Poverty, Inc. is a new documentary that draws attention to the flaws in the modern global aid and development industry. Although the film focuses on the topic of failed attempts to aid the poor, it is actually quite well-made and is a remarkably engaging film. The film draws attention to several parts of the aid and development industry that seem to be riddled with flaws. These include:
- The US food aid system that effectively keeps farmers rich domestically and farmers poor internationally.
- The concern that aid that goes directly to corrupt governments often does very little in the lives of the poor and (perhaps) makes the whole situation worse by weakening “the social contract” between governments and their electorate.
- The reality of perverse incentives created by orphanages that may actually be pulling poor families apart.
- The recognition that real and meaningful change, in ending the multidimensional puzzle of poverty, requires changes in the institutional structure of countries.
By raising awareness of these flaws in the global aid system, this film deserves appreciation, as these issues are presented in a clear and meaningful fashion. Two key critiques, however, beg for attention and further discussion: First, although these flaws may be astonishing to many viewers of the film, none of these points are all that novel to those who actually work in aid and development, as these flaws are more accurately consequences of a more fundamental problem that was (unfortunately) left out of the film. Second, the film focused only on the flaws of the current system and fails to mention what the aid and development industry (perhaps miraculously) has gotten right over the years.
TOMS Shoes: When Theory Doesn’t Hold in Reality
The film makes the case that aid doesn’t work, and may be hurting those it should be helping. This is a real concern, but the film doesn’t share much in terms of rigorous evidence. This lack of empirical evidence allows for mistakes to slip into the film.
For example, the film takes quite a bit of time explaining why TOMS Shoes, while well-intended, actually damages the local economies where the shoes are donated. This explanation uses well-developed theoretical economic logic: local shoe businesses can’t compete with free, so when shoes are given away for free the local shoe market suffers. Although this theory is solid, it is worth studying if this theory actually holds up in reality.
Three economists from the University of San Francisco performed such a study and recently published it in the peer-reviewed Journal of Development Effectiveness. The findings of the study are surprising, given the sound logic in the paragraph above. They find no statistically significant effects on the local labor market, in rural El Salvador, due to the donations of TOMS Shoes. There is a small effect—about one fewer pair of shoes demanded and sold locally due to 20 pairs of shoes donated—but this effect is so small (and statistically insignificant) that it hardly warrants the mass prevention of shoe donations.
Shoe donations (and aid, in general) ought to be targeted to those who actually need it. In the case of shoes, those who donate shoes should be careful not to give shoes to people who would otherwise pay the going market price for shoes. In many communities, however, there are lots of people who both need shoes and can’t pay the market price for shoes that would benefit greatly from the donation of good quality shoe donations.
Foreign Aid: A Simple Cost-Benefits Analysis
Although it is easy to point to aid and development spending that may have not generated genuine economic growth and poverty reduction, the benefits from aid and development have the potential to be remarkably large. When aid is spent well, even with numerous failures, the benefits may still outweigh the costs using typical cost-benefit practices.
For example, consider the case of the eradication of smallpox around the world. Suppose, just for the time being, that all forms of aid had no benefits except for aiding in the eradication of smallpox. Before smallpox was eradicated it killed a recorded 300 million people globally. Since its eradication, in 1973, roughly 100 million lives have been saved. To put that number in perspective, that’s more lives saved than would have been saved if we achieved world peace in 1973. Now, if you crunch the numbers, counting how many lives were saved in terms of how much money has been spent on foreign aid (remember, we are assuming there have been no other benefits of aid since 1973), you’d concluded that it cost roughly $70,000 per life saved. To put this calculation in perspective: standard cost-benefit analysis within the United States government rests on the assumption that a life is “worth” saving if it can be done with a price tag of $7 million or less.
To make the case against spending foreign aid, it is not a sufficient argument to simply point to projects or policies that seem to have not produced benefits. It is exceedingly dangerous to only consider aid spending that has not lead to the reduction of poverty while disregarding the aid spending that actually does produce worthwhile results. Several examples include: the eradication of smallpox and other global health initiatives, providing deworming tablets to children, and a recent multifaceted program targeting the so-called “ultra poor”.
Innovation in the Aid Industry: Cash Transfers
When the film presents the current reality of the global aid and development industry (pictured below), the newest, and perhaps, most exciting innovation in the last decade is omitted: direct cash transfers.
Inserted into the figure above, direct cash transfers create a line of little green arrows from the yellow group of people (presumably rich people) directly to the red and orange people (the “people in poverty”). No taxes, no donor nation governments, no developing nation governments, no NGO development project. Through organizations like Give Directly you can send money from your bank account directly to the mobile money (i.e. MPESA) account of the extreme poor all around the world.
When thinking about the power of direct cash transfers consider the idea of diminishing returns. This is the idea that $1 is worth exponentially more in the hands of someone living off of $2 per day than it is in the hands of someone living off of $200 per day.
It is rather stunning that a documentary about the modern aid and development industry left out the topic of direct cash transfers as discussions have been exceedingly common in recent years, not only among so-called development experts, but also in the media, for example: The New York Times, The Economist, Bloomberg Business, Forbes, The Economist (again), Foreign Affairs, The New York Times (again), NPR's Planet Money, The Huffington Post, and The Atlantic.
The Root of the Problem with Aid
The world is a complicated place. As demonstrated by the case of TOMS Shoes, well-developed theory and sound logic can only provide so much clarity about what will work and what won’t in various contexts. In order for aid to actually be effective data need to be collected, feedback needs to be heard, and impacts need to be measured. The problem with most NGOs, and the key reason why many countries remain poor despite the overwhelming number of NGOs, is because these organizations often don’t do anything as far as collecting data, gathering feedback, or rigorously measuring impact.
It’s understandable why very few NGOs spend time and money measuring impacts and collecting evidence. Doing so in any sort of rigorous and honest manor requires a lot of humility and courage. It is perhaps natural for us to want to live a (fictional) world where we know we know how things work. Admitting our own faults is often one of the most difficult challenges we face, however learning from failure and iterating through trial and error is simply the most effective problem solving strategy at our disposal.
In recent years, the idea that foreign aid is “bad” always seems to gain a lot of traction. I’ve never quite figured out why so many people are set on painting with such broad strokes when it comes to solving one of the world’s most persistent puzzles. The aid and development industry needs more evidence not less financial support. The last thing that is needed would be for public support of foreign aid to wane in years to come. In light of the flaws highlighted by Poverty, Inc. and the key points of this review, perhaps the most concrete task to be done would be to call your member of Congress to voice support for the Foreign Aid Transparency and Accountability Act.
-Jeff Bloem is a graduate student at Michigan State University in the Department of Agricultural, Food, and Resource Economics. He is currently working toward his MS degree. Prior to beginning graduate school, Jeff spent a year working in Kenya with Partners Worldwide - who's network is featured in the Poverty, Inc. film. He is a graduate of Calvin College. Following him on Twitter and on his blog.