Q for GiveWell: What is GiveDirectly's mechanism of action?

post by Eliezer Yudkowsky (Eliezer_Yudkowsky) · 2013-07-31T20:02:30.245Z · score: 16 (23 votes) · LW · GW · Legacy · 28 comments

I first wrote up the following post, then happened to run into Holden Karnofsky in person and asked him a much-shortened form of the question verbally.  My attempt to recount Holden's verbal reply is also given further below.  I was moderately impressed by Holden's response because I had not thought of it when listing out possible replies, but I don't understand yet why Holden's response should be true.  Since GiveWell has recently posted about objections to GiveDirectly and replies, I decided to go ahead and post this now.


A question for GiveWell:

Your current #2 top-rated charity is GiveDirectly, which gives one-time gifts of $1000 over 9 months, directly to poor recipients in Kenya via M-PESA.

Givewell tries for high standards of evidence of efficacy and cost-effectiveness.  As I understand it, you don't just want the charity to be arguably cost effective, you want a very high probability that the charity is cost-effective.

The main evidence I've seen cited for direct giving is that the recipients who received the $1000 are then substantially better off 9 months later compared to people who aren't.

While I can imagine arguments that could repair the obvious objection to this reasoning, I haven't seen yet how the resulting evidence about cost-effectiveness could rise again to the epistemic standards one would expect of Givewell's #2 evidence-based charity.

The obvious objection is as follows:  Suppose the Kenyan government simply printed new shillings and handed out $1000 of such shillings to the same recipients targeted by GiveDirectly.  Although the recipients would be better off than non-recipients, this might not reflect any improvement in net utility in Kenya because no new resources were created by printing the money.

There are of course obvious replies to this obvious objection:

(1)  Because the shillings handed out by GiveDirectly are purchased on the foreign currency exchange market using U. S. dollars, and would otherwise have been spent in Kenya in other ways, we should not expect any inflation of the shilling, and should expect an increase in Kenyan consumption of foreign goods corresponding to the increased price of shillings implied by GiveDirectly adding their marginal demand to the auction and thereby raising the marginal price of all shillings sold.  The primary mechanism of action by which GiveDirectly benefits Kenya is by raising the price of shillings in the foreign exchange market and making more hard currency available to sellers of shillings.  So far as I can tell, this argument ought to generalize:  Any argument that the Kenyan government could not accomplish most of the same good by printing shillings will mean that the primary mechanism of GiveWell's effectiveness must be the U.S. dollars being exchanged for the shillings on the foreign currency market.  This in turn means that GiveDirectly could accomplish most of its good by buying the same shillings on the foreign currency market and burning them.

(Or to sharpen the total point of this article:  The sum of the good accomplished by GiveDirectly should equal:

Indeed, since these mechanisms of action seem mostly independent, we ought to be able to state a percentage of good accomplished which is allegedly attributed to each, summing to 1.  E.g. maybe 80% of the good would be achieved by printing shillings and distributing them to the same recipients, and 20% would be achieved by purchasing shillings on the foreign exchange market and burning them.  But then we have mostly the same questions as before about how to generate wealth by printing shillings.)

(2)  Inequality in Kenya is such that redistributing the supply of shillings toward the very poor increases utility in Kenya. Thus the Kenyan government could accomplish as much good as GiveDirectly by printing an equivalent number of shillings and giving them to the same recipients.  This would create inflation that is a loss to other Kenyans, some of them also very poor, but so much of the shilling supply is held by the rich that the net results are favorable.  Printing shillings can create happiness because it shifts resources from making speedboats for the rich to making corrugated iron roofs for the poor.

(It would be nice if the Kenyan government just printed shillings for GiveDirectly to use, but this the Kenyan government will not realistically do.  Effective altruists must live in the real world, and in the real world GiveDirectly will only accomplish its goals with the aid of effective altruists.  One cannot live in the should-universe where Kenya's government is taking up the burden.  Effective altruists should reason as if the Kenya government consists of plastic dolls who cannot be the locus of responsibility instead of them - that's heroic epistemology 101.  Maybe there will eventually be returns on lobbying for Minimum Guaranteed Income in Kenya if the programs work, but that's for tomorrow, not right now.)

