Free trade and the ethicist

Randy Cohen, the New York Times Magazine's ethicist confronts the following question:

For years, I’ve donated old clothes to charity. Then I learned that many of these garments are shipped to poor countries where they are sold, devastating local industries and thus creating more poverty. The recipients do get inexpensive clothing, and my local charity makes money, but I fear I’m doing more harm than good. Advice? — Georgia Vogelsang, Baltimore

Here is his answer:

Even benevolent acts can have unintended consequences. Bama Athreya, executive director of the International Labor Rights Fund, says that the used-clothing trade “has contributed to the decimation of local garment industries, and therefore contributed to unemployment in Africa.” He suggests you ask your local charity what it does with used clothing and that you give only to charities that bypass middlemen and distribute donations directly to people in need, particularly to people in your community. This seems wise, maximizing the good and minimizing the ill done by your old “I’m With Stupid” T-shirt.

And yet. . . . Eric Stubin, executive vice president of Trans-Americas FSC, an exporter of used clothing, asserts that these are the only clothes the world’s poorest people can afford, and that companies like his “provide thousands of jobs while providing the essential clothing that has actually become part of the culture of Africa.” Stubin argues that as a country’s economy develops and its people are able to earn more, the used-clothing trade recedes. Until then, he says, the trade’s net effect is benign.

Alas, much that has “become part of the culture of Africa” is lamentable. But when experts clash over the facts, what is a civilian to do? She is to learn more. Doing good requires not only good intentions but due diligence — exhausting but unavoidable.

To any economist who favors free trade, the answer is clear cut. The importation of used clothes creates net gains in the poor country (the consumers gain more than the garment producers lose out) and that's that. The ethicist meanwhile finds this a difficult question to resolve because he does not know how exactly to trade off the losses against the gains. 

Would he have had an easier time resolving the question if he knew (or was told by the economist) that the absolute value of the gains is larger than the absolute value of the losses?  Would it matter if the ratio of net gains to redistribution is small or large? If the gainers were poor and the losers relatively richer?

How would you resolve the ethicists' dilemma?    

Comments

[Daniel from Bolivia]

Dani: Here you have the situation in Bolivia. The new government refused to extend the auhtorization to import old clothes, because of its negative impact in the local industry and its summugling into the Bolivian territory which is very easy because we have 5 boundaries with neighbor countries (Bolivia is a landlocked country).

We had the ethical discussion too, trying to balance the negative impact in local industry, poor people buying cheaper clothes and importers of old clothes losing their source of income.

According to the government a breakeven solution is to ban old clothes, finance a relocation program for importers and retailers of old clothes and promote clothing industry.

Here you have two translated news, from local newspaper explaining the issue:

http://translate.google.com/translate?u=http%3A%2F%2Fwww.la-razon.com%2FVersiones%2F20070420_005882%2Fnota_248_416929.htm&langpair=es%7Cen&hl=es&ie=UTF8

http://translate.google.com/translate?u=http%3A%2F%2Fwww.la-razon.com%2FVersiones%2F20070515_009007%2Fnota_249_427134.htm&langpair=es%7Cen&hl=en&ie=UTF8

[Kimmitt]

Relative sizes of the sectors combined with knowledge of how far apart the two sets of prices are would be helpful. But that's insanely complicated.

[Jtapp]

I'd have explained it the same as you did above. Probably in simple Ricardian terms such as "Your country doesn't have a comparative advantage in making clothes, but rather in making _____, so if you just specialize in that we'll all be better off."

[Jeremy McKibben]

It seems like a reasonable trade-off to me, especially if the money will be used to help people who are possibly more impoverished than those who lost their jobs in the garment industry. What's your take on this, Dani?

[notsneaky]

Well, what if instead of calling free used clothes "free clothes" you called it "foreign aid"? Would that change anything? Is the same ethical dilemma present?

(other than that generally speaking free money is better than in-kind aid)

[Dani Rodrik]

Indeed, the case of food aid (or for that matter of agricultural export subsidies by rich nations) is no different.

[terence]

Oh well, if nothing else, this adds another layer of meaning to the term dumping...

>"the absolute value of the gains is larger than the absolute value of the losses?"
Knowing this would help, but the measure provided is still a static one. What I'd like to know is the long term impact on the economic development of the country in question (i.e. is there a viable garment industry that could one day arise producing much larger welfare gains, than those that the free clothes currently provide.)

>"If the gainers were poor and the losers relatively richer?"
Yes - I think it would be fairly safe to assume diminishing marginal utility in these circumstances.

