Emily Skarbek  

Is TOMS Different?

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Poverty, Inc. is the title of a recent documentary created by the Acton Institute. The documentary aims to raise awareness about problems of foreign aid that undermine lasting economic development in African countries. The issue warrants attention. There are things aid can do, but there are many problems with foreign aid - propping up brutal dictators, doing more harm than good, a focus on interventions rather than rights and institutions, and lack of transparency. The film does a good job of drawing attention to the importance of entrepreneurship and of dispelling the view of African people as dependent.

But I am troubled by much of the economic argument in the documentary. It portrays the problem of aid as a problem of dumping cheap goods on developing countries and crowding out local production. For example, the film focuses on TOMS Shoes, a company that gives a free pair of shoes to people in developing countries for each pair bought in the West. The film argues that TOMS does harm by crowding out the establishment of local shoe producers.

TOMS Resized.png

For economists, producing goods at low cost and "dumping" them on foreign markets is not a problem. Consumers in the recipient country benefit from lower-cost (and sometimes higher quality) goods. Competition pressures producers in recipient countries to either find more efficient ways of producing, to differentiate their products, or to go out of business and move into a new line of work. Again, this process benefits consumers of these and other products because it helps to move resources to higher valued uses.

The Acton Institute has written about the fallacy of harmful dumping practices. In discussing the lumber trade between the US and Canada, a 2002 Acton commentary writes:

A fundamental point of free trade is at stake here-if Canadian lumber companies are able to produce a high-quality product at a lower cost, then they should not be penalized for doing so simply to protect American interests. While the short-term effects of lower prices may cause job losses and a decrease in the stock price of American lumber companies, in the long run, lower prices will encourage competition and strengthen both the U.S. and Canadian markets.

This could be chapter and verse from the Gospel of Free Trade. So, if the principle holds for Canada and America, why not America and say, Ghana?

One possibility is that the example of America and Canada presupposes good institutions that protect property rights and allow markets to function well. As such, the pressures of competition that would operate on American businesses if Canada were dumping cheap goods don't work through the same institutional channels in Ghana - one can't open and close businesses quickly, the courts are not impartial and don't uphold contracts well.

Another argument might focus on the temporary and uncertain nature of the influx of TOMS shoes. In this case, the alleged harm arises because TOMS shoe shipments send an incorrect signal to local producers not to produce shoes because the market will continually be fully supplied by donations. Lurking behind this interpretation, however, is an infant industry argument for protectionism - if TOMS goes out of business and local producers had not been protected enough to develop an industry, then the people will go shoeless. But as Doug Irwin and others argue, these arguments are unpersuasive.

Perhaps, the Gospel of Free Trade is simply correct. Dumping espadrilles on Ghanaians is beneficial, full stop. The broken window fallacy is equally applicable to developing countries.


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COMMENTS (19 to date)
Nick writes:

I'm not sure the analogy to the tinplate industry is accurate. The difference is that tin imports were presumably driven by market prices, while the shoes are charitably given. The argument against tariffs is that they promote domestic industries which are at a comparative disadvantage, siphoning off resources which should have gone to an industry which is at a comparative advantage. Shoe production might be an industry in which Ghana has a comparative advantage and so should be producing its own shoes.

CHN writes:

I love the Acton Institute but they are'nt infallible*. I don't recall having seen them mentioned here before so thank you for posting this. I'm a big fan of what they do.

*Get it? Infallible? Because Robert Sirico... Never mind.

Tom West writes:

I think arguments that dumping isn't harmful come from looking at the economics while divorced from the more important human context.

Let's take a case where *everything* is provided for you by acts of charity. You have no competitive advantage because you cannot compete with 'free'.

Sure, you don't have to work in order to maintain some minimal lifestyle, but more importantly, you have no avenue to improve your welfare.

I think that most of recognize this not as consumer utopia, but as a factory for creating human misery, a la refugee camps, etc.

Especially in underdeveloped countries with already sky-high unemployment rates, things that increase unemployment, even if they might theoretically increase overall wealth, are usually disastrous to the overall society.

In countries where there are no jobs to move to, a job with negative marginal product is still valuable, because an unemployed person has a hugely negative marginal product.

After all, unemployed people (especially young men) do not all sit around doing nothing. A significant number will predate on those around them either through petty crime, or by joining armed groups.

