Africa Partnership Station

The Economic Kindness of In-Kind Donations

The popular humor website “Cracked.com” recently published a thought provoking article entitled 5 Popular Forms of Charity (That Aren’t Helping). The five charitable activities mentioned were (1) awareness campaigns, (2) donating clothing, (3) choosing your charity based on its overhead, (4) earmarking donations, (5) volunteering after disasters.  The author’s arguments for why each of these activities don’t really help are compelling and economically sound … except for one. The author’s argument for why you shouldn’t donate clothing is entirely fallacious. He isn’t the only one to make this argument either, it is common to read articles bashing TOMS for putting shoe producers out of business, and others bashing a guy who just wanted to give t-shirts to poor people in Africa.

The argument against donating used clothing and other goods is that by introducing theses goods into the market for free, you put the current merchants of the goods out of business thus wreaking havoc on the local economy.  While it is true that consumers might choose the free goods over the new ones sold in the market and consequently put these sellers out of business, it is unclear why this is necessarily a bad thing.

The economy is dynamic and entrepreneurs (third world merchants in this case) constantly adjust prices and quantities of goods in response to the ever-changing circumstances of reality (preferences, availability of substitute goods, technology, etc.). The merchants derive profit by satisfying the preferences of consumers. If the consumers can satisfy their preferences in a lower cost way (with free, donated goods), then they will be able to spend their income on other goods and be richer for it. The merchants will see that consumers no longer demand their products and, in the search for profit, shift into selling other goods consumers demand. The consumers will be better for this as they will now have t-shirts, for example, and whatever other good the merchants shift into selling.

But does this wreak havoc on the economy as the Cracked author purports? Not at all. It is just one instance of the market continually adjusting to new conditions. To illustrate let us engage in the following thought experiment. What if it were simply a change in consumer preferences that put the merchants out of business? Would the same people who oppose in-kind donations because they put the merchants out of business still be lamenting the fact that the businesses went under? If not, why not?

Based on their arguments, they should be just as angry about the change in preferences as they are about in-kind donations. After all, both put the merchants out of business!

From a point view which takes into account societal welfare (not just the welfare of the merchants), there is absolutely no problem with the merchants going out of business. The local people no longer need what they provide. These merchants going out of business is just the market’s way of allocating resources to the most highly valued ends. The resources the merchants were expending in the acquisition and sale of t-shirts can now be spent on the acquisition and sale of other urgently needed goods.

Donating t-shirts frees up resources that were being used by the suppliers of t-shirts and the buyers of t-shirts and allows them to satisfy other needs in the community. The labor and cash that went into purchasing and then bringing to market t-shirts as well as the cash the buyers spent on the t-shirts can and will now be used to satisfy other preferences. This leaves the local community capable of satisfying more preferences and therefore increases their utility. The people who were supplying t-shirts simply move into the business of supplying some other good. What this good will be I am not sure, it depends on the preferences of those who make up the local community; and this is what is so beautiful about the free market–it allows people to understand objectively via economic calculation the subjective preferences of their fellow man. Then, as if that weren’t enough, the free market incentivizes them (with profits) to produce and bring to market the specific goods other people want and need.

There is the counter-argument that a donation based method of satisfying consumer preferences is not a good way to help a small, developing economy. This too is hogwash. Consider this: in the wake of a large, possibly continuing donation of t-shirts, resources once used in the selling of t-shirts will be freed up for entrepreneurs to use elsewhere. The resources once used to produce and sell t-shirts can now be used to produce and sell other goods. The resources could also be used (given the time preference of the local population) to invest in capital – a use that would increase the productivity and thereby the incomes of local wage-earners.

The diversion of resources from producing and selling t-shirts into capital investments is not a necessary outcome of in-kind donations but is a possibility opened up by such donations. The point is that donations open up this and many more possible reconfigurations of the economy that increase growth and improve preference satisfaction.

As the economy grows, donated t-shirts will no longer be appealing to consumers. They will be wealthy enough that they will rank a state of affairs with a new t-shirt and less money higher on their preference scale than holding onto the money and obtaining a free t-shirt of inferior quality. They will thusly have achieved a standard of living much closer to that of you and I. As this economy progresses to this higher level, entrepreneurs will see that profit can once against be made from selling t-shirts. Other things equal, the economy at this time will be in a more advanced stage than it would have been without the t-shirt donation.

Thus, it is completely absurd to think you can hurt an economy, or make people worse off by donating goods. If they don’t need the goods (as some in opposition to in-kind donations suggest) they can ignore the donation or give the t-shirts to somebody less fortunate. Or they could do what many relatively wealthy people do with old t-shirts – use them for work-out clothes and rags to wash the car.

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2 Responses to The Economic Kindness of In-Kind Donations

  1. libertas July 4, 2012 at 5:02 pm #

    Good thoughts, but free-market development economist William Easterly offers an opposing view here:

    http://aidwatchers.com/2011/02/in-zambia-pittsburgh-won/

    • ryanbud July 4, 2012 at 5:56 pm #

      I agree with the insight that transportation costs must be accounted for; i.e. if simply donating the money you were going to use to ship the goods is more than it would cost to buy the goods locally.
      Here is an interesting chart I just found: http://buildingmarkets.org/blogs/files/2010/05/SWEDOW_Flowchart_c2010.pdf

      One the other hand, if your options are donate nothing or donate some goods (like t-shirts), donating can’t hurt. The argument that it hurts local businesses is not tenable (as I have shown in the article).

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