Foreign aid that hurts rather than helps

Citizens unload relief food from a military helicopter on a soccer field in the Chilean village of Arauco.


Kai Ryssdal: Chilean President Michelle Bachelet said today it could take three or four years for her country to recover from the earthquake and tsunami of this past weekend. Bachelet's been getting a lot of criticism for not agreeing quickly enough to offers of international aid. She says what really happened is that she had to figure out what kind of help Chile needed first. Immediate aid, though, to those in need would seem to be a no-brainer. But even the simplest things can be more complicated than they seem.

Sabri Ben-Achour learned about the economics of disaster assistance in Haiti.

Sabri Ben-Achour: At Terminale Varreux -- one of Haiti's major ports -- a barge full of aid arrives, just weeks after that country's devastating earthquake.

Nobody seemed to know exactly what was on the boat, or who actually sent it. One rumor was that it was from Costa Rica. Wherever it was from, throngs of men and trucks lined up for a piece.

HAITI MAN: I've been here since 4 a.m., and I haven't gotten anything.

Whoever sent the boat didn't really arrange for distribution.

The boat, it turned out, had mostly packs of water bottles, which is nice and everything, but water isn't really what Haiti needed right after the quake. There was plenty of water. Sanitation equipment or rice would have definitely been more useful. This is one example of aid that just might have been hurting more than it was helping.

TRACY REINES: It really can actually do harm to an operation.

Tracy Reines is with the Red Cross.

REINES: Just to manage that and to use resources to get that in and to get that out when there's a whole other way to provide water in the country that's safer, has less impact, has less logistical impact is really critical.

Reines remembers times when aid agencies including the Red Cross have had to foot the bill to store, sort, and figure out what to do with unwanted, sometimes even broken supplies that have been sent to them. It's prevented more urgently needed things from coming in.

REINES: The trick is matching up peoples' natural good will and intention to provide support with what is really needed, what's able to be used, and how do we prioritize it.

That's why aid agencies really like cash -- it's flexible. But it turns out there are a lot of ways that aid supplies can have unintended effects, and in more complicated ways than just clogging up ports. Let's say, for example, you want to give food to a country, so you give tons of your own wheat, for free. Well, then you're undercutting local food producers. They can't compete with free food.

Manuel Orozco heads the Remittances and Development Program at the Inter American Dialogue. He says this has actually happened before.

MANUEL OROZCO: During the 1980's, U.S. food assistance to Guatemala was distorting national production. In some cases it was discouraging people from continuing to produce corn, for example.

Well then, you say, you'll just buy your donation food from the country you're trying to help. That'll spur the damaged economy. Well, that could be a disaster because you might spur inflation. Too much demand, too little supply. In the case of Haiti, inflation was already at 8 percent before the earthquake.

JEAN DONNES: Prices went up the following day.

Jean Donnes lives in the Carrefour neighborhood of Port-au-Prince. He says imported products were scarce right after the quake.

DONNES: The day before it happened, you could buy a Coke for $3. Now it's $4, somewhere you get it for $5.

So in this situation, bringing in food actually helped keep prices down. Free imported rice from the World Food Program actually stabilized rice prices and, of course, fed two-and-a-half million desperate people.

But as time goes on, and as aid groups pile on needed assistance, the risk grows for distorting everything from currency to real-estate prices.

Again, Tracy Reines.

REINES: The Red Cross has a team right now looking at market assessments to see what the market can absorb, primarily in the food sector and in the shelter sector.

But, Reines adds, the case of Haiti is pretty special. It was so poor to begin with that while economic distortions are something to keep an eye on, they're not immediately likely. Haiti can absorb a lot of aid right now.

From Port-au-Prince, I'm Sabri Ben-Achour for Marketplace.

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Actually, strictly speaking, inflation refers only to an increase in the average price of goods/services in an economy over a period of time. This could result from the devaluation of a currency (as happens when a central bank prints too much money) but also from the situation described in the story as too much demand versus supply.

While the increase in the average price is in and of itself inflation, the resulting increase envisaged in the story is not natural as labeling it "simple supply and demand" would suggest because aid groups would be introducing foreign capital and demand into the local economy that the economy cannot handle. This, along with the ability (and willingness due to exigency) of the outside groups to pay higher prices creates a localized inflated price.

It is also worth noting that the increase in outside aid money can be—like a central bank printing too much money—a sudden increase in the monetary supply in excess of what the economy can put to productive use driving the value of currency in the affected area down, further feeding inflation.

Consumers purchasing products (regardless of the level of inflation) does not cause inflation. Central banks notwithstanding, non-government entities cannot [legally] increase the monetary supply, and certainly not simply by purchasing goods and services. Greater demand without an increase in supply is a market force that causes prices to rise.

Unfortunately, there is no simple term for this market force, and in general, all price increases are lumped under the term "inflation". I thought Marketplace did a poor job in this story by not making the distinction.

I disagree with the comment by Mr. Tyney. Inflation is caused by printing money, true, but it is also caused by buyers willing and able to buy at inflated prices, among other things. An inflated money supply is an inflated money supply, no matter whether the extra money came from government or from international aid.

I was disappointed by this quote from your story, "Well then, you say, you'll just buy your donation food from the country you're trying to help. That'll spur the damaged economy. Well, that could be a disaster because you might spur inflation. ...inflation was already at 8 percent before the earthquake."

Inflation is caused by government printing presses. Your reporter isn't clear when referring to the 8% inflation rate whether or not price increases or the presses are to blame, but price increases caused by increased demand are simply market forces at work.

Sure, it hurts the people who want to buy products, but it's certainly helping those on the receiving end of the relief and the growers who benefit from the increased prices for their goods.

It's complicated, to be sure, but the reporting should not confuse inflation with market forces, in this case, simple supply and demand.

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