Economic Human Rights (35b): What’s So Funny About Charity?

I’ve stated before why I believe charity helps to prevent poverty, and why it’s better than government welfare, at least in principle. The welfare state, in my view, is a fallback option when charity fails (as it often does).

The usual argument against this view is that charity is bound to fail because it’s crowded out by the welfare state. People don’t and won’t assist others because they think that they already do enough by paying taxes, whatever the effectiveness or fairness of the tax system. The evidence for the occurrence of crowding out is, however, unclear, and that’s a “charitable” interpretation of the evidence.

Another criticism of charity is closer to the mark:

Charity is counter-cyclical. When the economy is booming and there’s less need, there’s also more capacity. When the [economy] is worse and there’s more need, donations dry up and there’s less capacity. That’s not a criticism of charities: It’s hardly their fault. And nor is it a criticism of the people who donate — or stop donating — to charities. When you’re worried about paying your mortgage, it’s harder to help other people pay theirs. But it’s a big part of why we need a robust, federal safety net that’s immune … from the ravages of the business cycle. (source)

Indeed, as the need for charity rises, the supply diminishes, and vice versa. That is why a theory of poverty alleviation that depends solely on charity is incomplete. However, implicit in this argument is that the welfare state is immune to the business cycle, which is obviously incorrect. A recession means a drop in tax revenues and a simultaneous increase in demand for welfare transfers (there are more unemployed etc.). Hence, a recession means a weakening of the capacity of the welfare system. That’s exactly the same mechanism that makes charity unreliable.

Fortunately, the welfare state can bridge over recessions by going into debt, something that few private charity donors will do. This means that a welfare state can keep its anti-poverty transfers going in times of increased demand for funds and decreased supply of funds.

More on charity here.

The Causes of Poverty (29): Overview

Our research shows that if you want to avoid poverty and join the middle class in the United States, you need to complete high school (at a minimum), work full time and marry before you have children. If you do all three, your chances of being poor fall from 12 percent to 2 percent, and your chances of joining the middle class or above rise from 56 to 74 percent. (We define middle class as having an income of at least $50,000 a year for a family of three). Isabel V. Sawhill and Ron Haskins (source, source)

However, that seems to be a bit reductionist. There are many other possible causes of poverty. Some more convincing than others. For example, here’s Montesquieu according to whom people in hot places are simply too lazy to become rich:

In Europe there is a kind of balance between the southern and northern nations. The first have every convenience of life, and few of its wants: the last have many wants, and few conveniences. To one nature has given much, and demands but little; to the other she has given but little, and demands a great deal. The equilibrium is maintained by the laziness of the southern nations, and by the industry and activity which she has given to those in the north. (source)

According to Thomas Malthus, poverty is caused by overpopulation. Food and other resources are limited, and a population growth that exceeds a certain pace will inevitably hit a resource ceiling, and will result in decreasing standards of living, poverty, conflict over scarce resources, famine etc.

Max Weber believed that protestant work ethic put protestant nations at an advantage compared to other nations. Certain values, such as the opinion that God will reward those who work hard and save money, or the belief in predestination—getting rich is a sign of God’s approval—make some nations rich and others, that lack these values, poor.

Jeffrey Sachs focuses on geography and weather. In the poorest parts of the world, the soil is nutrient-starved, making it difficult to produce food. Moreover, tropical climates foment disease, particularly malaria. The UK, on the other hand, the country where the Industrial Revolution started, has a fertile soil, a lot of coal, and good waterways.

Daron Acemoglu states that nations are not like children — they are not born rich or poor. Their governments make them that way.

People need incentives to invest and prosper; they need to know that if they work hard, they can make money and actually keep that money. And the key to ensuring those incentives is sound institutions — the rule of law and security and a governing system that offers opportunities to achieve and innovate. … if you wish to fix institutions, you have to fix governments. [People should be able to] enjoy law and order and dependable government services — they can go about their daily activities and jobs without fear for their life or safety or property rights. (source)

There are obviously many more explanations of poverty, both “exotic” and sensible ones. And regarding the latter, it’s extremely difficult to say which ones are more important. Poverty is surely one of the most complex and intractable problems facing humanity. However, if we look at the country that has been most successful in the reduction of poverty – China – then the last quote above seems to be the most convincing one. China still has institutional and legal weaknesses today, but it did start to develop only after it abandoned the follies of the Cultural revolution and communist rule in general, and started to protect property rights and build its government institutions. Which doesn’t mean that institutions are a “silver bullet” solution to the problem of poverty. There’s no such thing, unfortunately.

The Causes of Poverty (6): Foreign Debt

Much of the foreign or external debt of developing countries is unpayable, and exacts a heavy toll. Cancellation of debt can free resources because poor countries have to pay a lot servicing their debt (not so much repaying their debt but paying interest rates on the money they owe). If they don’t have to pay this servicing anymore, the same money can then be used to expand health and education services, improve infrastructure etc.

“Can”, because there is no guarantee that the often corrupt governments of these countries will do so. They can use the money available because of debt write-offs for other purposes. That is why debt cancellation is often conditional. The main lenders of money, the international institutions such as the World Bank and the IMF (“multilateral creditors” which lend money at relatively low commercial rates), and the Paris Club, an informal group of rich lender nations (“bilateral creditors”), impose conditions such as good governance before agreeing to cancellation. They argue that only countries which have met these conditions can guarantee that the money will be spent on development. They also worry that debt relief might be seen as a perverse reward for countries that lack financial discipline.

Others charge that conditionality violates the sovereignty of borrower countries and imposes programs that may create problems for the local economies and for the legitimacy of the governments. They also claim that countries can only establish good governance and fight corruption when they have the money to do so. Any relief must therefore be unconditional. The truth is probably in the middle somewhere, which means that some conditions should be imposed but not too strictly.

The Heavily Indebted Poor Countries (HIPC) initiative was launched in 1996 by the World Bank and IMF to provide relief to poor countries from excessive debt burdens. HIPC identified about 40 countries, most of them in sub-Saharan Africa, as potentially eligible to receive debt relief. Countries deemed eligible have to meet HIPC targets for good governance, curb corruption and fraud, open up their economies and liberalize their international trade. Although it has provided debt relief which is worth billions of $ to many countries, it has still not produced a lasting solution to the debt crisis. Even HIPC countries are still spending more on debt than healthcare, for example.

Although today all parties agree on the necessity of debt cancellation (but not on the method of cancellation), it’s not useless to recall the origins of much of this debt. Poor countries suffer from so-called “odious debt”, the consequence of past or current regimes borrowing money not for the development of their country but for the conduct of wars for example.

In international law, odious debt is a legal theory which holds that debt incurred by a regime for purposes that do not serve the interest of the nation should not be enforceable. Such debts are thus considered by this doctrine to be personal debts of the regime that incurred them and not debts of the state. (Wikipedia)

And even the debt that was initially incurred for beneficial purposes was often diverted by corrupt and undemocratic regimes, institutions and individuals. So, these two facts put together makes it very difficult to maintain that this debt should be serviced.