I volunteered some years ago in an Oxfam store in London. The high quality clothes that were donated (you wouldn't believe what the people of Wimbledon threw out...) were sold through Oxfam stores across London. The poorer quality clothes were sold to companies that produced rags. Nothing, IIRC, was sent to developing countries other than the money made. A much better approach in my opinion.

On the subject of tied food aid. The US's position on this is becoming increasingly egregious as many other countries now refrain from the practice. The Guardian had a good article on this recently.
http://lifeandhealth.guardian.co.uk/food/story/0,,2086467,00.html

[guest]

Food aid is only a problem if it makes market prices too volatile and unpredictable. If African farmers had access to modern futures markets, this would be a non-issue.

[happyjuggler0]

"the case of food aid (or for that matter of agricultural export subsidies by rich nations) is no different."

Are you sure about that? The US and Europe subsidize food producers in various ways. If the US then buys that already subsidized produce, ships it and sells for a price of $0 (we, i.e. the US, does this all the time), what does that do to the ability of local (i.e. recipient nations of US food aid) for-profit farmers to make a living? It destroys it of course, thus creating the need for such wasteful aid in the first place. Same thing with totally unskilled sustenance farmers who live in isolated locations without export capabilty do to lousy or nonexistent infrastructure. It drives them off the farm, taking more otherwise valuable farmland out of use.

What becomes of them when all their capital is destroyed by direct food aid, noting that in many of these countries this represents the vast bulk of their population?

This is not analagous to US textile workers who are put out of work by clothing imports, and who then have to go to work elsewhere in the US to sustain themselves. In the US there is work to be had, although during the initial displacement the work may not be as lucrative as what they had before. But there is work.

Quite frankly a much more intelligent source of "aid" would be to promote and buy sweatshop goods from these countries, giving the locals cash wages with which to purchase food at market prices and feed themselves.

Clothing aid is different, assuming it isn't subsidizes during production, and even then it is different. Clothing "sales" at $0 may destroy some local producers and their jobs, but a lot of the same infrastructure can be used for something else. Examples might be higher end clothes, drapes, rugs, etc., as well as nontextile wares.

Or am I wrong here about in-kind food aid? Where did I go wrong (if I went wrong)?

[happyjuggler0]

I guess the key difference between killing the local clothing industry and the local food industry (i.e. farming) is that the existence of teh clothing industry presupposes the existence of all kinds of infrastructure, from roads, transport vehicles, electricity, buildings, ports (if they are good enough to export anyway), etc., not to mention institutional variables like established division of labor, employee work ethic, some form of contract law (albeit possibly informal), tolerable (to some extent anyway) administration of justice, etc. that might well not exist in a poor agricultural country, or not to nearly the same extent.

Norman Borlaug, the father of the green revolution, understood that one thing that hurt the cause of increasing farming productivity in many, if not most, poor countries is lack of infrastructure.

[Jeremy McKibben]

happyjuggler,
I don't quite understand why food aid will destroy more jobs than clothing aid when you take a country's infrastructure into account. If the US is providing free food to developing countries, then the money that the recipients of the food are saving (if they would have bought food from a local farmer instead) must be used to buy something else, regardless of the presence of infrastructure. This money should cause other industries to expand as it is spent (even if those industries require little infrastructure).

[Justin Rietz]

Jeremy stole my comment ;-)

If the people receiving the aid (food, clothes, etc) are saving money, they are most likely going to spend it on something else. This will result in the growth of other local businesses and industries.

For an extreme (and satirical) look at the "harm" of free imports, I suggest reading Bastiat's "The Candlemaker's Petition" (http://bastiat.org/en/petition.html).

That being said, charities need to be careful how they go about solving economic problems while bypassing the market system. For a good read, I recommend William Easterly's "The White Man's Burden."

[Joe]

Do we need a debate on-- to use the old cliché--"whether teaching someone how to fish is better than gifting her with a fish everyday?".

A problem, in my view, with neo-classical, free-trade spirited economists is that their theoretical knowledge has blinded them from appreciating what is commonsense to the rest of us. Infant industry type protection becomes important (and commonsensical) if one breaks away from the narrow realm of neo-classical comparative statics to the broader, realistic realm of economic dynamics (I am not sure where Prof. Rodrik stands here; in any case, Alexander Hamilton to whom he referred in an earlier post cannnot have been farther in thinking from today's free traders).

The relevant question, then, should have been "are short term gains, if any, from free trade are counterbalanced by long term losses from it?"

[happyjuggler0]

Long post warning, noting I am trying to be more precise this time.

Thank you Jeremy McKibben and Justin Rietz for your textbook replies. Be that as it may, I fully realized the savings from the consumers, and if they could get free imports of food forever they'd be better off and could spend their savings on something else.

