Help That Hurts: The Case of US Food Aid

President Trump’s discretionary budget proposal includes a $182 million cut to the McGovern-Dole Food for Education program, eliminating the program entirely. Whatever else one thinks of Trump’s budget, this is a good idea.

It will save taxpayers a small amount of money, which is nice. But far more importantly, canceling the program will also likely help the former recipients.

This may sound like a surprising claim. How could eliminating aid be a good thing for the people that get the aid? It’s a reasonable question with a complicated answer. Let’s go through it.

Free Stuff Is Good

At the risk of stating the obvious, free stuff is good. It’s true for individuals and it’s true for countries as well.

Suppose some government decides to give me a loaf of bread out of the kindness of their bureaucracy. Assuming I’m not allergic to wheat or on a strict paleo diet, I’m better off as a result. Some of the money I was going to spend on bread or food is now available to be saved or spent on something else I want. That is, as a result of the aid, I reallocate my resources to their next best use once my bread needs are taken care of.

The same general process would take place with countries as well.

Suppose the country of Laos receives $50 million of rice from the benevolent US government. Assuming the people of Laos are willing to eat rice, this makes them better off. Approximately $50 million that the population would have spent on rice is now freed up for other purposes–savings, investment, consuming other goods, etc.

That said, this story is undeniably bad news for the rice farmers of Laos. They can’t compete with free, so their business is harmed by the aid. The amount of the harm depends on the size of the shipment. If the injection of aid is small compared to the size of the market, the effect will be to simply lower prices and profits somewhat. If the injection of aid is a substantial portion of the market, the farmers might have to sell the crop at a significant loss or even let the crops perish.

This harm could be mitigated if the farmers had easy access to global export markets, the price on which would be largely unchanged by the aid shipment. But since aid is primarily given to very poor, developing countries–and a common characteristic of such countries is that do not have sufficient access to the global markets–this channel will probably offer limited relief.

Should Government Protect the Farmers?

The plight of the rice farmers described above is not entirely unique to foreign aid. Aid is an extreme case because they are forced to compete against free goods of comparable quality. But a similar result occurs anytime an industry or business starts competing against a competitor who can provide  a comparable product for less money (or a better product for the same money).

This superior competition could emerge due to many different factors, from the liberalization of trade policy to the introduction of new technologies. For example, the invention of the automobile and its subsequent mass production put the horse-drawn carriage industry largely out of business. No doubt, this was an unpleasant development for the carriage-drivers and, at least in the short-run, reduced their standard of living. Meanwhile, the advent of the affordable automobile meant a massive increase in the average standard of living for society at large.

The net result of the automobile, at least as described so far, appears the same as what occurred with the foreign aid to Laos. A small number of producers and workers lose (carriage-drivers and rice farmers, respectively), but the full population of consumers benefits.

If we were to apply a utilitarian analysis to either situation, we would find that that the net benefit to consumers outweighed the losses. Additionally, there is no inherent right to have paying customers. Thus, the fact that some of those customers might freely choose an alternative, however unfortunate for the businesses and workers involved, does not constitute a violation of anyone’s rights.

Given these facts, both a utilitarian and rights-based analysis would recommend the same general economic policy response–basically nothing. That is, don’t inhibit competition and don’t protect industries that can no longer compete.

The people in those old industries will have to find a new line of work since there is less demand for their old work. Seen from a 30,000-foot view, we would observe the productive resources of the country being reallocated from the previous industry (horse-drawn transportation or rice farming) to other industries that are in higher demand. The end result is that the society produces more than it did before and average standards of living rise. Once the adjustment period occurs, everyone is better off.

What I’ve described above is a textbook story of how competition works in the economy and the ideal political response to dislocated industries. This story can also fit with the common sense insight that free stuff is good.

Until now, we’ve assumed that introducing foreign aid has basically the same effect as introducing a really efficient competitor in the market. Unfortunately, this assumption does not hold up in practice. And this is where a major harm of foreign aid kicks in.

Aid Isn’t Like The Automobile

In our automobile example, it went without saying that the supply of automobiles in the future would be reliable and predictable. Of course it would be. Ford, oil companies, mechanics, and others stood to make a fortune by facilitating the rise and widespread adoption of the automobile. So there was little doubt that cars would be produced and that businesses would spring up to serve car owners. The possibility of profits ensured it.

Accordingly, there was little harm from moving away from horse-drawn transportation. A better alternative existed and it was going to be around for years to come.

These same beneficial conditions do not apply to foreign aid, however. Instead of being driven by predictable, and enduring self-interests, distribution of foreign aid is dictated by arbitrary political decisions. What is granted one year may not be available the next–or it may be twice as large.

