This is an answer to a possible objection to cash-transfer charities like GiveDirectly. I remember reading about this on LessWrong a while ago, but I can’t find the discussion now. I was planning on asking about this on an Open Thread, but I got curious, did my own research, and answered my own question, so now it gets its own Discussion post.
Cash-transfer charities do something very simple: they take money given by donors, find very poor people, and give them the money, in instalments. A prominent example is GiveWell’s current top charity, GiveDirectly, which gives yearly gifts on the order of $1000 to very poor people in Kenya and Uganda. There is a lot of convincing research that cash-transfer charities are very effective at helping poor people.
There is a complicated debate about whether cash transfers are actually the very best way of helping poor people, or if there are in-kind charities that do the job a little better. This post is not about that. Instead, this post is just about a possible problem with the mechanics of cash transfers. The problem is this: say a donor in (say) the US gives money to GiveDirectly, and they send that money to a person in (say) Kenya. The recipient in Kenya now has a larger bank balance. But this doesn’t actually create any wealth in Kenya; it just increases the amount of currency chasing the same pile of goods there. The person getting the transfer gains a positional advantage over her neighbors, but the total wealth there stays exactly the same, which of course is no good. What we as donors would really like to do is make sure that we are in some sense donating real wealth; that we are giving up a claim on some of the world’s resources in such a way that other, poorer people then get to claim those resources themselves. But if just money, but no, like, actual stuff, is transferred, then giving to charity just amounts to a bookkeeping trick.
The way out of this, of course, is global trade. Dollars in the US aren’t separate from dollars in Kenya; they both participate in the same global market. If global trade is efficient enough, then Kenya as a whole gains dollars relative to the US, and the buying power of their whole economy increases relative to the US economy. So Kenya does really get a bigger pile of goods for their higher number of dollars to chase, so I can transfer real, actual wealth just by changing numbers on a computer screen.
But again, this all depends on global trade, and in particular trade between the US and Kenya, being efficient. A way to measure this is correlation between the price of the same commodity in different countries. If the correlation is low, that suggests the two economies operate pretty much separately. But if the price correlation is high, that suggests that the two countries are both participating in the same market together, and transferring money reliably transfers wealth.
I decided to test this using the price of crude oil. Here’s a graph of the price of crude oil in Kenya and in the United States, in inflation-adjusted US dollars, from January 2007 to January 2014. The red line is the US, the blue line is Kenya.
And the correlation is 0.93, according to Excel. So the economies seem tightly connected enough that transferring money does transfer real wealth, and you can be confident that your donation to GiveDirectly doesn’t have perverse unintended consequences (or at least, not this kind).
A big caveat: I am no kind of economist; this is purely the result of back-of-the-envelope, common-sense layperson’s thinking, and some numbers I found on the internet. Problems I could have include:
1. My intuition that commodity price correlation implies “connectedness” in the relevant way is just wrong.
2. In theory it’s okay, but just one commodity doesn’t give you the whole picture.
An answer to a possible objection to cash-transfer charities
This is an answer to a possible objection to cash-transfer charities like GiveDirectly. I remember reading about this on LessWrong a while ago, but I can’t find the discussion now. I was planning on asking about this on an Open Thread, but I got curious, did my own research, and answered my own question, so now it gets its own Discussion post.
Cash-transfer charities do something very simple: they take money given by donors, find very poor people, and give them the money, in instalments. A prominent example is GiveWell’s current top charity, GiveDirectly, which gives yearly gifts on the order of $1000 to very poor people in Kenya and Uganda. There is a lot of convincing research that cash-transfer charities are very effective at helping poor people.
There is a complicated debate about whether cash transfers are actually the very best way of helping poor people, or if there are in-kind charities that do the job a little better. This post is not about that. Instead, this post is just about a possible problem with the mechanics of cash transfers. The problem is this: say a donor in (say) the US gives money to GiveDirectly, and they send that money to a person in (say) Kenya. The recipient in Kenya now has a larger bank balance. But this doesn’t actually create any wealth in Kenya; it just increases the amount of currency chasing the same pile of goods there. The person getting the transfer gains a positional advantage over her neighbors, but the total wealth there stays exactly the same, which of course is no good. What we as donors would really like to do is make sure that we are in some sense donating real wealth; that we are giving up a claim on some of the world’s resources in such a way that other, poorer people then get to claim those resources themselves. But if just money, but no, like, actual stuff, is transferred, then giving to charity just amounts to a bookkeeping trick.
The way out of this, of course, is global trade. Dollars in the US aren’t separate from dollars in Kenya; they both participate in the same global market. If global trade is efficient enough, then Kenya as a whole gains dollars relative to the US, and the buying power of their whole economy increases relative to the US economy. So Kenya does really get a bigger pile of goods for their higher number of dollars to chase, so I can transfer real, actual wealth just by changing numbers on a computer screen.
But again, this all depends on global trade, and in particular trade between the US and Kenya, being efficient. A way to measure this is correlation between the price of the same commodity in different countries. If the correlation is low, that suggests the two economies operate pretty much separately. But if the price correlation is high, that suggests that the two countries are both participating in the same market together, and transferring money reliably transfers wealth.
I decided to test this using the price of crude oil. Here’s a graph of the price of crude oil in Kenya and in the United States, in inflation-adjusted US dollars, from January 2007 to January 2014. The red line is the US, the blue line is Kenya.
US data here: http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RWTC&f=M
Kenya data here: http://www.petroleum.co.ke/index.php?option=com_content&view=article&id=50&Itemid=108
And the correlation is 0.93, according to Excel. So the economies seem tightly connected enough that transferring money does transfer real wealth, and you can be confident that your donation to GiveDirectly doesn’t have perverse unintended consequences (or at least, not this kind).
A big caveat: I am no kind of economist; this is purely the result of back-of-the-envelope, common-sense layperson’s thinking, and some numbers I found on the internet. Problems I could have include:
1. My intuition that commodity price correlation implies “connectedness” in the relevant way is just wrong.
2. In theory it’s okay, but just one commodity doesn’t give you the whole picture.
3. Crude oil is not a good index to use.
4. Something else?
Any criticism or other thoughts welcomed.