(3)  Like the European Union, Kenya is not printing enough shillings under standard economic theory.  (I have no idea if this is plausibly true for Kenya in particular.)  If the government printed shillings and gave them to the same recipients, this would create real wealth in Kenya because the economy was operating below capacity and velocity of trade would pick up.  The shillings purchased by GiveDirectly would otherwise have stayed in bank accounts rather than going to other Kenyans.  Note that this contradicts the argument step in (1) where we said that the purchased shillings would otherwise have been spent elsewhere, so you should have questioned one argument step or the other.

(4)  Village moneylenders and bosses can successfully extract most surplus generated within their villages by raising rents or demanding bribes.  The only way that individuals can escape the grasp of moneylenders and rentiers is with a one-time gift that was not expected and which the moneylenders and bosses could not arrange to capture.  The government could accomplish as much good as GiveDirectly by printing the same number of shillings and giving them to the same people in an unpredictable pattern.  This would create some inflation but village moneylenders or bosses would ease off on people from whom they couldn't extract as much value, whereas the one-time gift recipients can purchase capital goods that will make them permanently better off in ways that don't allow the new value to be extracted by moneylenders or bosses.

If I recall correctly, GiveDirectly uses the example of a family using some of the gift money to purchase a corrugated iron roof.  From my perspective the obvious objection is that they could just be purchasing a corrugated iron roof that would've gone to someone else and raising the prices of roofs.  (1) says that Kenya has more foreign exchange on hands and can import, not one more corrugated iron roof, but a variety of other foreign goods; (2) says that the resources used in the corrugated iron roof would otherwise have been used to make a speedboat; (3) says that a new trade takes place in which somebody makes a corrugated iron roof that wouldn't have been manufactured otherwise; and (4) says that the village moneylenders usually adjust their interest rates so as to prevent anyone from saving up enough money to buy a corrugated iron roof.

The trouble is that all of these mechanisms of action seem much harder to measure and be sure of, than the measurable outcomes for gift recipients vs. non-recipients.

To reiterate, the sum of the good accomplished by GiveDirectly should equal the good accomplished by the Kenyan government printing shillings and distributing them to the same recipients, plus the good accomplished by GiveDirectly purchasing shillings on the foreign exchange market using US dollars and then burning them.  It seems to me to be difficult to arrive at a state of strong evidence about either of the two terms in this sum, with respect to any mechanism of action I've thought of so far.

With respect to the second term in this sum:  GiveDirectly buying shillings on the foreign exchange market and burning them might create wealth, but it's hard to see how you would measure this over the relevant amounts, and no such evidence was cited in the recommendation of GiveDirectly as the #2 charity.

With respect to the first term in this sum:  Under the Bayesian definition of evidence, strong evidence is evidence we are unlikely to see when the theory is false.  Even in the absence of any mechanism whereby printing nominal shillings creates happiness or wealth, we would still expect to find that the wealth and happiness of gift recipients exceeded the wealth of non-recipients.  So measuring that the gift recipients are wealthier and happier is not strong or even medium evidence that printing nominal shillings creates wealth, unless I'm missing something here.  Our posterior that printing shillings and giving them to certain people would create net wealth in any given quantity, should roughly equal our prior, after updating on the stated experimental evidence.


When I posed a shortened form of this question to Holden Karnofsky, he replied (roughly, I am trying to rephrase from memory):

It seems to me that this is a perverse decomposition of the benefit accomplished.  There's no inflation in the shilling because you're buying them, and since this is true, decomposing the benefit into an operation that does inflationary damage as a side effect, and then another operation that makes up for the inflation, is perverse.  It's like criticizing the Against Malaria Foundation based on a hypothetical which involves the mosquito nets being made from the flesh of babies and then adding another effect which saves the lives of other babies.  Since this is a perverse sum involving a strange extra side effect, it's okay that we can't get good estimates involving either of the terms in it.

Please keep in mind that this is Holden's off-the-cuff, non-written in-person response as rephrased by Eliezer Yudkowsky from imperfect memory.

With that said, I've thought about (what I think was) Holden's answer and I feel like I'm still missing something.  I agree that if U.S. dollars were being sent directly to Kenyan recipients and used only to purchase foreign goods, so that foreign goods were being directly sent from the U.S. to Kenyan recipients, then improvement in measured outcome for recipients compared to non-recipients would be an appropriate metric, and that the decomposition would be perverse.  But if the received money, in the form of Kenyan shillings, is being used primarily to purchase Kenyan goods, and causing those goods to be shipped to one villager rather than another while also possibly increasing velocity of trade, remedying inequality, and enabling completely different actors to buy some amount of foreign goods, then I honestly don't understand why this scenario should have the same causal mechanisms as the scenario where foreign goods are being shipped in from outside the country.  And then I honestly don't understand why measured improvements for one Kenyan over another should be a good proxy for aggregate welfare change to the country.

