Common sense principles in international trade are surprisingly useful for aid as well. Here’s a list of overall principles that help explain some of the most discussed aid dos and don’ts on this and other blogs.
1) Don’t trade low value items with huge transport costs. No exporter or importer in their right mind would ship bulky low-value items large distances, which is why things like construction materials are often locally-sourced. Aid examples: Nobody wants your old shoes, 1 million shirts.
2) Don’t send coals to Newcastle. Nobody exports food to a food-abundant region. Well nobody but US food aid, which ships food from Nebraska to the Horn of Africa, when there is plenty of food already in the region (it’s just badly distributed inside the region, which is what wise food aid could correct).
3) Don’t do dumping; it is illegal. Exporters are not supposed to charge a much lower price abroad than they do domestically, driving local producers out of business – that’s called dumping, and it’s illegal under WTO rules. Wait, unless the dumper is USAID and it’s called food aid. Actually, US food aid violates all of these first three principles.
4) Do export goods intensive in abundant resources; don’t export goods intensive in scarce resources. Many aid projects designed to promote poor country exports in a promising product violate this rule when they make the project dependent on the scarce and expensive resource called International Expertise. Small-scale handicraft projects heavily dependent on foreign experts are particularly gross violators.
Actually, ANY aid project should be designed to maximize use of abundant resources and minimize use of scarce resources. This is one of the defects of the Millennium Village approach – it’s intensive in the use of expensive foreign expertise, and so is not scalable.
5) The most gains from trade come when something is cheap in the exporting country and expensive in the importing country. Thank goodness the US does not try to grow its own bananas at some enormous expense, when they are cheaply bought from Central America and Colombia. Antibiotics can be cheaply made in rich countries but would be very expensive to produce in African countries, which is why aid projects that provide antibiotics cheaply make a lot of sense (actually private trade in antibiotics happens for the same reason, but doesn’t reach the poorest of the poor). Antiretroviral drugs, unfortunately, are expensive in the exporting country, so they are not as good an aid deal as antibiotics.
31 Comments
“Antibiotics can be cheaply made in rich countries but would be very expensive to produce in African countries, which is why aid projects that provide antibiotics cheaply make a lot of sense (actually private trade in antibiotics happens for the same reason, but doesn’t reach the poorest of the poor). Antiretroviral drugs, unfortunately, are expensive in the exporting country, so they are not as good an aid deal as antibiotics.”
Um. Although the principle stands, you might want to have a look at how the example (antibiotics vs ARV) really works. Some antibotics, some ARVs, yes, but there are antibiotics out there that are more expensive than some ARVs.
“What don’t make sense in trade don’t make sense in aid”
Don’t you think that this is a rather big extrapolation from no more than five examples?
DO build skills around low cost, easy to use technology such as consumer-grade GPS units and open source software stacks that can help communities advocate for themselves.
http://www.mapkibera.org
Prof. Easterly,
I’m wondering why you critique MVP (and, as I understand it, “fair trade handicrafts”) for their lack of scalability.
Isn’t most of your writing directed at critiques of “big plans” meant to scale to hundreds of villages and millions of people? You emphasize being a “searcher” and I think that’s what a lot of the people doing the handicraft sales are (or at least some are). Look at the story behind Emerge Global: http://www.emergeglobal.org/about/
Michael, yes I am talking about the cheap antibiotics, not the expensive ones. I am not extrapolating from examples, I am appealing to first principles and the examples are for illustration.
Steve, yes, small scale operations are fine as long as the costs are also small scale!
I think I might have not been sufficiently clear in my question. It relates specifically to the title of your post, “What don’t make sense in trade don’t make sense in aid”. Do you really feel that this is a ‘first principle’, that it would be impossible to find counter-examples to that rather sweeping statement?
Selling second-hand American clothing in Africa is a very profitable business.
Dear Bill,
Let me come back to the question I asked you by email some weeks ago, related to points 3) and 5)
In this post about the 1MillionShirts campaign, it is said:
cheap donated clothes flood local markets, undercutting local textile industries
Or as you put it: it drives local producers out of business
However, I can’t think of any situation where donating goods or selling cheap (or doing dumping) actually causes more harm than good in the recipient country. For the same reason I can’t think of any instance where importing cheap goods (or free goods) into a Western country causes more harm than good.