The economic benefit of free stuff can be quickly eaten by having some of the displaced workers decide that an AK-47 is also a means of career advancement.

Khodge writes:

A co-worker mentioned that when he was in the Plillipines (which has an educated workforce) they would not buy a lawn mower because cutting lawns (with scissors) was the only employment available. This is anecdotal but it does suggest that, while "dumping" in a poverty stricken country should be an economic plus, how to get those economies functioning is more important. Absent a functioning economy, the criticism of TOMS is perhaps well-founded, as is often the case with American "we know what's best for you" assistance.

Matt writes:

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James writes:

Tom West,

If "everything" were provided for you by acts of charity, there would be no need to improve. You'd already have everything: all the Lear jets and caviar and...

If someone started providing every person in Ghana with all of the things that they currently provide for themselves, the people of Ghana would have the time that they would have spent to provide those things. Don't you think the people of Ghana could find a way to use that time to improve their circumstances even further?

RAD writes:

In my opinion, the Canadian softwood lumber issue is one of comparative advantage, not dumping nor government subsidies. The Canadian comparative advantage is vast amounts of boreal forest that is 90% owned by the provinces (5% federally). Ironically, one can argue that the U.S. softwood industry only exists due to tariffs and a government subsidized legal campaign. Are there other examples of innocuous dumping?

I'd like to believe that "infant industry protectionism" is unpersuasive but the anecdotal evidence seems strong to me, for example, the South Korean auto and electronics industries. One would also have to explain why the large Internet giants (Alibaba, Baidu, Tencent) grew in China but not India if not for Chinese Internet restrictions that benefited local web properties.

On the other hand, an infant industry implies a clear path to global competitiveness. Punishing charitable shoe giving in the hopes that an infant industry may emerge probably hurts everyone involved.

Lauren writes:

There is an interview with the Director of the Poverty, Inc. video on EconTalk at http://www.econtalk.org/archives/2015/11/michael_matheso.html. The interview discusses some of the questions about TOMS shoes.

john hare writes:

In some cases, giving goods to people creates a sense of entitlement that is hazardous to moving forward with their lives. I have met many people that think they deserve things they haven't earned as is often discussed here involving minimum wage or food stamps. One that feels entitled to the unearned is often trapped at the bottom. I don't know if this is one of those cases.

ThaomasH writes:

Foreign aid programs in the US are in a bind. Because they are politically unpopular there is intense pressure to show that they are "getting results." The means that they cannot focus on long term factors like rights and institutions (or even infrastructure projects) that have an impact over decades.

Khodge writes:

Good link, Lauren.

The interview with Matthew Matheson Miller presents a somewhat different view of conditions than "dispelling the view of African people as dependent." It is not that they do not want to work as much as perverse incentives make it nearly impossible. To some extent they are living in a socialist utopia where all things are given and nothing more is required/permitted.

Art Carden writes:

I too was a bit frustrated with "Poverty, Inc" for this reason. If we accept all the arguments for free trade, then $0 shoes and clothes are a blessing, not a curse. I agree that the real issues are labor market flexibility, the possibility of propping up dictators, etc., and in rich countries the "they don't have stuff, so we should give them stuff" approach is sorely and sadly misdirected when the real problems are more fundamental.

Annie Vu writes:

Within the context of free markets, TOMS is playing all of their cards right. Having the comparative advantage to make shoes, TOMS should definitely be the one producing shoes and then easily offering it to its Ghana “consumers.” Consequently, if Ghana can’t compete, then they should definitely “leave” the market and allocate resources towards something else, right? One can even argue that there’s no deadweight loss in this case. This is supposedly the definition of economic efficiency!

However, TOMS heavily markets itself as a charity, appealing to consumers, such as myself, who wouldn’t initially buy their thin fabric shoes for a hefty price of ~$50. Initially, they're very persuasive in making me want to support their cause, which is where I now have problem. Tying ethics into economics is always a difficult matter, and TOMS is one of those cases. If TOMS were actually trying to help Ghana, there are better options than a temporary pair of shoes that wouldn’t last them into the future.