Bringing it back to our rice farms in Laos, let’s suppose there’s an aid shipment $50 million worth of rice in the first year. If a similarly-sized aid shipment were going to continue into perpetuity, we would have no issues. The effects on the market would be similar to that of the automobile–some rice farmers would necessarily transition to other lines of work and the whole society would have more production and higher standards of living.

However, let’s consider the more likely case that the aid shipments are not consistent. Suppose the aid to Laos is $50 million in rice in the first year as before. But then suppose it gets cut off after that–perhaps because the aid gets sent to a different country instead. What would be the effect now?

Well, in that first year, $50 million in aid is still likely to wreak a bit of havoc on the rice farmers. Prices will drop significantly as the market gets flooded with free rice, and the local farmers suffer a heavy loss. Further, given that they live in a poor, developing country, many of these farmers probably do not have significant savings. So, we would expect these losses to bankrupt some of them. And upon going bankrupt, the former farmers would have to find another line of work. Thus, the number of rice farmers in the country decreases and the country’s overall capacity to produce rice is reduced.

The next year comes and the rice aid gets diverted. Now, since there are fewer rice farmers than before in Laos, the country finds itself with a shortage of rice and prices spike up. While the consumers struggle with unexpectedly high prices, the remaining farmers actually have a great year this time. Indeed, their profits are so high that more Laotians may be enticed to get back into rice farming.

The problem here is that these adjustments are not costless and they are not instantaneous. It’s great that the price system will encourage more people to start farming again and thus lower prices next year. But they will need to invest in new equipment, buy the land, develop their skills at farming, etc. All of that takes time and resources–time and resources which had already been invested by the rice farmers that got put out of business last year. This is not a positive outcome.

Moreover, the uncertainty introduced by the possibility of aid in the future creates problems as well. Will people be willing to jump back into the rice industry knowing that benevolent US aid might return to crush their business a few years hence? Maybe, maybe not. Either way, the likely end result is that the aided country has a less robust and reliable agricultural sector than they would have had in the absence of aid. And perversely, this occurs even though a typical stated goal of this aid is to increase food security.

Back To McGovern-Dole

Above, we have told a general economics story of why granting food aid can actually do more harm than good. And we have been careful to stress that the problem is not really the aid itself, but the unpredictability that often comes with it.

To assess whether the McGovern-Dole Food for Education program targeted in Trump’s budget might bring these same problems, we have to look at its consistency over time. The results are not encouraging.

From the US Department of Agriculture website, here are the grant allocations in the two most recent years:

Aside from the slightly annoying change of denominations, what stands out in the above charts is that, remarkably, none of the recipient countries overlap.

Now, the actual implementation of the program probably isn’t quite this sporadic. This resource on the program notes that the aid agreements often span multiple years, and the USDA website indicates that some current McGovern-Dole grants from as far back as 2011 are still active. That said, the programs still do end. And when they do, they will leave the recipient countries with a hole in their agricultural market that cannot be immediately or costlessly replenished and that didn’t have to exist in the first place.

Conclusion

Foreign food aid is one of the many areas where good intentions often do not produce good outcomes. Even assuming no malice or corruption on the part of any of the actors involved, foreign food aid is still likely to serve as a destructive force by unpredictably disrupting developing economies. This is not the purpose, but it is one of the consequences

Notably, this harm won’t occur in all cases. As we have seen, the harm occurs when aid inconsistently disrupts the normal economic system in these developing countries. If this system has already been significantly disrupted–say, due to a major natural disaster, the outbreak of war, etc.–then emergency food aid could provide value without instigating distortions. Similarly, if aid was given in the form of a product that had no domestic supplier (perhaps AIDS medications, for example), this would also avoid the disruptive effects outlined above.

However, in the more common case of food aid being provided during normal times, real economic harm can be done. Uncertainty is introduced and fleeting distortions make the recipient economy less efficient and stable than it would be otherwise.

As with medicine, a good rule of thumb for economic policy is “First, do no harm.” Unfortunately, many foreign food aid programs, like McGovern-Dole, don’t appear to meet this standard. They should be opposed accordingly–for the sake of the US taxpayer and for the sake of the countless would-be victims in developing countries.

Note: For more discussion of the unintended consequences of foreign aid (as well as aid from non-governmental organizations), I’d highly recommend this EconTalk interview between economist Russ Roberts and Michael Matheson Miller, the creator of an excellent documentary on this topic called Poverty, Inc. The discussion is very interesting and does an excellent job of explaining the relevant economic forces at work in this area.

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