How to help the 'Poorest of the Poor'

There are many examples of foreign aid that went wrong.  These have alienated many who would have supported the donations, and, in many cases, has generated a system that is essentially corrupt.

A glaring example of such misdirected Foreign Aid was the donation of corn by the United States to the starving poor in Zimbabwe.  One shipment alone, of 20 000 tons of corn, was sent via a freight terminal in Durban, South Africa, to Zimbabwe.  The corn was shipped in bulk, and the freight terminal was paid to pack the corn into bags marked “Gift of the people of the United Sates of America.  Not for sale.”  A worthy gesture on the face of it.  What actually happened is that the corn arrived, and a representative of the Zimbabwe Government informed the freight terminal opewrator that the bags would not be acceptable.  The Government supplied its own, unmarked, bags.  The corn was duly packed in the anonymous bags and railed to Zimbabwe, where it was sold by members of the ruling Party to favoured groups.  Those who did not support Robert Mugabe were not permitted to buy the grain.  The effects of this ‘worthy gesture’ were fourfold.  First, the value of the corn flowed directly into the personal coffers of Robert Mugabe and his henchmen, strengthening their oppressive grip on the country.  Second, the flow of corn into the country reduced the value of corn produced by local farmers, reducing their economic stability even at this basic level of near-subsistence farming and increasing their poverty dramatically.  Third, the purchase of the corn by the American Government increased the world market price of the commodity, making it more expensive for Aid Agencies to purchase this basic food commodity, but adding to the perceived support of that section of the American agricultural sector by the ruling Party in the United States – a purely internal political handout.  Fourth, within the economy of the United States, the payment for goods which were withdrawn from the economy had the effect of ‘destroying’ that small part of the economic cycle, leading to an inflationary effect in much the same way as a war would.  The end result?  Everyone lost, except the dictator in Zimbabwe who had brought about the economic plight of his nation by his depredations and his inept operation of the previously-thriving Zimbabwe economy.

The worst of this story is that, when notified, the American Government, directly and via the Embassy in Pretoria, of the destination of the Foreign Aid, they did not even the have courtesy to reply!  One can only assume that the American Government knew of the facts and condoned them.  One can only wonder why!

No doubt there are many instances of Governmental Foreign Aid that have had a similar outcome.

In a separate story, the Government of Robert Mugabe, itself a basket case economy, made the gesture of sending a military ‘peace-keeping force’ to assist the Government of the Democratic Republic of the Congo.  This fine act of ‘international solidarity’ was rewarded by the President of Zimbabwe and his Minister of Defence being given a 50% shareholding in four of the most productive diamond mines in the DRC, which were grabbed from their rightful owners for the purpose!  The effect was that the peacekeepers were given the freedom to rape and pillage in the desperately poor DRC, the then unstable Government of Laurent Kabilla was propped up by undemocratic means, and two vicious politicians became even wealthier than they had been able to manage in their own collapsing country, while the poor people of Zimbabwe became even poorer.

There are also many Government handouts to the ‘poorest of the poor’, and many Government policies that, while passing themselves off as well-intentioned, are aimed not at uplifting the poor of the nation, are, in fact, no more than payments transferring wealth from the ‘tax-paying elite’ of the nation to those whose votes are influenced by the minimal handouts to ensure that the ruling Party behind the Government is re-elected.  These payments have no sense in economic terms, and, in fact, are positively destructive of the economy.

The effect of a redistribution of wealth from tax-payers to the poor represents a conversion of potential capital to consumption.  The money that could have been used to invest in new manufacturing plant and other capital investments is handed over to people who spend it on current living.  This has a long-term negative effect on the economy.  This negative effect is compounded when one realises that the tax, taken from the productive members of society, produces the effect that the tax-payers are forced to earn more in order to maintain the standard of their existence, whether as a manufacturer (in the form of increased costs) or as a salary earner (in the form of an increased wage demand).  This increases the costs for all, leading to a spiral of increased costs, increased wages, increased subsidies to the poor, and so on.  The only way to get out of this spiral is to break it, and the most obvious point to break it is to freeze or cut the transfers to the poor, with the intention of creating more earning opportunities for them in the medium term.  While apparently hard-hearted, this has to be done.  In economics, there ain’t no such thing as a free lunch!

Let us look at an example.  A project was launched in the Eastern Cape Province of South Africa in the mid-1990s to create at least 350 000 jobs.  During a discussion with the then Premier of the Eastern Cape, the project leader was astounded to hear from the Premier that he was unwilling to divert some of the funds for the building of houses to the establishment of small factories to enable the people to become economically active.  “How would I explain to my 84 year old mother that she would have to wait another year for her house?” he asked in explanation.  The answer to the question now, 17 years later, is that she and the 6 000 000 unemployed in that Province are still waiting, still have no means of earning even a basic minimum income, and still have no hope in life.  There can be little doubt that the creation of many new jobs in that Province would have started a positive spiral of income, job opportunities and increasing wealth for the people that would have had a much more beneficial effect than the construction of a few thousand brick and corrugated steel huts, barely usable as a cowshed, has achieved.

To explain the Multiplier Effect of job creation, we need to understand how an economy works in real life.  If an entrepreneurially-minded person starts doing some economically-productive work, say making shoes from hides produced by a local farmer, a number of economic activities start to move.  The farmer has a buyer for the hides, which he has tanned for him by a local worker.  The farmer now has some money to spend, and so does the worker tanning the leather.  The man making the shoes sells them for a price, and he now has the funds to buy more leather and thread, to send his children to school and to buy food.  Each of these activities generates a flow of money, and so produces economic activity beyond the original entrepreneur.  Each of the beneficiaries has funds to spend or invest, and each of them plays a role in the creation of further flows of money.  This is how the European economies, and others, got off the ground in the first place.  Each activity that has an economic outcome creates further activities, and each of those does the same.  Research in Western Australia, Germany, the Caribbean Islands and other widely disparate places shows the same result. 

Each new job has the effect of creating between eight and twelve additional spin-off jobs!

In several cases, where the jobs have an immediate local effect and the types of activity promoted have been chosen to provide the greatest level of development net effect, it has not been unusual for the Multiplier Effect job creation factor to be as high as eighteen!

Contrast this with the effect of an unemployment subsidy.  The small amount transferred to the poor, usually not sufficient to maintain any life, never mind a reasonable standard of life, does no more than enable the recipient to buy food for the week.  The Multiplier Effect is minimal, as the suppliers of food are already established at a level where the additional business is only marginally beneficial.  The transfer of funds away from the taxpayer, if he or she is an individual, is fairly substantial, often leading to a forsaking of the opportunity to save or invest the funds, or, if it is a company, depriving it of a portion of its capability to invest in bigger and better productive capability.  The net benefit to the economy is, at best, barely positive.  At worst, the transfer of the funds has a substantially negative Multiplier Effect on job creation in the narrow view and on the economy in the wider view.

In summary, it is safe to say, from an economic point of view, the handing of social welfare payments to indigent recipients is, at best, neutral and probably damaging to their economic prospects.  From a sociological point of view, long-term social welfare handouts are demeaning and demotivating, and contribute in a most negative way to the building of an equitable economy.  In this light, the humanitarian aspects of long-term handouts, particularly if not accompanied by an economic development program with components of education, training, funding for business activity and a meaningful job creation activity, are at least questionable.