In addition, I agree that TOMS IS robbing Ghana’s local shoe producers of their jobs. Think about it, TOMS is making the extra pair of shoes without a dent in their cost just to influence American consumers to buy the first pair; I could argue this is producing extra waste. They then have to send and give that second pair to Ghana, when Ghana could have made their own shoes and keep their economy somewhat running. If there's competition, Ghana is not within the same economic level as the US, so they can’t even compete and enter a new industry, based on supposed laws of exit-and-entry.

Now, keep in mind that I’m arguing for Ghana in the context that TOMS is trying to offer foreign aid to HELP them. If we ignore the whole foreign aid thing, then yes, too bad for Ghana if they couldn't stay in the game. But that’s exactly it: we want to somehow let Ghana stay in the game.

Offering true foreign aid to developing countries should include investing in education or helping them develop their own strengths based on local resources rather than using their “underdeveloped country needs” to strengthen one's own economic power.

Circling back to TOMS, this becomes a question of whether their aim is to participate in foreign aid or if it is to be a business. I admit, TOMS isn’t in the wrong; it’s marketing and resulting profits are fair game. Sadly, the idealistic side of me also sees that TOMS isn’t as seemingly giving or wholly concerned for Ghana’s overall welfare as they portray to consumers, and in that case, it’s just as calculative as any other business. But again, business is “fair game."

Joe Carter writes:

Thanks for this article, Ms. Skarbek. Some of us at Acton have already come to the same conclusion as you have:

http://blog.acton.org/archives/87994-how-my-inner-protectionist-supported-policies-that-harm-africans.html

Mark writes:

You're missing two major points also made by the film (with which I had nothing to do).

First, as argued by Tom Woods, by giving things away for free (and this applies is spades to agricultural goods), people in these countries, who are low skilled and with little capital, have a difficult time developing in which they have a comparative advantage. They are then limited in developing more advanced skills in order to create a more advanced economy. Jamaica, for example, has largely hand implements with which to farm, so our dumping food in this country (at high cost to us, remember), makes it impossible for them to develop its own agricultural sector, subsequently developing more advanced skills needed to promote their own economic well-being.

Second, and the more important of the two arguments from the documentary, is that we are essentially making people dependent on us, which, for the sake of protecting U.S. interests, robs them of their ability to determine their own destiny. Consider the 30-year-old kid who (gladly) still lives at home at the expense of his or her parents. Why would anyone not want that? Because part of being human is becoming an independent individual who seeks his or her own destiny. The dumping-as-beneficial argument Emily makes here is akin to arguing that welfare has zero deleterious effects to the human psyche and I'm guessing few libertarians would argue that it doesn't.

Mark writes:

One clarification. The documentary was making the argument with regards to Tom's that their motto was centered around they'll supply a kid shoes for life. This is the harm about which the documentary was making.

I am in no way saying (nor was the documentary) that some times charity is helpful. The gist was that it is often a benefit for some rent-seeking industry in the U.S., but has adverse effects on the recipient country.

AJ writes:

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Peter Gerdes writes:

I think the argument that many people in the above discussion are gesturing at, and I at least find plausible if not persuasive, is that there are positive externalities from local labor, especially skilled, artisan or craftsman style labor.

In particular, even if putting all former shoemakers in Ghana to work doing manual labor generates more value than the cost of importing the shoes (so Ghana is a net winner) the loss of a business community, high skilled trade etc.. creates externalities. Both in terms of lack of political support for business friendly regulations but also in terms of a larger cultural gap between the locals and potential foreign investors etc..

In short, it might be that developing countries do best when they have a higher status, better skilled and richer skilled worker class even if that class puts a net drain on the economy.

While I think this is a plausible argument and a subject of concern I suspect the people who worry about dumping and the like will be reluctant to embrace a view which suggests inequality is important to development.

Peter Gerdes writes:

To be clear the argument I'm suggesting above is that a certain minimum critical mass of moderately skilled labor and/or local businesses leads to diffuse cultural changes that can help increase it's productivity in the long run.

Because skilled individuals and businesses have made substantial investments in their enterprises they will be more inclined to favor long term stability rather than political spoils systems that promise booty to the winning side. They will also support protections for private property, and have more interest in enforcing law and order. They even have a greater interest in less corruption.

All of these considerations, however, no longer apply once the country is well above such a critical mass of somewhat skilled workers. Thus, in the case of the US and Canada or the like these concerns don't apply.

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