Do Fair Trade and Foreign Aid work?

Like many people I've always been a strong supporter of foreign aid and argued for an increased commitment by the Federal government in a previous post on the 'Business of World Poverty'. But some question the notion that simply spending more money is necessarily a wise thing. The most vocal critics believe in a free market and want minimal government interference in market forces. Recently, Associate Professor Andrew Leigh from the Australian National University wrote an opinion piece in the Australian Financial Review (20th May, 2008) in which he was (constructively) critical of Fair Trade programs and foreign trade in general.

An economist's view

Andrew Leigh has an interesting site aimed at economists, students of economics plus, I guess, policy makers and interested people like me. It is one of a number of secular sites that I read that aren't in any way connected with my Christian networks and communities. While he says plenty of things that I don't agree with, he also applies his econometric skills to many topics that I'm interested in and he challenges some of my views. I see this as good! It helps me to sharpen my own arguments, learn new things and offers opportunities to participate in other virtual communities. There is great benefit in entering and participating in varied communities of interest and debate - that's what apologists should do! It is important to listen to other ideas shaped by different worldviews, to understand them, and to learn from them.



Andrew Leigh quotes the economist Tim Harford who suggests that fair trade coffee in some London stores costs an extra 25 pence per cup, but only about a tenth of the mark-up actually reaches the coffee farmer. Harford suggests that "A fair trade cappuccino might have given the drinker a warm inner glow, but it didn’t do much to reduce world poverty".

Leigh points out that the harshest of critics sometimes say the same about overseas aid.

"They point out that unlike the voters who judge domestic programs, the recipients of foreign aid cannot punish bad policy at the ballot box. Aid’s critics say that with a few exceptions – like disaster assistance – the world would be better off with less aid, not more. With this year’s budget promising a major increase, Australia’s overseas aid is set to rise from 0.3% to 0.5% of national income by 2015. So the billion-dollar question is: does aid work?"

Leigh's key arguments

Here's a summary of Leigh's response:

• It is difficult to identify the impact of foreign aid on a country’s level of development.
• In the 1990s, a series of studies reached ambiguous conclusions about the impact of aid.
• Burnside & Dollar (2000) found that aid did raise growth as long as the recipient country had good fiscal, monetary and trade policies.
• Easterly, Levine & Roodman (2003) suggested these results were fragile, and did not hold up when more years of data were added to the analysis.
• Paul Collier later conceded that even in badly governed Africa, poverty rates would today be much higher had the continent received no aid.
• Jeffrey Sachs has argued that much foreign aid in the post-war era was directed towards winning the Cold War rather than helping the poor.
• Sachs accepts though that we shouldn’t discriminate against countries with bad institutions; but instead we should be ruthless about not giving the wrong kind of aid.

Andrew Leigh suggests that ethically, it would be hard to justify withholding charity from some of the world’s neediest people. With this I strongly agree! Yet the research suggests that we need to understand that progress will be slow.

The second challenge Leigh highlights is the need “to distinguish between good and bad aid. This is a particularly thorny question at a time when the program is being expanded. This year, AusAID’s budget will rise from $3.2 to $3.7 billion.”



A Christian response

The Bible is clear that we are to be generous, to give to the poor, that the most disadvantaged must be amongst the recipients (Matt 25:31-46), and that we should give to aliens (Jer 22:2-4) as well as to those in the church. But how do I reconcile the work of economists like Andrew Leigh with the biblical imperative to be generous to the poor. Here are a few thoughts that I've had. First, three fundamental biblical foundations that give me hope:

• I need to remind myself that my concern for justice in the world is an outworking of my faith in Christ, my gratitude to God and my desire to "act justly and to love mercy and to walk humbly with your God" (Micah 6:8).
• I need to remember that my primary concern is first to see people of all nations hear the gospel of Christ - their souls saved not just their earthly needs met.
  
• While God is not responsible for the suffering and injustice that concern me, and while I know that it will be part of God's fallen world, I need to remember that God is in sovereign control (Prov 19:21; 21:1; Dan 4:35; Rom 8:31; 35-37).
  

With the above as foundational, how might I respond to the fact that even within attempts to fight against injustice (e.g. the giving or foreign aid etc), the sin of mankind is undermining well-intentioned responses to injustice?

• I need to continue at a personal level to try to give generously, indeed sacrificially to people I identify as needy. As I see need I must respond.
• I should be wise in how I use the limited amount that I can give and I should target it at those in greatest need (e.g. those in the most life threatening situations, or those who have received less support).
• I should make sure that agencies that I give to use the money wisely and that the funds generated from others and me reach the people in need (or as much of it as possible).
• I should actively encourage governments and major aid organizations to use support wisely to help communities to become more sustainable and self-sufficient economically, agriculturally and educationally.
• I need to be prepared to look more closely at foreign aid policy and participate in informed ways to seek better outcomes for the most disadvantaged. I need to understand the limitations of government-to-government aid (see this critique from the CATO Institute). I need to be prepared to speak out and lobby politicians when government aid policy appears to be shaped by a desire for strategic advantage (e.g. protection of our trade, access to foreign resources etc) rather than a response to the most acute need.
• Finally, I need to support agencies where possible that have a desire to share the gospel of Christ as well as providing material support.

You can read the post from Andrew Leigh that prompted this post here

The business of world poverty

How do you sell the need to address world poverty to business? The Business for Poverty Relief Alliance (an initiative of 'Business for Millennium Development') recently commissioned a report by Allen Consulting on poverty, which has just been released. The report, Business for Poverty Relief: A business case for business action, seeks to challenge business to understand that world poverty affects everyone, including business. The founding members are ANZ Bank, Grey Global Group, IAG, Pfizer and Visy Industries. I agree with the alliance's goals and much that it says, and applaud the initiative, but I'm uncomfortable about with some aspects of the 'sell' to business. First, some background on world poverty and Australia's aid effort to underline the significant need for more action.

