.3% of World Vision’s revenue goes to program expenses, by the way; not too shabby!)

At bottom, there is no such thing as “free stuff.”  Everything has a cost, or as every economics student ever has been told about a thousand times (or should), “there is no such thing as a free lunch.”  Gifts in kind, like everything else, have a cost and a benefit, which need to be weighed carefully before being donated, even to the extremely poor.



7 thoughts on “When is it a bad idea to give the poor free stuff?

  1. Great response to World Vision’s Super Bowl antics. If anyone doubts the damage that gifts in kind do to local producers, look no further than the African sports ball manufacturer, Alive & Kicking, which has seen its market impacted by enormous donations of imported balls, and are speaking up about it. We’ve also responded to the World Vision program on our blog.

    1. If any Master’s in Economics students are looking for a good thesis, maybe a cost-benefit analysis of World Vision’s free t-shirts or Alive & Kicking’s free soccer balls would be worth doing. What will be the effect of World Vision’s 100,000 free t-shirts on employment, income, labor productivity, years in school, life expectancy, import costs, export costs, and everything else that might be affected by GIK?

  2. Sometimes, of course, you’re right. Sometimes INGOs provide so much aid to a community that labor productivity declines, leading to an unhealthy dependency. But not all GIK does this. At bottom, costs and benefits need to be weighed, and some GIK will prove more costly than beneficial, while other GIK will prove more beneficial than costly. The trick is to tell the difference.

    Free vaccines are a great example. Does it matter whether they create dependency? They save a lot of lives and livelihoods, which makes them extremely cost-effective (or even cost-saving). There is also a strong moral argument to provide vaccines for free, because the poor are often unable to afford them or unwilling to pay for them out of pocket, as they have other, more pressing, short-term needs, which suggests that free vaccines can save more lives than vaccines at free-market prices.

    Free vaccines also don’t create the sort of dependency that results in laziness, because the poor generally don’t manufacture vaccines whether you give them free vaccines or not. Do you really think the poor will save themselves from Hepatitis B if you don’t spend a tiny fraction of your income to save them yourself? Would allowing the poor to die of Hepatitis destroy anyone’s incentive to “bounce back,” or would it just get a lot of people killed?

    Can you think of any other examples like vaccines? (No, panties are not one of them)

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