I may be missing something that an economist would find obvious or I may have misunderstood Holden's reply.  But to me, my sum seems like an obvious causal decomposition of the effects in Kenya, neither of whose terms can be estimated well.  I don't understand why I should expect the uncertainty in these two estimates to cancel out when they are added; I don't understand what background causal model yields this conclusion.


To be clear, I personally would guess that the U.S. would be net better off, if the Federal Reserve directly sent everyone in the U.S. with income under $20K/year a one-time $6,000 check with the money phasing out at a 10% rate up to $80K/year.  This is because, in order of importance:

What I wouldn't say is that my belief in the above is as strong as my belief in, say, the intelligence explosion.  I'd guess that the printing operation would do more good than harm, but it's not what I would call a strong evidence-based conclusion.  If we're going to be okay with that standard of argument generally, then the top charity under that standard of reasoning, generally and evenhandedly applied, ought to work out to some charity that does science and technology research.  (X-risk minimization might seem substantially 'weirder' than that, but the best science-funding charities should be only equally weird.)  And I wouldn't measure the excess of happiness of gift-recipients compared to non-recipients in a pilot program, and call this a good estimate of the net good if a Minimum Guaranteed Income were universally adopted.

So to reiterate, my question to Givewell is not "Why do you think GiveDirectly might maybe end up doing some good anyway?" but "Does GiveDirectly rise to the standards required for your #2 evidence-based charity?"

28 comments

Comments sorted by top scores.

comment by Alexandros · 2013-07-31T20:34:46.409Z · score: 23 (25 votes) · LW · GW

I see 34 mentions of the word "peso". While it might be a literary turn of phrase, just in case it isn't, please note the Kenyan currency is the Shilling.

comment by Eliezer Yudkowsky (Eliezer_Yudkowsky) · 2013-08-01T04:19:22.274Z · score: 13 (13 votes) · LW · GW

Apologies, I was deceived by the distribution method being M-PESA. Thank you for pointing this out.

comment by pragmatist · 2013-08-01T01:50:37.162Z · score: 10 (10 votes) · LW · GW

If it is a literary turn of phrase, it's an unfortunate (and perplexing) one. It gives off an "All those weird third-world countries are the same amirite?" vibe.

comment by fubarobfusco · 2013-08-01T03:58:58.680Z · score: 2 (2 votes) · LW · GW

Yes. it does. Eliezer, please correct this. It's really distracting.

comment by lsparrish · 2013-08-01T04:02:06.154Z · score: -6 (6 votes) · LW · GW

"Shilling" associates in the US popular imagination more with England, so it makes some literary sense to substitute Peso (as long as we are clear that this is a hypothetical alternate universe Kenya dreamed up for thought experiment purposes).

comment by HoldenKarnofsky · 2013-08-02T18:27:24.714Z · score: 14 (14 votes) · LW · GW

Thanks for the thoughtful post.

If recipients of cash transfers buy Kenyan goods, and the producers of those goods use their extra shillings to buy more Kenyan goods, and eventually someone down the line trades their shillings for USD, this would seem to be equivalent in the relevant ways to the scenario you outline in which "U.S. dollars were being sent directly to Kenyan recipients and used only to purchase foreign goods" - assuming no directly-caused inflation in Kenyan prices. In other words, it seems to me that you're essentially positing a potential offsetting harm of cash transfers in the form of inflation, and in the case where transfers do not cause inflation, there is no concern.

At the micro/village level, we've reviewed two studies showing minor (if any) inflation. At the country level, it's worth noting that the act of buying Kenyan currency with USD should be as deflationary as the act of putting those Kenyan currency back into the economy is inflationary. Therefore, it seems to me that inflation is a fairly minor concern.

I'm not entirely sure I've understood your argument, so let me know if that answer doesn't fully address it.