Poverty facts

• Almost 30,000 children under the age of five die every day, mostly from preventable causes.
• 6,000 people die every day from diseases associated with lack of access to clean water, sanitation and poor hygiene.
• Approximately 2.6 billion people live on less than $US2 per day (1 billion of these live on less than a $US1)
• AIDS is the leading cause of death worldwide for people aged 15-49. In 2005 alone 2.8 million people died from AIDS and 4.1 million were newly infected.
• In Australia there are special needs within the Indigenous community with life expectancy at 59 for males and 65 for females.

Australia's Aid Budget

Australia's overseas aid budget stands at 0.28% of gross national income (GNI). The incoming Labor government has committed to increasing this to 0.34% by 2010, which is wonderful, but this would still be well below the 0.47% average for developed countries.


The call to business

The up front objective of the Business for Poverty Relief Alliance is to look at ways that Australian businesses, through their various programs, services, markets, and professional staff, can make a difference to global poverty and contribute to the Millennium Development Goals of the United Nations which were agreed to by world leaders, including John Howard, in 2000. The Business for Millennium Development (B4MD) project was an outcome of UN work. This objective is sound, as is (to some extent) the stated Mission. The Mission is to:

Provide a leadership forum that will act as a catalyst for change towards alleviating poverty and driving sustainable development in the emerging economies of the Asia Pacific. We will support Australian businesses to operate, innovate and grow in true partnership with the communities in which they operate.

Why "emerging markets"?

But why “emerging markets”? To understand this focus you need to examine the business case and the Millennium Development Goals themselves. These promise that companies which contribute to emerging markets have the potential for "improved supply chain, new marketplace opportunities, becoming an employer of choice, improved corporate culture, staff retention and morale, increased licence to operate, improved investor attractiveness, global corporate reputation, and personal motivation (for business leaders)." In short, tackling issues such as "hunger, universal primary education, child mortality, maternal health and the spread of HIV" will be good for business in developed countries.

The Business for Poverty Relief report has many commendable goals that could help to address poverty in some countries, but what bothers me is the fact that the report uses self-interest as a motivator for engaging with the fight against poverty. The report states:

"Global poverty represents a direct threat to the current and future prosperity of a range of Australian businesses through the loss of potential markets, damage to foreign affiliates and a greater risk of regional instability. In addition, contributing to the development of poor countries - by generating income, creating jobs and investing in local businesses and skills - can present Australian firms with the opportunities of new markets" (p. 8)

This sentiment is also picked up in a quote on the B4MD homepage:

"Companies that are considered leaders in implementing environmental, social and governance (ESG) policies to create sustained competitive advantage have outperformed the general stock market by 25 per cent since August 2005. In addition, 72 per cent of these companies have outperformed their peers over the same period"
Goldman Sachs, June 2007


A right motivation for giving

The question for me is what should motivate concern for the poor? What should drive us to address the injustice of world poverty as summarised by the facts at the start of this post? The Bible speaks nowhere of being concerned for the poor out of self-interest. Instead, a pattern is set first in the Old Testament to consider the poor. The Israelites were instructed to reduce production so that the poor could have more. Fields were not reaped right up to the edge (Leviticus 23:22), vines were not to be fully stripped (Leviticus 19:10), and gleanings were left to be gathered by the poor (Leviticus 23:22b). They were also commended to "....defend the rights of the poor and needy” (Proverbs 31:9b). Another example of justice in action was the concept of the Jubilee year (Leviticus 25) that was given to them by God as a way to redress injustices in the possession of land every 50th year, ensuring the return of land to original owners to avoiding more and more land being accumulated by a few. The Bible has frequent references to the need for concern for the poor:

Psalm 41:1, "Blessed is he who considers the poor!"
Proverbs 14:31, "He who oppresses a poor man insults his maker, but he who is kind to the needy honours him."
Proverbs 21:13, "He who closes his ear to the cry of the poor will himself cry out and not be heard."
Luke 3:11, "He who has two coats, let him share with him who has none; and he who has food let him do likewise."

Isaiah 58:10 provides another insight into the nature of giving:

"If you pour yourself out for the hungry and satisfy the desire of the afflicted, then shall your light rise in the darkness and your gloom be as the noonday. And the Lord will guide you continually, and satisfy your desire with good things, and make your bones strong; and you shall be like a watered garden, like a spring of water whose waters fail not."

This passage follows a discussion of 'wrong fasting'. The Israelites had been embracing outward signs of faith with wrong motives. God demands from them fasting accompanied by genuine repentance, as well as a turning away from exploitation and injustice. "Is this not this the kind of fasting I have chosen; to loose the chains of injustice and untie the yoke, to set the oppressed free and break every yoke?" (Is 58:6).

Of course this passage also throws up one of the great paradoxes of giving; that blessing comes from self-denial, and that we receive through giving (Luke 6:38). But this, of course, is not our motivation. The biblical pattern is to follow the pattern of Jesus, to lay down our life in order to gain it (Luke 9:24).

It seems to me that while well intentioned, the Millennium Development Goals are back to front. They start with a desire for personal gain and implement actions that reflect this desire. Nothing could be further from the Biblical pattern that Jesus’ life and teaching and sacrificial death on our behalf demonstrates.

You can download a copy of the Business for Poverty Relief report here. There are many great examples of generous giving from business and business leaders. Sacrificial giving based on compassion for the poor and a desire to seek justice for all nations, should be the call we issue to business, not giving based on self-interest.