Also, in the short run they'd be better off for the same reason, they'd be able to purchase useful things with the money they had earmarked for food. I am concerned about what happens the next year, and in the following years, after foo aid is implemented. I realize I didn't really convey what I was worried about. I was, and am, concerned about two different groups of people, call them groups A through C, and group D.

Assume a very poor country, Ethiopia perhaps. I am not fully aware of how Ethiopia feeds itself, so I'll make another few plausible assumptions. Imagine Ethiopia is usually self-sustaining in agriculture, as are their neighboring countries. This need not reflect reality for my concept.

Imagine also that 50% of its population (group A) is engaged in sustenance farming, producing only enough to feed itself, with little or nothing else to trade with others, and with little or no other source of income.

The other 50% of the population feeds itself from larger farms, which employ a lot of landless citizens (about 40% of the population, group B), leaving about 10% of citizens (group C) involved in scratching out a low income existence in various local services or small scall trade.

Now imagine a severe drought affecting Ethiopia, but not its neighbors, that radically cuts harvest, to 1/4 of its previous "normal" level. Imagine also that there is no substantial stock of food reserves in the country due to lack of infrastructure such as grain silos or freezers.

Famine is imminent, but it was foreseeable. Food aid transported from the US is brought in instead of bought in countries neighboring Ethiopia, for political reasons (Iowa is quite powerful). The food aid forestalls the famine. the 10% who previously bought their food are big winners since they get their food for free, allowing them to purchase other goods and services on top of food and their "normal" other purchases.

Now what is wrong with that? After all, Dani Rodrik, Jeremy McKibben, and Justin Rietz, all say the country is wealthier for it all. I spot some serious problems.

First off there is the stupid US policy which doesn't maximize the bang for the aid buck by buying at the lowest cost location. Instead it further subsidizes already subsidized US farmers and buys from them. We'll ignore that US-centric issue though.

Second, there is the issue of the unmentioned group D, Ethiopia's neighbors. They made the rational expectation that the US would follow past precedent and flood Ethiopia with free food. They knew they couldn't compete with $0 food, so they didn't bother trying to borrow to buy farm machinery with which to grow food that they could've otherwise sold at high prices, and then repay a huge chunk of their loans with those proceeds. This farm machinery would've increased their productivity in future years as well, improving their incomes and their countries per capita GDP. They also didn't bother to plant in marginal land, so as to export their surplus to Ethiopia.

Back to Ethiopia. Most of the 40% in group B get laid off early in the season as their employers hvae no need for them when their end product is unsellable when the market price is $0.

With a lack of infrastructure with which to leverage their cheap labor, few are able to find other work. Employees are thus big losers from an income point of view, but it is partially mitigated from free food.

Employers in group B lose out as well, and are unable to further their climb up the productivity ladder with now nonexistent profits, noting the reason they are in group B instead of group A.

Group A neither gains nor loses very much as they weren't much involved in trade, and still aren't. Still, they can't find work either doing something else.

Group C also loses since the 40% in group B no longer have incomes with which to purchase their wares and services. They may not starve since they get their food for free, but this doesn't mean they aren't losers.

Now the question is how does the situation in Ethiopia compare to one in which the US sources its food aid from Ethiopia and its neighbors. Assume the US advertises well in advance that it is ending its exports, but will still feed everyone for "free".

In addition to Group D gaining as outlined above, "everyone" in Ethiopia gains. They all get free food, plus since the US is sourcing its food purchases locally, they also get to sell their output. Some in group B still get laid off, and are still mostly not going to find work. But the employers in group B win, and group C wins as well because they not only get free food and get to spend their savings (which I didn't overlook despite the worries of Jeremy McKibben and Justin Rietz), but they also get new customers to trade their output with since they too suddenly have free lunches (and breakfasts and dinners) with accompanying freed up savings.

With either form of aid, either sourced from Iowa (and thereabouts), or from the general disaster area, there is an averted famine, which is a very good thing. But with the locally sourced food (with imports from outside the region only upon actual shortage) there are also other gains to the very poor.

Or to frame it another way, if one thinks of my preference as the norm, with in-kind aid being the alternative, then the alternative hurts the country (and its neighbors) thanks to dumping due to locally grown food gone to waste, as well as the unseen opportunity costs of the ungrown food in group B (which cut its losses) and group D.

The main key here is to recognize that the idle farmers have little other source of work due to a lack of industrial infrastructure, and aren't likely to get such work any time soon. If clothing was "dumped", there would still be a one time dislocation problem, but it in theory ought to be overcome much more rapidly and with less pain involved. Nor is it analogous to farmers in the US midwest being faced witha similar situation. The more developed the country, the less the pain from dislocation effects as people find at least some work relatively quickly (e.g. where was the unemployment bump after Hurricane Katrina?).

