Poverty, Inc. is the title of a recent documentary created by the Acton Institute. The documentary aims to raise awareness about problems of foreign aid that undermine lasting economic development in African countries. The issue warrants attention. There are things aid can do, but there are many problems with foreign aid – propping up brutal dictators, doing more harm than good, a focus on interventions rather than rights and institutions, and lack of transparency. The film does a good job of drawing attention to the importance of entrepreneurship and of dispelling the view of African people as dependent.

But I am troubled by much of the economic argument in the documentary. It portrays the problem of aid as a problem of dumping cheap goods on developing countries and crowding out local production. For example, the film focuses on TOMS Shoes, a company that gives a free pair of shoes to people in developing countries for each pair bought in the West. The film argues that TOMS does harm by crowding out the establishment of local shoe producers.

TOMS Resized.png

For economists, producing goods at low cost and “dumping” them on foreign markets is not a problem. Consumers in the recipient country benefit from lower-cost (and sometimes higher quality) goods. Competition pressures producers in recipient countries to either find more efficient ways of producing, to differentiate their products, or to go out of business and move into a new line of work. Again, this process benefits consumers of these and other products because it helps to move resources to higher valued uses.

The Acton Institute has written about the fallacy of harmful dumping practices. In discussing the lumber trade between the US and Canada, a 2002 Acton commentary writes:

A fundamental point of free trade is at stake here-if Canadian lumber companies are able to produce a high-quality product at a lower cost, then they should not be penalized for doing so simply to protect American interests. While the short-term effects of lower prices may cause job losses and a decrease in the stock price of American lumber companies, in the long run, lower prices will encourage competition and strengthen both the U.S. and Canadian markets.

This could be chapter and verse from the Gospel of Free Trade. So, if the principle holds for Canada and America, why not America and say, Ghana?

One possibility is that the example of America and Canada presupposes good institutions that protect property rights and allow markets to function well. As such, the pressures of competition that would operate on American businesses if Canada were dumping cheap goods don’t work through the same institutional channels in Ghana – one can’t open and close businesses quickly, the courts are not impartial and don’t uphold contracts well.

Another argument might focus on the temporary and uncertain nature of the influx of TOMS shoes. In this case, the alleged harm arises because TOMS shoe shipments send an incorrect signal to local producers not to produce shoes because the market will continually be fully supplied by donations. Lurking behind this interpretation, however, is an infant industry argument for protectionism – if TOMS goes out of business and local producers had not been protected enough to develop an industry, then the people will go shoeless. But as Doug Irwin and others argue, these arguments are unpersuasive.

Perhaps, the Gospel of Free Trade is simply correct. Dumping espadrilles on Ghanaians is beneficial, full stop. The broken window fallacy is equally applicable to developing countries.