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The hidden dangers of charity

Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He writes on this and many other matters, from the perspective of individual liberty and free markets.

It really does make us feel better. A small monetary donation here, an old fluffy blanket there. But we need to think hard about not only why and where we practise charity, but also how. After all, we could be perpetuating the very thing – poverty – we’re trying to prevent. 

Charity has a great deal of emotional appeal, as well as practical value. I indulge in occasional charitable acts myself. However, it pays to think long and hard about its wider implications. Good intentions, they say, pave roads to fairly undesirable long-term outcomes.

It is easy to witness a sad state of affairs and act on the urge to “do something” about it. See a hungry child? Feed it. See a cold man on the street? Clothe him. See a sick woman with nowhere to turn? Pay for a doctor’s visit. Do something. Anything. Can you stand by and do nothing?

These clichés are as vapid as the instincts are heartfelt. Throughout history, people and organised social groups – be they churches, associations, companies or governments – have engaged in charitable work of some sort.

Some time ago, I mentioned a charity event I was supporting. An incurable socialist troll responded that my charity was depriving the free market of an opportunity to supply the need at a profit.

It was meant as a sarcastic joke, suggesting that my charity amounts to a concession that free-market principles aren’t all that. 

Of course, one can easily justify charity in terms of purely self-interested individualist philosophy: a stronger and more prosperous society is essential for an individual to succeed. One can’t get selling to people who are broke, or hiring people who are stupid. It benefits even cold-hearted capitalists (as the insulting caricature goes) when those around them prosper.

However, the comment was closer to the mark than the troll probably intended. 

Charity should never be entered into lightly. The economic impact of charity extends far beyond enriching someone who suffers deprivation as a result of abuse, poverty or disease.

Take, for example, a drive to collect warm clothes for the poor and homeless in winter. Everyone feels the cold, sees the need, and sympathises with those who struggle to adequately provide for themselves. So, relatively well-off people buy some stuff, or gather some unneeded extras from their closets, to donate to the poor.

So far, so good. The well-off feel generous for a while and the poor get something to feel thankful for. On both sides, some will handle the emotion with more grace than others. But now, let’s think a bit further, about the economic consequences of such an act.

When you’re poor, you have to watch every cent. You have to budget carefully, prioritise necessities, and make sure that what little money you are able to earn (or receive as a welfare grant) stretches as far as possible. If a poor person knows that they can rely on private charity for a cup of soup and a roll twice a week, or a blanket every winter, they have no reason to budget for this. The consequence is that, next year, they may well find themselves in exactly the same boat, needing exactly the same charity. In fact, they might choose to be in the same boat, since they’d rather save their own money for the things charity does not provide. Charity reduces the motive of necessity for being productive, turning a temporary misfortune into a permanent structural problem.

For a number of charity recipients, the generosity of their community solves a very real problem that could not otherwise be solved. Some do save that money to spend it on more nutritious food, essential healthcare, or their children’s education. It would be cruel to begrudge them that. For some, however, it does not solve an unavoidable problem. Too many recipients save that money only to spend it on goods and services that really ought to have a lower priority. Sometimes, the charity of the rich indirectly funds drink, drugs, toys and cigarettes. 

The economic impact of trapping people in aid dependency or, worse, encouraging outright exploitation of the generosity of others is a significant risk. If not carefully managed and closely monitored, that risk can overwhelm any good a charity project does.

The economic impact of charity is not limited to its recipients, however. An even more important hidden danger is to undermine the capacity of the local economy to provide society’s needs.

In an ideal world, even the poor are catered for by manufacturers and merchants. You might prefer to drive a big car, but cheap cars, scooters and bicycles serve the lower end of the market, and the taxi industry caters to people who can’t afford even those luxuries. You might prefer designer clothes, but budget stores and second-hand dealers cater for those who can’t afford to be fussy.

The world is not ideal, of course, and some people can’t afford even the most inexpensive necessities of life. It would be nice to know that this number is as low as possible, instead of being inflated by the structural unemployment caused by the government’s economic policies, but even if it were, there would be a small minority of people who for reasons outside their control truly can’t provide for themselves.

However, by supplying such people with goods and services from elsewhere, the low-end businesses that try to cater for the poor get undercut. How can a second-hand store compete with free clothing? How can a budget supermarket compete with free food?

