“An underlying theme in basic economics says, ‘offering a product for free can destroy the local economy’” writes Luis Miranda. Miranda recently watched Poverty, Inc and since seeing the award winning Acton Institute documentary he has shared some of its lessons in an article at The Indian Economist. He begins by explaining how often times aid can harm its recipient more than help them.
A farmer in Rwanda goes out of business because he cannot compete against an American church sending free eggs to feed starving Rwandans. A rice grower in Haiti stops growing rice because he is unable to compete against very cheap rice coming from rich farmers in the US who receive huge subsidies. A local cobbler goes out of business in Africa when TOMS shoes land up in the village and are distributed for free.
In all these cases, the donors had honest intentions. The American church wanted to feed starving people in Rwanda. The US government wanted to feed the disaster-stricken Haitians. Blake Mycoskie, the founder of TOMS, genuinely wanted to help Africans who did not have proper footwear.
Miranda continues to share key takeaways from Poverty, Inc. Next he shares how although aid can appear to be effective in the short term, it can create negative effects in the long term.
Another example from Poverty Inc is the interview of Jean-Ronel Noel, Co-Founder of Enersa in Haiti. Noel started a business in his garage to make small solar panels for street lights and be part of ‘something special’. They had created a Haiti-made product. Their business grew gradually and created jobs in a poor neighbourhood; for people who would otherwise be gang members. After the 2010 earthquake, US NGOs raised money to give away solar panels. And the company struggled to stay afloat.
Why would someone buy something if it was available for free? The solution for a more long-term change would be to empower the people whose lives have been devastated. Of course, short-term humanitarian aid is necessary, but that should stop as soon as possible to help restart the local economy. Removal of poverty calls for helping local entrepreneurs rebuild their businesses.
Miranda concludes his article by discussing some of the ways that India can improve on the ways it has created dependency.
What does this mean for India? Instead of doling out freebies, we should be encouraging local entrepreneurs and creating institutions that support economic freedom. Micro Finance Institutions (MFIs) have done a lot to help local entrepreneurs, but a better effort could take them to a larger scale. Instead of dumping rice or eggs, donors should help support domestic producers of rice and eggs. Through schemes like MNREGA, we are creating a new generation of beggars who lose their initiative and depend on the government. We should, instead, be spending that money to help entrepreneurs develop self-reliance and create jobs that are sustainable.
It finally boils down to the fact that market-based solutions which encourage entrepreneurs to grow are the best ways to create prosperity. No country became a first world country because of aid.
You can read Miranda’s full article at The Indian Economist here.