Incoherence: The contradiction of subsidies, aid and philanthropy

Incoherence

It’s a natural human trait to focus on celebrating the good while giving less thought to the harmful. Reconciling contradictory behaviours can be difficult, especially when good intentions are challenged by uncomfortable questions about the problems we’re trying to solve.

Two areas where this is especially true relate to foreign aid and philanthropy. The provision of both undoubtedly improve lives and lift many out of poverty. Many problems addressed by these forms of giving are highly complex and difficult to solve. Generosity is vital to developing lasting solutions.

But is it a case of giving with one hand while taking more with the other? Whether it’s through agricultural subsidies, tax regimes that favour multinationals or profiting from low wage workers, it’s useful to reflect on a simple question:

Is it better for me to give more, or take less?

Hand-out or hand up?

With the UN’s summit on the post-2015 development agenda just around the corner in late September, I decided to give myself a history lesson by reading Fair Trade For All by Joseph Stiglitz and Andrew Charlton. While the book was published in 2005, the themes it highlights remain highly relevant, almost concerningly so.

However it was the following three sentences from the foreword which have stuck with me the most:

We are in the bizarre position of giving the developing world some $100 bn in aid every year, but costing them three times as much in protectionist trade policies. This system is a lesson in incoherence. Why would we give the poorest countries a hand-out but deny them a more valuable hand up.

Put differently, subsidies, tariffs and other trade barriers imposed by developed countries prevent developing countries from participating on a level playing field. Actually, it’s more akin to being locked out of the stadium, wearing borrowed boots generously donated by the opposition and being asked to score!

Unfortunately, as illustrated in Figure 1, this inconsistency broadly remains intact 10 years on from the book’s publishing. The rich OECD countries, including the EU and US continue to provide generous subsidies to their farmers for commodities such as sugar and cotton. These subsidies keep prices low on domestic markets, meaning that producers in developing countries aren’t able to compete. Increases in aid have partly offset these protectionist measures, but subsidies continue to dominate, accounting for around 149% of total aid provided in 2014.

Figure 1: Subsidies and Aid – OECD, EU and US

Sources: OECD, CURRENTLY UNDER DEVELOPMENT. Subsidies data represented by Producer Support Estimate (PSE) and aid data represented by Official Development Assistance (ODA). Data for 2014 is estimated.

Progress on this dimension has been slow. In an attempt to address these contradictions, the UN’s Sustainable Development Goals (SDGs) highlight the contradictory nature of subsidies and call for their removal in goal 2b. While there may well be some important flaws in the SDGs, at least the topic is being raised as a problem area.

Bittersweet catastrophe

Emblematic of the challenges posed by protectionist policies is the case of sugar in the EU. Under the EU’s Common Agricultural Policy (CAP), sugar beet farmers in member states receive generous support, estimated in Fairtrade’s Sugar Crash report to be in the order of 1.8p per kilogram of sugar. Further, according to a recent paper by the Food Research Collaboration, despite reforms to the CAP, 10 out of 28 EU countries will provide support payments to sugar beet farmers amounting to the value of between €169 million and a €179 million per year from 2015 to 2020.

Concurrent with these measures, the EU is due in 2017 to end a quota scheme which was designed to partly provide market access to sugar cane farmers from Africa, Caribbean and Pacific (ACP) and the Least Developed Countries (LDC). Also quoted in the Fairtrade report is research by the UK’s Department for International Development which indicates that removing the quotas could “push 200,000 people in ACP countries into poverty by 2020”. This comes at a time when sugar cane farmers are facing very low world market prices for their produce.

The EU isn’t alone in its incoherent behaviour. US cotton subsidies also act to crowd out producers in developing countries. Worse still, consolidation in the US agricultural sector has meant that the biggest beneficiaries of these subsidies are not necessarily small farmers, but very likely to be large corporates. These include the likes of Archer Daniels Midland and Monsanto, both listed companies. And who are the largest shareholders in these companies?: the usual large fund managers including Vanguard, Fidelity, State Street and BlackRock.

So effectively, this is a case of taking from tax payers, providing subsidies to large corporates who are in turn largely owned by large fund managers. Meanwhile, small producers in developing countries are prevented from competing on equal terms. It’s difficult to justify how those structures are consistent with free trade and open markets. Not only does this contribute to inequality between countries, it also impacts on inequality within developed countries including the US.

In order to achieve goals 2 and 10 of the SDGs (“End hunger, achieve food security and improved nutrition, and promote sustainable agriculture”; “Reduce inequality within and among countries”) the subsidy versus aid dichotomy needs to be addressed. Without this, the balance of power will continue to be heavily weighted against the most vulnerable, reinforcing the structures which cause and perpetuate poverty.

