Book Review: The White Man's Burden

In The White Man's Burden, former World Bank economist William Easterly reviews mountains of anecdotal and statistical evidence to conclude that a lack of accountability and feedback from the poor has rendered most of the world's mega-aid organizations (World Bank, IMF, UN, WHO, USAID, UNICEF, etc.) extremely inefficient if not outright destructive. Easterly argues that the processes which bring true economic growth and opportunity are fundamentally internal to a society, and that external meddling by the big aid organizations has hampered these natural processes.

Far from condemning foreign aid altogether, Easterly offers some advice for the aid industry. Here are paraphrases of some of his key points:

1. Aid organizations should make it easier to evaluate their programs by sticking to narrowly focused goals.

2. Aid organizations should collect at-least-rudimentary statistics to determine the effectiveness of their programs.

3. Donors should be constantly aware of the temptation of aid organizations to waste funds on programs that merely look good on paper, such as HIV treatment programs, which are one of the least cost-effective ways of helping the poor.

The most important paragraph is on page 380 and is quoted here in it's entirety (note the striking similarity with The Freakwenter's proposal in Roasting Fair Trade Coffee):

"One idea that is too quickly dismissed is for foreign aid to just give cash grants targeted to the poorest people. This would be the purest solution to letting the poor choose for themselves what they needed. Although there are many potential pitfalls, it's surprising that aid agencies have not experimented with this approach in any serious way. This would be a promising area in which to do a randomized controlled trial."

Just pages before that, Easterly references a list of aid projects that have been proven to be most cost-effective for helping the poor. Topping the list is deworming drugs and dietary supplements such as those for iron, vitamin A, and iodine. Luckily for donors now turning away from the big aid organizations, some smaller aid organizations are already working on these kinds of projects. For example, the "MAMA Project", a private US aid organization that began as a health-services provider in Honduras in 1987, is now gearing up for a large deworming campaign in Honduras and a vitamin A distribution project in Nigeria, where malnutrition is especially severe (see http://www.mamaproject.org/).

Roasting Fair Trade Coffee

Some coffee drinkers raise the incomes of poor farmers by choosing to pay a premium for "fair trade" coffee. Is this sensible? In particular, why would someone buy fair trade? What are the costs of buying fair trade? Could the benefits of fair trade be purchased more cheaply in some other form? Let's take these issues one at a time.

What is the coffee drinker trying to achieve by paying more? Unless the coffee drinker is drinking fair trade coffee merely to be cool, he is probably trying to help the poor coffee farmers. And unless the coffee drinker has a personal attachment to workers in the coffee industry, he is probably trying to help poor people in general, and sees paying more for coffee as one way to do that. From here on out our analysis will focus on whether paying a premium for fair trade coffee is a good (or cost-effective) way to help the poor.

What are the costs of buying fair trade? The obvious cost is the difference between the price of a bag of fair trade coffee and a bag of free trade coffee of similar quality. If you buy a bag of fair trade coffee for $5 instead of a similar free trade bag for $3, you have $2 less in your supply of funds to give to the poor.

But this is not the only cost. Consider the scene in the coffee farming community. The "fair" trade coffee industry must select a few coffee growers to receive the above-market "fair trade" rates for their beans. If this fair trade rate is substantially higher than the free trade rate, it would be surprising if neighboring coffee farmers do not exert substantial effort to position themselves to get the higher rates. This jockeying for access to the lucrative fair trade contracts does not produce anything in and of itself, and it distracts farmers away from continuing to support themselves in whatever way they did before the fair trade contracts showed up. To what extent this happens is hard to measure, but it surely must be counted as a cost to the coffee-farming community, both as a social cost (how can you feel good about the neighbor who gets twice as much for his beans) and as a material cost.

A final cost is the loss of efficiency in the coffee intake/processing/distribution process. Leading fair trade companies such as Equal Exchange do not have careful estimates of what portion of the $2 premium on a bag of fair trade coffee gets passed on to the farmers, but there is strong reason to believe that this portion is less than 100%. Fair trade companies tend to be small and hence lack the corporate infrastructure and economies of scale that the large companies achieve, so they tend to have higher overhead costs, which eat into your precious $2 premium.

Therefore, the extra $2 you pay for a bag of fair trade coffee arguably benefits the poor coffee communities by substantially less than $2. This brings us to the final question. Could the benefits of fair trade be purchased more cheaply in some other form? In other words, is there a way to deliver your $2 to the poor without incurring corporate inefficiency or the material and social costs of the jockeying effect?

Existing charitable programs deliver medicine and education to the poor and it is quite possible that many of them could deliver your $2 to the poor with lower overhead costs than than a fair trade organization. However, it is difficult to evaluate the effectiveness of most of these programs in a way analogous to our evaluation of the fair trade industry. In order to demonstrate the silliness of the fair trade movement, we will design an aid organization that delivers money to the poor at a near-to-100% efficiency rate.

Here is how it works. You give your $2 to our hypothetical aid organization. The organization sends the money to the sister branch in a poor country, and it's employees take the money and drive through the country side and cities, stopping occasionally to discretely give a small box of money (or write a check) to the inhabitants of any home that is suffering from obvious and extreme want. If such an employee can distribute $10,000 in a day and requires only $100 in wages, we're looking at overhead costs of little over 1%.

The Charity Problem

Suppose you have a pile of US dollars dedicated toward making the world a better place. What is the most effective way to use the money toward that goal?

Let's refer to this question as the charity problem. The above statement of the problem is imperfect in at least the following two ways: We aren't always sure what it means to make the world "a better place"; and it is similarly unclear whether a "most effective" use for charititable funds exists.

However, these sticking points are not keeping people from making their best guess at how best to use their money to make the world a better place. The Center on Philanthropy at Indiana University estimates that American households in 2005 donated over 250 billion to various causes. Remarkably, only about 30 percent of these donations were aimed at helping "the poor." (See http://www.philanthropy.iupui.edu/Research/
Giving%20focused%20on%20meeting%20needs%20of%20the%20poor%20July%202007.pdf, page 30.)

Given that the charity problem is a multi-hundred billion dollar question, and given that so many of us donate some portion of our income to charitable causes, the lack of discussion on this topic is startling. To be fair, most of us have internalized at least the old saying, "It is better to teach a man to fish than to feed a man a fish." What are some other principles that can be applied to the globally-minded sector of philanthropy that aims to help the poorest of the worlds poor?