[Justin Rietz]

Joe -

I would actually ask your question in the opposite manner:

"Are the short term losses, if any, counterbalanced by the long term gains?"

[happyjuggler0]

Sigh. I also managed to miss not posting about the longer term issues of opportunity costs from not:

developing infrastructure to handle storing food surpluses in bumper crop years;

developing infrastructure such as roads and ports (or improved ports anyway) and services alongside that infrastructure. These roads increase the ability to specialize and profitably trade radically farther than one's village;

smaller incomes under the "aid from Iowa norm" than under my norm, with those foregone incomes could've improved productivity as much with which to purchase machinery or fences or irrigation infrastructure etc.;

The inability to "price gouge", and the lack of need to protect oneself from such alleged "price gouging", are problems also associated with price floors, such as $0. To frame it differently, the inability to profitably anticipate famines means a huge opportunity cost on the supply incentive side, as well as a huge moral hazard on the demand incentive side.

[Ivo Staub]

@ terence:
thank you for the link.

[jonfernquest]

It think what is more scary is the psychology such statements in major media like the NY Times can have on altruistic psychologies, despite the fact that the author provides a little admonition to think harder at the end.

What would one do to one's clothes to avoid them ending up in some commercial clothes seller's bundle to foreign countries, burn them?

Why would one necessarily accept the statement of the guy from Africa that this sort of business is always bad everywhere? It is a business, the clothes are not free. In places I've been too they compete with, do not completely displace, and have a formative influence on local markets.

For example, jackets for cold Chiang Rai Thailand are not produced in tropical Thailand and are either imported from the west, new or used, or from China. I used to buy used designer shirts in Yangon, Myanmar when I lived there (one funky French abstract painting shirt that I still treasure). Right next to these stalls were people selling overflow from the Korean textile mills. High quality stuff destined for foreign markets. Factories that are no longer there. How can one make generalisations that apply across all places and times?

In Bolivia perhaps they make a collective decision in response to local conditions, but to make a generalisation that applies every?, a universal rule, forget it.

[larae]

What about the entrepreneurs who sell the used clothes? They gain. It's not just consumers vs. the garment industry. Other producers (in this case producers of services) gain as well. Although the evidence is anecdotal, Pietra Rivoli's book "The Travels of a T-Shirt in the Global Economy" details this type of trade in used clothes very well.

[dissent]

Here's a point from left field: if you want to help developing countries, assist the women, and push for raising the status of women. It's been shown that aid funneled to women is much more likely to be used to feed educate and otherwise care for children, and contributes more to family wellbeing, than aid funneled to projects controlled by men. Also low status for women is part of what distinguishes cultures where violence undermines the rule of law.

[Maureen]

Your question was, "how would you resolve the ethicist's dilemma"?

Speaking as a development worker with a background in economics, the used clothes question is much more complicated than it looks. Donating clothes to charities that sell the clothes in Africa to, supposedly, finance their community work seems a bit bizarre to me. You give something up for free so that an African (or Bolivian or whatever) pays for it and thus finances what you were unwilling to finance with cash. So, you are essentially choosing that someone else pay for a service that you yourself don't even value.

Donating clothing to the Salvation Army or another group that sells the used clothes in the US is a different, but not less complicated ethical question. At least the people paying for what the SA does overseas are American, and in many cases, not very poor (vis. College students shopping at SA, etc.)

Donating clothing directly to a development organization, as was done post-Tsunami to a frightening degree, is a complete waste from a development perspective, since we have been trying for more than 20 years to get out of the charity business (except with food aid), and distributing clothing is a logistical and ethical nightmare of its own.

Taking into consideration the effects on the local garment industry, I'd guess that if you ran the numbers, you'd notice that while large, the used-clothing market has a much smaller effect on the local garment industries than subsidies in Western countries. Here, we'd also have to ask the question, "why do these folks need cheaper clothes than they can currently get on the local market" and the (unsavory to the naive do-gooder) question, "why do people buy this stuff?"

So, I would solve the ethical question thus: give cash to organizations working with the poor overseas and your used clothes to Goodwill, which will use them to generate funds for local projects.

[anon]

I actually just finished reading a book called "The Travels of a T-Shirt in the Global Economy" by Pietra Rivoli that addresses this issue along with many others that accompany trade (labor standards, protectionism, ethics, etc.). It's a really good read - not dense at all- and I would recommend it to anyone who is interested in trade issues.

[jonah]

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