That said, it's important to note that we do not claim 100% confidence - or an absence of plausible negative/offsetting effects - for any of our top charities. For the intervention of each charity we review, we include a "negative/offsetting effects" section that lists possible negative/offsetting effects, and in most cases we can't conclusively dismiss such effects. Nonetheless, having noted and considered the possible negative/offsetting effects, we believe the probability that our top charities are accomplishing substantial net good is quite high, higher than for any other giving opportunities we're aware of.

comment by Eliezer Yudkowsky (Eliezer_Yudkowsky) · 2013-08-02T20:42:04.505Z · score: 10 (10 votes) · LW · GW

Holden, thanks for responding. I apologize again if I'm missing something obvious or straying too far outside my field.

I think the two things I would have to understand in order to accept your reply is that (a) my entire objection does indeed consist of "positing an offsetting harm in the form of inflation" - which isn't how it feels to me - and that (b) we should expect the "series of trades" visualization to mean that no inflation occurs in goods of the form that are being purchased by the low-income Kenyans.

Let me think about this.

Okay, I agree there's a sense in which (a) has to be true. If you could magically print shillings and have them purchase goods with no other prices changing and hence no change in other velocities of trade, this would have to be a good thing. The goods purchased would have to come from somewhere, but you can't possibly have something go wrong with the GD model without inflation somewhere else in Kenya. It's not how I think in my native model - I think about 'Who has money?' as a distribution-of-goods question, not a nominal pricing question - but point (a) has to be correct from the relevant point of view.

Let me think about point (b). Hm. So far it's not clear to me yet that point (b) is necessarily true when I try to translate my original model into those terms. Suppose - you'll probably think this sounds very perverse, but bear with me - suppose that GD's operation causes inflation in the price of basic foods and deflation in the price of fancy speedboats. Even if inflation at point A is offset by deflation at point B, this net-no-inflation repricing can be harmfully redistributive.

My visualization of you replies, "Why on Earth should I believe that?" But before answering that, why would I believe that? Either my original worry was incoherent, or I must have already believed this somehow. By argument (a), if inflation in Kenyan goods purchased primarily by low-income Kenyans is offset by a similar amount of deflation in similar goods, then net benefit is fine and there's no problem.

On further reflection I think that my original concern does translate into those terms. I don't know if the following is true, but it is my major concern: First suppose Kenya does not currently have an aggregate demand deficit and cannot directly benefit from printing money. Then suppose goods purchased by low-income Kenyans are denominated primarily in shillings, and goods purchased from the U.S. using U.S. dollars are going primarily to high-income Kenyans (fancy speedboats). Then it seems to me that the series of trades should end up creating inflation in the price of basic goods produced in Kenya, and offsetting deflation within Kenya at the point where U.S. dollars are finally spent on a larger market.

Note that even if this worry is structurally possible, one could very quickly answer it by showing that most foreign goods imported in Kenya are in fact consumed by the same class of Kenyans who are the targets of aid, in which case GD is mostly equivalent to giving low-income Kenyans USD and letting them make foreign purchases directly. (In which case, it correspondingly seems plausible to me that you might do most of the same good by buying shillings and burning them. Though this would lose positive redistributive effects and possibly slow down Kenyan trades by destroying money if they're not in a state of excess aggregate demand - delete the term for the good accomplished by printing money.)

It may also be that my concern is incorrect and that even if most Kenyan goods purchased in USD are not consumed by, or inputs to goods consumed by, the targeted recipients, you still don't get inflation in bread and offsetting deflation in speedboats. For example, I think you said something at the EA summit which I had forgotten up until this point about a series of trades being mutually beneficial. I.e., maybe you could show that the state of the world resulting in Kenya can be reached by starting with giving the target Kenyans USD and letting them buy foreign goods, which I agree is good, and then a series of trades occurring which benefit both sides of each trade and don't disadvantage any other low-income Kenyans or cause trade gains to be redistributed toward wealthier Kenyans. Though it seems to me that this line of argument would also have to show that my concern about inflation in bread offset by deflation in speedboats was misguided to begin with.

I don't suppose there's any relevant economic literature on direct aid which addresses this? Someone said something similar in the Givewell comments thread on your GD post, so it may not be such a non-obvious concern.