The argument against donations or dumping looks like the lump of labour fallacy to me. Cheap imported goods benefit consumers, who now can save more or consume more in other lines of production, and resources previously employed in producing those goods locally are free up to be employed in other lines of production. As I see it this reasoning applies to all goods in all circumstances, in Africa and Western countries alike.
So re point 3), I would like to know if dumping (and donating goods) produces efficiency gains or not (regardless of its legality).
And re point 5), I would like to know in which cases the recipient does not benefit (on balance) from cheap imported products or donations, regardless of the effect on the exporting country. I mean, I understand producing bananas in the US to export them to Colombia would be a waste for the US (and a loss of global efficiency), but if we take just Colombia’s welfare into account, it would be beneficial: Colombia would get cheaper bananas and could develop other lines of productions that before (when resources where employed producing bananas) were not profitable.
Thank you in advance
Re Josh’s point, I think the critical issue of ICTs is that the software needs to be repurposable for locally-identified issues and priorities — not that it has to be open-source. Open-source may or may not be the best means to that end.
For example, every health worker in sub-Saharan Africa (at district level or above) now has a working email account, thanks to Yahoo Mail, Hotmail, and now Gmail. Those mail applications are ALL “closed” and proprietary . . . but they are repurposable by USERS (meaning, regular health workers) rather than just by programmers: they can be used to send messages about any topic important to local users. And they are free: REALLY free, not “free plus the travel and living and salary costs of the programmers we’ll need to use them”.
Software tools that require programmers to adapt them to local circumstances don’t generally scale because programming expertise will always be more rare and expensive than plain old basic computer literacy. The focus on open source — that is, on software that is repurposable only by relatively rare and relatively expensive technical experts — ignores the fact that easily repurposable software like Excel and Word, Facebook, Google Docs and Google Maps, and our own EpiSurveyor (http://www.episurveyor.org) for mobile data collection is what really empowers regular users in poor countries. No need to hire a programmer (or get one donated, or BE one) to use any of those exceptionally useful tools, even if priorities change.
I’m not against open-source at all (and a lot of what we do at DataDyne.org is open-source), but it’s really an issue for software developers — not doctors and teachers and administrators. From the health worker perspective (as for lots of other non-programmers) the issue is “can I use this Hotmail system to send a message on a topic that I determine — without calling the IT department? Can I use this Excel spreadspreet to crunch the numbers I need to crunch without hiring a programmer? Can I throw up a quick Facebook page to promote the cause I want to promote — again without hiring, or being, a programmer”
I believe one of the critical points Bill E keeps making is that very high-level technical expertise doesn’t scale. Open-source software promotes as one of its benefits that it can be modified to suit local needs — but that is only with high-level technical (ie programming) expertise. I believe very strongly in increasingly local programming capacity (see our Coded in Country intiative at http://datadyne.org/cic) but I recognize that the key to scale is not training everyone to be a programmer, whether in the US or in Cameroon. The key to scale is making programming expertise (ie high-level techical expertise) unnecessary for implementation.
@Albert Esplugas
How does growing bananas in the USA and selling them to Columbia make for less expensive bananas for Columbians, than if they were growing them themselves? I can’t wrap my head around that one.
As for dumping being beneficial, I’m going to need a moment to compose my thoughts on that one…
@Albert,
Surely your argument falls when dumping is scaled up with multiple actors i.e. fallacy of composition?
The sun is guilty of #3. I would argue that irratic imports that lead to high variation in price are more damaging than imports leading to low prices. Consistently low prices allow productive factors to be redeployed, as Albert Esplugas pointed out.
@Tom D.
Let me clarify my argument: if bananas are produced in the US and sold cheaper (or donated for free) in Colombia, it would be beneficial for Colombians: they would get cheaper bananas and could develop other lines of production that before (when resources where employed producing bananas) were not profitable.