Thriving or wilting?

On a more personal scale, every day actions can also be contradictory. Donating to charity is great and should be appropriately acknowledged. However, the potentially more impactful but also greater challenge is to recognise behaviours which act to offset good intentions. These can be as seemingly benign as food consumption habits, shopping at a fast fashion chain or choosing which bank to use. Of course, taken to an extreme, accounting for all of these inconsistencies would lead to analysis paralysis! Regardless, certain contradictory actions do warrant further consideration.

An example of this incoherent behaviour is the well documented tax avoidance used by some of the best known philanthropists. For example, in 2011, Robert Green wrote in a Forbes blog post that Warren Buffett was estimated to have avoided a cumulative $13bn in taxes on his personal wealth. That number has possibly grown to a much larger amount as Berkshire Hathaway stock has risen by around 80% since then. And that figure doesn’t include the tax avoidance strategies used by Berkshire Hathaway including the corporate inversion technique employed in a range of transactions including Burger King’s acquisition of Tim Hortons in 2014, among other deals.

In a similar vein, Jeff Bezos, founder of Amazon has made generous donations through his family’s foundation, but how much more significant a contribution could be made by fairer tax practices by Amazon? Or better treatment of the firm’s employees?

It may be unfair to single out these two (very wealthy) individuals, but their behaviours demonstrate the incoherence of an inadequate taxation system permitting massive wealth accumulation which is then used to fund philanthropy. One could question the democratic principles of these actions: rather than having taxation revenue being directed by the state for the benefit of society, philanthropists are able to determine where they would like the money to go.

Either way, just because these practices are legal doesn’t mean that one needs to take advantage of them. By taking more out of the tax system, the very wealthy are able to exert power and influence, which often isn’t desirable. Instead of solving the problem by providing tax incentives to address growing inequality, why not simply have the rich pay more tax as Warren Buffett has advocated in the past?

A recent speech by Anand Giridharadas entitled The Thriving World, The Wilting World, & You encapsulates the concept of taking less rather than giving more. This may be an uncomfortable concept, one that goes against the instinctual norms of optimism and innovation as part of solving problems. Nevertheless, this introspective and self-critical approach may be what is necessary to provoke the types of systemic changes required to come to the optimal solution. Rather than healing the wound, it’s about ensuring that the painful cut doesn’t occur in the first place.

As Harriet Lamb, CEO of Fairtrade International writes:

…let’s all keep donating, and donating more wisely in ways that will bring the greatest good to the most people. But let’s not stop there. Let’s all keep thinking of how to challenge the systems of power that keep marginalised people from receiving their due.

Shifting the focus to doing less harm is necessary to ensure that the good things we do don’t go to waste. Let’s try being a little more coherent.

Incoherence: The contradiction of subsidies, aid and philanthropy

2 thoughts on “Incoherence: The contradiction of subsidies, aid and philanthropy

  1. Thanks as always for the encouraging feedback!

    There’s a few different alternatives for addressing the issues relating to shareholder power. One of the longstanding issues related to intermediation, essentially there are more layers between corporates and their end investors. A few solutions to this are in this excellent paper by Jennifer Taub: http://lesliecaton.com/wordpress/wp-content/uploads/2012/01/A6-Taub.pdf

    Further, there’s the concerns about the interaction between shareholder power and wealth. Piketty’s views on this are very well publicised, calling for a global wealth tax which can then redistribute capital towards the majority.

    Meanwhile, ShareAction have called on greater disclosure of corporate tax payments within the EU in an attempt to shed more light on corporate tax avoidance strategies: http://shareaction.org/european-shareholder-rights-directive-takes-steps-curb-corporate-excesses-governance-gaps-remain. As highlighted in this blog post, corporate tax avoidance (and subsidies) effectively benefits shareholders at the cost of the rest of society who will have less of a tax base with which to invest in other communal services such as infrastructure and healthcare.

    A final thought is that investor behaviour needs adapt by looking beyond the near term direct effects of corporate strategies. For example, are shareholders in H&M ultimately better off in the long term by having the firm pay higher wages to workers in poor countries who may eventually become a growth market for the company in the longer term? By not enabling poorer countries to develop, corporates could be cutting off a potential long term source of growth, especially as consumers in their more traditional markets age.

    There’s many more dimensions to this so I’m sure there will be much more to write on this and related topics.

    Liked by 1 person

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