Price of development aid

Prices are interesting. I asked my dad once how much my George Brett rookie card was worth; he responded, "Whatever someone pays for it." What a bad answer. I knew at that young age that my dad had surely fallen to the fallacy of circular reasoning; his answer was worthless. Later in life, I look back and have decided that I owe him because I finally figured it out (I also figured out that my father, too, was an economics major).

Most things are scarce in that there is no endless supply. The more scarce something is, the more an additional amount of that something costs. Salt is very valuable, but additional salt for the average person is not so scarce and not so expensive. Economist magazines are not so abundant on the street of Kigali, so if I'm lucky enough to get another issue (I have only one Christmas edition issue now) then I would gladly pay over $10 USD. So price, what I am willing to pay, depends on the happiness that an additional magazine issue brings me. My demand for an additional unit of something plus the relative scarcity, this is where we get price. Some like to just say, supply and demand. Economics, … whatever.

Let's talk about the price of development aid. In Rwanda, NGOs flooded the market for social services after the war in 1994. There was great need, and there is still great poverty.

Made up scenario to illustrate the price of development aid:

One typical NGO response to poverty is to give a family a cow. The family receives the cow at a price of zero (0). After giving the family one cow, their demand for an additional cow is less than before. If every family in the village gets a cow and more than one NGO is competing to give away more cows, then cows at zero cost are higher in supply, and demand for an additional cow is lower. Now if an NGO wants to give away more cows, they may find that families are willing to spend less than zero to get that cow. What's less than spending zero? You pay me. I mean, if I'm willing to miss out on work that could make me money, there are opportunity costs for me to get your free cow; and if I have to travel to the village center to meet you then I incur transaction costs to get my cow. I find that I'm no longer willing to come get it, that is, unless you pay me. In fact, if NGOs are competing to give me a cow, and it is important for NGOs to fulfill their missions and report back to their donors, then the best strategy for the NGO is to compete on their respective pricing for free cows. That is, the prices for cows become more negative, NGOs pay for meeting attendance and pay extra for transportation allowance.

What is the cow worth to the villager?

That's not the primary question to the NGOs; they like to ask, "Is poverty being reduced?" If poverty is defined by not having cows, then poverty is being reduced. If poverty is defined by not having sick cows … It costs money to keep a cow from getting sick, by the way. NGOs can train people to care for cows, but the cows are not worth very much, relatively speaking. The cow has worth, but is it worth more than my time and effort in taking care of the cow, or worth more than the money spent to buy medicine for the cow? Not when an additional cow is provided to me at negative cost. I can get paid for receiving more zero-priced animals, so my time, effort, and money are better used elsewhere. Possibly, I'll want to devote more time to leisure, and that's a completely rational response.

Prices are supposed to align people's motives so that their pursuit of self-interest is guided by the invisible hand that makes society better off. How does society react with negative prices?

NGOs ask families to take care of their free livestock and to then donate any offspring to the next family in the program. However, neither of these things makes rational sense to the participants. Why invest in the cow? I don't have much money or high expectations for my future and more negative priced cows are available. Why give away the offspring? The same people that gave me my cow can just give my neighbor a cow, I can sell mine, we're both better off. What makes sense to NGOs does not make sense to the villagers because it's not in their best interest. You get the cow at a negative price, sell the offspring for a positive price.

When you artificially change prices, you distort people's choices, their incentives, and their actions. You do not, necessarily, change poverty this way.