Sorry I was replying to J
Thanks for the comments about dumping beneficial to the importing country. If food aid had zero opportunity cost you would be right. However, in general aid has a positive opportunity cost — it could have been spent on something else that’s better. For example, rather than replacing an efficient industry in the recipient country, you could use aid in a way that increases production or well-being somewhere else in the economy — more human capital, more infrastructure, etc. Thanks for these comments again. Bill
Good point! I’m used to arguing against dumping laws applied to countries that actually have lower production costs in the goods they “dump” on other countries.
Thank you for your comment, Bill.
I would reply that, even if aid could have been spent better on something else that increases production even more, free goods replacing a locally efficient industry in the recipient country are better than no free goods at all. Free goods increase consumers’ purchasing power and allow redeployment of productive resources into other lines of production.
In other words, the fact that someone could have bought me a nicer gift for the same price doesn’t mean I would be better off without any gift at all.
I basically agree with a lot of what you said.
On #2, I have a different point though. If my government is going to tax me to subsidize Nebraskan corn which is then going to be shipped off to Africa, why doesn’t my government just tax me to provide a small discount-subsidy for fertilizer use in Africa (a la Duflo et al: http://www.stanford.edu/group/SITE/SITE_2009/segment_4/segment_4_papers/robinson.pdf)? It would seem more efficient.
@ Albert. Dumping can consign the recipient to perpetually producing primary products with no added value. For example, I can start producing bananas and then graduate to high value bananas (perhaps canned/dried or juiced/bottle, and marketed under a brand). But if another govt (or many govts) keep on dumping, how do I graduate to higher value added goods and start developing my industries? I can perhaps redeploy resources to other industries, but what if dumping occurs in these as well? Doesn’t that leave me perpetually stuck producing primary goods with no added value? If all my industries (or the main ones – primarily agricultural) are constantly undercut, how do I specialize and develop?
Neither shirts nor shoes are low value items with high transport costs, which explains why there is massive trade in second-hand clothes in Africa.
Dumping massively subsidized EU and US food on Third World producers has been a disaster. Instead of producing extra capital to be spent on other in house goods it leads to massive unemployment amongst farmers, just as the cost of shifting from home-produced coal in the 80s in the UK to cheaper Polish coal cost the country billions overall.
trade with low values of less profitable, especially when requiring a large transport values, agree
Support me in contest Never Give Up Dude, All Come From Zero
Re: dumping food over the long term.
In India when there is a crop shortage and a potential famine, the government institutes a temporary public works programme for those people (farmers, village tradesmen) who are affected. The wages earned give such people purchasing power and they can buy food brought in from elsewhere in the country.
By dumping food over the long term, the local farmers cannot compete and will be driven out of business; unless they are fortunate in finding what will usually be unskilled work elsewhere, their purchasing power has been removed over the long term. If they cannot find work, then they are in the situation of a potential famine and the need for a public works programme to re-establish their purchasing power – or they become dependent upon long term food aid.
The main difference in these scenarios is the former potential famine is caused by the random hazard of nature; the later potential famine is caused by not-so-random human agency.
When a market is flooded with free goods it’s not as if people can turn on a dime and start producing other goods. There are startup costs associated with producing anything new and on top of the investments that have to be made there is also the risk of failure involved with starting any new enterprise. Even if you succeed it could be years before you turn a profit.
In theory, if these people are poor enough to need the aid we are dumping on them, they do not have the resources on hand to get them and their family through both the loss of livelihoods and the development of new livelihoods.
What is the long term impact this will have on their family and community? Will they have to sell land or livestock to stay alive and have the funds necessary to invest in new livelihoods? Land could take years, if not generations, to replace. Have they had to resort to other negative coping mechanisms such a prostitution or theft to help their family survive. Think of the long term impact this could have on individuals, families, and communities.
The US is a prime example of this. Look at the number of people that lost their houses and life savings in the economic downturn. Look at the negative effect that so many unemployed people have had on our communities.
Human beings are not mathematical calculations. While in theory it appears to be simple substitutions of livelihoods in reality changing livelihoods is a difficult and long process.
And then think about what happens if the aid stops pouring in and suddenly access to that cheap product is gone again. Imagine if all clothing imports to the US suddenly dried up. How long would it take and how much money would it cost to get our textile factories up and running again.