If you’re offering free internet access to a community, or free books, or free extra maths lessons, what is the impact on the companies who might otherwise be in a position to supply these services? They will be left with a smaller addressable market, which raises their unit cost. This, in turn, can keep prices permanently out of reach of the poor, which makes charity self-perpetuating.

If your company offers to paint a school, a shelter, or a clinic, how do you think the painter who sits on the side of the road begging for work feels about that? Does it really benefit the local economy to have highly paid engineers, salespeople and managers spend their time working as amateur painters? And if local professional painters sit unemployed, will they be in a position to take the next urgent community need into their own hands?

This effect is well known in international aid. When a country faces starvation, the need to save lives is urgent and immediate. The emotional appeal of poster children is strong. The problem is that Bono-branded food donations undercut domestic farmers. How can they compete with free food, when they’re already struggling with droughts, pests and other causes of low crop yields? Charity robs the local agriculture sector of the very income it needs to invest in fertiliser, better seed stock or irrigation. Out of business or under-capitalised, they end up unable to prevent a famine the next time a hard season comes around.

If you are going to give to the poor, it is much smarter not to cut those businesses that ought to be able to supply them out of the loop. If there is a need for warm clothes, go out of your way to buy them from the cheapest discount supermarkets or second-hand stores, located in the area where the charity is to be distributed. Short term, a fluffy blanket from a fashionable outlet (if not traded for a cheap blanket and some cigarettes) might help someone. Long term, it is perverse to enrich the shareholders of an upmarket shop in the rich part of town, while the cut-price supermarket at the taxi rank struggles or the thrift shop in the township goes under.

The knock-on effect doesn’t end there. If the shop catering to the poor makes less money or goes under, it will employ fewer people. It will buy less stock from suppliers, which in turn may have to cut back on staff. This ripple effect undermines the very infrastructure on which prosperity is built. It increases poverty, rather than reducing it. That is exactly the opposite of what the kind-hearted donors had in mind, one must suppose.

The cynical will observe that charity can even be used as an anti-competitive weapon. If you’re trying to dominate a market in order to maintain pricing power, it might pay handsomely to make a few strategic donations. You look wonderfully caring to your rich customers, while at the same time you undercut competitors that sell blankets at half the price you do. Some “corporate social responsibility” is just predatory pricing on steroids.

The most harmful kind of charity comes from government itself. It requisitions money by force from those who earn it, and distributes it through vast, one-size-fits-all programmes. Every welfare programme, from child grants to public education, suffers from these problems. They are inefficient, expensive to administer, crippled by bureaucracy, corrupted by lazy gravy-train riders, vulnerable to misappropriation, and opaque to oversight. They entrench perverse incentives on the part of recipients, and undermine local economies that ought to be able to supply (and employ) the poor.

Many people who work in government or non-profit circles are inclined to view growth in social welfare spending as a good thing. It is the exact opposite. Social welfare programmes ought to be considered successful if the need for them declines. As finance minister Pravin Gordhan said in his budget speech: “Government has expanded social assistance to households over the past decade, but employment and economic growth have to be the main future drivers of income growth and poverty reduction.”

In the business sector, a vibrant ecosystem of small entrepreneurial firms form the bedrock of the economy, stimulating growth, creating employment, rewarding success and punishing failure. 

Likewise, charity is at its most healthy and effective when it consists of many small, local and private ventures. Such people have focus and know local conditions. They know how to support local business while helping the poor to prosper. Like with badly run companies, which are soon abandoned by watchful investors, badly run charity projects will get shunned by donors who have active oversight and a real choice over how their money gets spent. Such failures create space for better “competition” to succeed.

If you’re going to donate to charity, think hard about it. When you start thinking about it, it is startling how many apparently charitable acts turn out not to be worth doing. There is no easy substitute for hands-on charity in your local community, so you can choose how your time or money is best spent. How it is done is just as important as what is done. Just writing a cheque, sending a premium text message, or dropping off a baby blanket at a collection point might make you look generous or assuage your guilt. It might even have short-term benefits. 

But think deeply about the unintended consequences of a particular act of charity, to make sure that limited resources are applied to optimum effect, while minimising the unseen harm caused by doing good. In the long run, charity can make poverty worse rather than better. DM


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