The biggest story in the development blogosphere this week has been the 1 million t-shirts for Africa campaign and the incredibly strong reaction of the blogging community. For those new to the discussion, a full list of all the relevant posts is available here. Until now, my brain was too overloaded to manage anything but a few grunts in crayon form.
There have been various, familiar arguments against the prospect of dumping more used t-shirts into markets in poor countries. A lot of people are worried about the effect on those markets themselves, of undercutting local textile producers. I’ve made this argument myself before, but am becoming less convinced by it; I’m beginning to suspect that the damage to local producers has already been firmly done, and that other sources of cheap clothes (such as growing imports from places like China) will continue to dominated markets in the long-run. Unfortunately there hasn’t been much in terms of rigorous study on the topic, aside from an in-depth report from Oxfam, making it difficult to know what the aggregate effects are.
Let’s move on to the more important argument, which has to do with missed opportunities and meeting the needs of the recipient. This has been covered quite a bit, but I think it’s an important enough argument to be restated in a more precise way, so here we go:
Gifts in-kind are, for most recipients, strictly inferior than cash gifts of an equivalent value.
Imagine a poor person with no income. Now, give her a dollar and she will spend it on the most urgent necessity (in econospeak, the good that offers her the highest expected gain in utility). Give her a second dollar, and she may continue to spend it on that good, or she may switch to another good. As the her income rises, she will dedicate each marginal dollar to what matters most to her at that moment. If you give her another dollar and she buys a mango, that doesn’t necessarily mean she couldn’t afford the mango before, but that a mango currently offers her the greatest marginal benefit after spending her other resources on other, possibly more important things.
This is an extremely rational model of expenditure prioritization. Of course, reality is much more complex – some would argue that it’s not very easy for people to identify what they need or may ignore their own best-interests (although I don’t think the latter assumption gets us very far in life). If you can stomach the constraints of my simple model for a moment, consider the following thought experiment:
You have a population of people of different incomes and different priorities. Some of them have shirts, others don’t. You can easily identify these people and you decide to buy/obtain shirts for those lacking them (at a cost to you of $1).
What is the welfare impact of your intervention compared with just handing out dollars? For a select few – those that were poised to spend their next available dollar on a t-shirt, the welfare impact is equivalent. For everyone else that is shirtless, the welfare impact of giving a shirt is strictly less than that handing out a dollar.
Why is this the case? If you hand someone a dollar, they spend it on the good that represents the highest possible welfare benefit. So if they spend it on something other than a t-shirt, it means that the t-shirt wasn’t the best possible purchase for them*. So, if you hand them a t-shirt instead of a dollar, there is an implicit cost to that missed opportunity. The harder it is for the recipient to exchange that t-shirt for what they want, the bigger the missed opportunity.
The resulting rule of thumb is: “if someone doesn’t have a shirt, there are probably a lot of other things that they don’t have, and we have no good reason to give the shirt priority.” The important thing to take away is that the same holds for all in-kind gifts.
Of course, there are lots of other reasons why we may not want to just go around giving cash, but there are lots of alternatives to running around dispensing used goods. On a micro-scale the gold standard of cash-transfers may be impossible to beat with in-kind gifts, but interventions that move beyond the individual, such as investment in public goods or removing kinks in the system that create poverty traps, can result in larger welfare gains.
*I am, in this simple model, mostly ignoring budget dynamics. If your income was 90 cents a day, you will buy whatever bundle of goods that is best suited for you at the prevailing prices. It could be that you really, really want a shirt, more than anything in the world, but they cost $1, and when your income goes up to $1 a day, you only spend your money on shirts, and would have loved it if someone had given you a shirt when you were still making 90 cents a day. However, these people are no easier to identify, and so giving each person an extra dollar in income is still strictly superior to handing out $1 t-shirts, because those that had always wanted a t-shirt will just go on to buy the t-shirt.