I have my problems with PEPFAR, [I think it unsustainable, as we see now that Global Fund et al are clamoring about decrease in funding from a cash-strapped govt] but..
“Antiretroviral drugs, unfortunately, are expensive in the exporting country, so they are not as good an aid deal as antibiotics.”
Then what do you suggest?
The post title is: What don’t make sense in trade don’t make sense in aid
However many commentators criticizing my points on the lump of labour fallacy, donation of goods and redeployment of resources are not applying trade theory to these aid issues.
Consider this:
Local consumers are spending 10 on food sold by local producers. No aid.
ONGs/Foreign Governments start proving food for free. Local producers are driven out of business.
For most of you, the story seems to end here. But there is more.
Local consumers who were spending 10 on food now spend 0 on food, so they save 10.
Local consumers can spend 10 on other goods eg. clothes. Local clothes producers have additional demand, they hire more workers, open more factories, purchase more machinery, bid for more raw materials etc
This is the whole story. Of course this adjustment doesn’t happen overnight, and on the meantime some people may be worse off (loss of jobs in the food sector, food business go bankrupt etc.). Just in the same way some people is worse off in Western economies when we start importing cheaper goods and some local business are driven out of business because they are not competitive enough.
But over the long term there are efficiency gains: consumers are better off (they get more goods for the same money) and free up resources (like labor) are redeployed in other lines of production (eg. clothes).
Let me fix it up for you:
Quote:
Local consumers are spending 10 on food sold by local producers. No aid.
ok
Quote:
ONGs/Foreign Governments start proving food for free. Local producers are driven out of business.
Yup.
Quote:
For most of you, the story seems to end here. But there is more.
Local consumers who were spending 10 on food now spend 0 on food, so they save 10.
Unless, of course, these local consumers were working in the farming buisness.
Quote:
Local consumers can spend 10 on other goods eg. clothes. Local clothes producers have additional demand, they hire more workers, open more factories, purchase more machinery, bid for more raw materials etc
Just like magic!
You’re assuming that there is an other industry in the village or region that can handle that kind of expansion.
Also, now that the farming buisness is dead, what happends when the NGO decides that they are moving on to other things and the magical free food stops flowing? Or what if an other NGO comes in and decides to give everybody free clothes?
@ J
Your “fix” is circular. Basically you are saying that a local producer is his own demand. That is, he works to produce X amount of food, which he later exchanges for X amount of food…
You exchange production with production. If I have a purchasing power of 10 means I have produced goods valued at 10 that I can exchange for other goods at this price. So if I’m spending 10 on food means I have produced other goods (or different food) valued at 10 by the food producer I’m trading with. Thus my reasoning stands: If someone is giving me for free the goods I’m purchasing for 10, I have spare production (valued at 10) to exchange for something else.
You are saying that because everybody works in farming this means that food aid drives everybody out of business, and then their purchasing power doesn’t increase (as they are unemployed). For the sake of the argument, let’s say that ALL goods produced by local producers are provided for free by NGOs and Foreign Governments. Don’t you see the obvious efficiency gains? Everybody gets THE SAME amount of goods, but now they don’t need to work to produce them. They can either remain unemployed if they are happy being taken care off or, most reasonably, work in other lines of production to get ADDITIONAL goods. In either case, they are better off.
@Joel Selanikio: you are a heathen.
Albert:
When a third world country provides cheap goods to a first world country everybody ends up better off because it is the result in specialization in each nation’s comparative advantage.
When the rich country is providing cheap goods to the poor country through aid, though, the rich country is using its absolute advantage often creating a deadweight loss through the foregone specialization. You can see this when the rich country has to subsidize its producers or buy their products at above market costs just to give them away to another country.
Furthermore, when a poor country provides cheap goods to a rich country, it will continue doing so as long as those products are profitable. This creates more long term certainty about the state of the world and less risk in retasking expensive capital assets.
On the other hand, rich countries will provide aid to poor countries so long as it is _politically_ profitable. This creates a great deal of uncertainty about the future and may make investment and retasking of valuable assets much more risky. In your example, the clothing manufacturer will only invest in a larger factory if he believes that his customers will continue to receive food aid. If he thinks they will again have to pay 10 for food in 6 months to a year, he is likely to continue as is.
