The Charity Paradox

Can charitable giving ever be a bad thing?

After Hurricane Matthew left parts of Haiti with significant amounts of destruction, the world responded with large amounts of charitable contributions.

But could such contributions actually do more harm than good?

Examining such a question was the focus of a recent article in the Wall Street Journal.

The answer may be tied to the way in which humanitarian aid, necessary and welcome in an emergency, easily morphs into permanent charity, which undermines local markets and spawns dependency.

The article mentions a documentary, Poverty, Inc. that looked at this issue in detail. As the title of the movie suggests, administering to the poor is now a big business that works to sustain itself. Less obvious are the destructive unintended consequences of its intervention.

People and organizations that give aid are not criticized for their motives of wanting to help, but for their assumption that poverty is caused by a lack of money or resources. Such an assumption leads to the wrong solution of sending as much free stuff to the target economy as possible.

An entrepreneur in Ghana believes the problem is lack of access to the global trade markets. In addition, there is the curse of charity.

The enormous giving to many developing countries has created harmful distortions in the local economy because when what would otherwise be traded or produced by Haitians is given away, it drives entrepreneurs out of business.

As one entrepreneur in Haiti noted, “It’s tough to compete with free.” He also notes that NGOs are changing the mentality of the people, creating a generation with a dependency mentality.

Here’s the trailer for the documentary:

As I was watching the movie, I was taking some random notes, which I have included below.

The filmmakers note that despite the well-intentioned efforts of many entertainers and celebrities, their efforts do little to alleviate the problem.

As evidence they mention the 1984 video “Do They Know It’s Christmas”, that offered bleak images of Africa. Thirty years later an update was made to the video, and offered the same kind of doom and gloom about Africa.

Yet when they talk to people in Africa, the people talk about how deceptive such videos and images are, and that Africa has the resources, both people and natural, that if given the opportunity, could solve many of the problems in Africa.

People in the developing countries emphasize that instead of being given the metaphorical fish, they would prefer to be taught how to fish.

Countries develop based on trade, not aid.

There was discussion of the requirements needed for what is referred to as the ladder to prosperity:

  • legal protection from theft
  • justice in court
  • title to ones land
  • freedom to start business
  • links to wider circles of exchange

When people climb out of poverty, the aid industry becomes obsolete. So what incentive is there for all of these aid organizations and NGOs to stop doing what they are doing, even if it does not solve the problem.

So the question is who benefits the most from these aid efforts – the people in poverty or those who work in the poverty industry?

Muhammad Yunus, the founder of Grameen Bank and the winner of the Nobel Peace Prize compared foreign aid to a bonsai tree. You may take a seed from a mighty tree and just plant it in a small planter, it will restrict the growth of that tree. But if you plant it in rich soil, it can grow to its potential. Developing countries need to first be given the ability to build a solid foundation, and then the charitable contributions could be much more effective.

Poor is not living on $2 per day; it is being excluded from networks that enhance productivity and exchange; things like cell phones, banks, and education.

Rule of law is an important part of developing a country, particularly with respect to property ownership .

Bono has been both a curse and a blessing to developing countries.

Perhaps what struck me most in the video was a constant theme of parents wanting to build a better life for their children. Sometimes even to the point of giving up their children to live in an orphanage because it offered the children a better life than the parents could provide.

I never thought about how powerful the desire to provide for your children can be. Perhaps if world aid focused on the power of such a desire, we could go a long way towards solving the problem of poverty.

I highly recommend watching Poverty, Inc. It is currently available for streaming via Netflix.