Foreign aid: forget the T-shirts, just give them the money
I am thinking of starting a contest.
To the first three people who sign up to follow my blog I will send one of my used T-shirts, shipping and handling included. Or how about this: to the first three people who sign up I won’t send T-shirts, but will send the approximately $10 it would have cost to ship them.
Which would you prefer?
Before answering you should know that foreign aid programs are often designed as in-kind transfers: they send the T-shirts, not the money. In fact, in some cases quite literally the T-shirts.
In “Haiti Doesn’t Need Your Old T-Shirt”, an article by Charles Kenney published in the November issue of Foreign Policy magazine, it is pointed out that T-shirts celebrating the victory of the Green Bay Packers hit the market the instant the winner of the last Super Bowl game was decided. The speed at which the NFL met this fickle spike in consumer demand could only be accomplished by printing up two versions of the T-shirts ahead of time, the other one celebrating a Pittsburgh victory. But what to do with these worthless T’s declaring the loser to be the winner?
Kenney reports that they were given to World Vision, a registered charity, netting the NFL a tax deduction.
All of this is to say nothing about the 2.4 million Pop Tarts dropped on Afghanistan as a part of American food aid to that country. But at least the infrastructure was already in place to keep shipping and handling costs down.
Not so for the T-shirts. The amount of money World Vision spends to distribute them could have just been given to their eventual owners who would have bought what they really needed.
The same dynamics are at play with food aid. Governments in rich countries give subsidizes to their producers, dump the excess supply in poor countries where it causes prices to fall, and end up putting poor farmers out of business.
Farmers in rich countries receive subsidies orders of magnitude greater than the NFL’s tax deduction through so-called “price support” programs.
The only way prices can be changed in perfectly competitive markets—those with a large number of buyers and sellers of a homogenous good—is to somehow change market demand or market supply. Price support programs involve governments creating an artificial demand that leads to higher prices for consumers which, along with the added sales to the public sector, boasts the revenues of producers.
What to do with all the government inventories? If expectations develop that the government will dump them on domestic markets at some future date the goose is cooked: the expectation of lower prices in the future will lead consumers to demand less in the present, and government purchases would have to be even higher.
So not only does Haiti get the T-shirts that Americans don’t want, it also gets the rice. And guess what happens to rice production in Haiti (which in fact has fertile land for this in some of the areas just north of Port-au-Prince) as domestic producers have to compete with “aid”?
You might think that consumers there gain, but money transfers always trump in-kind transfers because recipients are given the freedom to choose according to their own preferences. Foreign aid programs are not designed this way either because of some hidden self-interest, or because public policy is paternalistic and assumes that the recipients cannot make the best choice for themselves.
So what’s it going to be: the T-shirts or the cash?