@Zach
When the rich country is providing cheap goods to the poor country through aid
From the point of view of the recipient country, it doesn’t matter if it’s “through aid” or through trade. The fact is they get cheaper product from abroad, and the effect (“drive local producers that sell at a higher price out of business”) is the same.
Why do you make this distinction then? If you accept they have the same effect and you think your argument still applies, you should be against importing cheaper products in general (ie. restricting free trade).
I’m not sure your second point stands either. Again, think about imports to Western Economies: is it inefficient to get cheaper goods from abroad just for a short period of time? Would have we been better off buying the more expensive local products all along? Besides, I’m not quite sure political profitability is any more uncertain than market profitability (I mean, how are you so sure an import is going to be profitable in the future and the inflow of products from abroad is going to remain constant?)
American farmers have been producing record amounts of corn for the past few years, yet they are only able to put food on their own tables because the US government subsidizes production heavily. This is a dead weight loss to society: Everybody would be better off if Iowa farmers started growing more profitable crops and the US government bought their cereals from places that could produce them profitably.
When providing aid leads to this type of situation, it costs the donor government more than market value to supply the good and therefore they supply less of it than they would if they weren’t subsidizing domestic suppliers. When a poor country can provide goods to a rich country at a cheaper price than domestic producers, there is no subsidy involved, and hence no deadweight loss. This is how aid differs from outsourcing.
As far as uncertainty is concerned, I think it’s the main issue. You can argue that richer societies aren’t significantly hurt by the efficiency losses from subsidies while poor countries can be helped a lot. Also, I can’t argue with short term aid in response to a temporary problem, but that situation won’t lead to a reallocation of capital and wealth creation, either.
Entrepreneurs will only expand business when they expect long term or permanent increases in demand. First world entrepreneurs are able to take advantage of cheap imports and switch to more profitable ventures because those imports will most likely continue so long as they’re profitable. Generally, a profitable product will stay that way until someone finds a way to make it cheaper or develops a better alternative. So the entrepreneur took advantage of a cheaper imported widget can count on the market for that product or its alternatives to continue as long as people want them.
On the other hand, when a government program is supplying a cheaper product to a donor country, the calculus is different. Government programs can and will be stopped without supplying an alternative for any number of reasons; changes in leadership of the donor or recipient country, changes in policy, new aid opportunities competing for limited aid funds, intentional or policy defined time limits on aid, etc. This creates more uncertainty about the future state of the world for the entrepreneur, making him less likely to expand.
There are no guarantees, first world entrepreneurs face uncertainties with cheap foreign goods as well. But I think there are a lot of cases where the deus ex machina nature of foreign aid creates much more uncertainty, and hence a lower likelihood of increased investment, than the observable market forces that lead nations to import certain goods because they are cheaper.
“to the Horn of Africa, when there is plenty of food already in the region”
Really!?!?!? This is major news to me. The average life expectancy in Somalia is below 50. As recently as 2002, Eritrea/Ethiopia was listed as 70% “undernourished” by the UN’s FAO.
“It’s just badly distributed.” WTF? One person can only eat so much food, so where does the rest of it go? They’ve got food markets in these places, it’s just that often the food is too expensive to buy for the people who live there. When the US ships in free food, the price of said food goes down. Hence, it is “distributed” better. Hence, there is too little.
For your story to be correct, you’d need to produce evidence of mountains of hoarded food rotting…
4 Trackbacks
[...] This post was mentioned on Twitter by William Easterly, @mikegechter's RSS and Good Intentions, Arnold Fang. Arnold Fang said: RT @bill_easterly: If it don't make sense in trade, then it don't make sense in aid http://bit.ly/93n2fy [...]
[...] This post was mentioned on Twitter by . said: [...]
[...] Trade and aid. [...]
[...] Num recente comentário, este menciona algumas regras para que as ajudas internacionais tenham mais sentido (inspiradas num qualquer livro de texto de comércio internacional). Aqui fica a transcrição das 5 regras: [...]