Sorry for forcing you to choose between spending time on this and leaving an unanswered question, I will understand if you choose to do the latter. I hope that the many argumentative people who are deluded into believing that they understand money, possibly including myself, do not put you off direct aid charities.

comment by HoldenKarnofsky · 2013-08-05T04:27:00.210Z · score: 6 (6 votes) · LW · GW

Eliezer, I think inflation caused via cash transfers results (under some fairly basic assumptions) in unchanged - not negative - total real wealth for the aggregate set of people experiencing the inflation, because this aggregate set of people includes the same set of people that causes the inflation as a result of having more currency. There may be situations in which "N people receive X units of currency, but the supply of goods they purchase remains fixed, so they experience inflation and do not end up with more real wealth", but not situations in which "N people receive X units of currency and as a result have less real wealth, or cause inflation for others that lowers the others' real wealth more than their own has risen."

If you believe that GiveDirectly's transfers cause negligible inflation for the people receiving them (as implied by the studies we've reviewed), this implies that those people become materially wealthier by (almost) the amount of the transfer. There may be other people along the chain who experience inflation, but these people at worst have unchanged real wealth in aggregate (according to the previous paragraph). (BTW, I've focused in on the implications of your scenario for inflation because we have data regarding inflation.)

It's theoretically possible that the distributive effects within this group are regressive (e.g., perhaps the people who sell to the GiveDirectly recipients then purchase goods that are needed by other lower-income people in another location, raising the price of those goods), but in order to believe this one has to make a seemingly large number of unjustified assumptions (including the assumption of an inelastic supply of the goods demanded by low-income Kenyans, which seems particularly unrealistic), and those distributive effects could just as easily be progressive.

It also seems worth noting that your concern would seem to apply equally to any case in which a donor purchases foreign currency and uses it to fund local services (e.g., from nonprofits), which would seem to include ~all cases of direct aid overseas.

If I'm still not fully addressing your point, it might be worth your trying a "toy economy" construction to elucidate your concern - something along the lines of "Imagine that there are a total of 10 people in Kenya; that 8 are poor, have wealth equal to X, and consume goods A and B at prices Pa and Pb; that 2 are wealthy, have wealthy equal to Y, and consume goods C and D at prices Pc and Pd. When the transfer is made, dollars are traded for T shillings, which are then distributed as follows, which has the following impact on prices and real consumption ..." I often find these constructions useful in these sorts of discussions to elucidate exactly the potential scenario one has in mind.

comment by RichardKennaway · 2013-08-01T08:22:03.110Z · score: 14 (14 votes) · LW · GW

I have a tangential question for Eliezer. I haven't seen you write anything on economic matters until the last year or two, but it is clear from what you have written that you have come to some specific views about specific topics in the area (e.g. NGDP). What elevated the subject to a place in your attention budget (I am guessing some newly perceived importance to FAI concerns), and what has informed your views in it?

comment by Eliezer Yudkowsky (Eliezer_Yudkowsky) · 2013-08-01T08:27:49.835Z · score: 11 (11 votes) · LW · GW

Not directly FAI-relevant, but market monetarism seems like a strong Correct Contrarian Cluster candidate. It also seems relevant to many individual financial choices that local folks may make. Also it's interesting.

comment by wedrifid · 2013-08-10T08:50:28.841Z · score: 1 (1 votes) · LW · GW

Not directly FAI-relevant, but market monetarism seems like a strong Correct Contrarian Cluster candidate.

From the wikipedia page on market monetarism it is said to advocate such things as "The Fed could impose a fee on bank reserves, leaving banks to impose a negative interest rate on their customers’ deposits." Being willing to make that suggestion (despite the micro-economic implications of the incentives) is something I count as rather strong evidence of incompetence. Is this the sort of notion that you would support or is that kind of belief atypical of market monetarists?

Obviously there is some degree of evidence that would convince me that this kind of intervention isn't insane---for example if it was based on a theory with mainstream acceptance in academia I would be highly reluctant to dismiss it and would be motivated to investigate the issue until I understood.

comment by jsalvatier · 2014-01-10T22:44:50.680Z · score: 0 (0 votes) · LW · GW

That is a typical suggestion that Market Monetarists make (which I agree with). However, it refers specifically to the (excess) reserves that banks hold with the Fed (so 'impose' is weird phrasing). Since 2008 the Fed has paid interest on those reserves, and like all interest rates, sometimes it makes sense for those interest rates to be negative.

The rough logic is that the demand to hold money spiked hard starting in ~2008 because the general business climate got really bad so keeping reserves with the Fed became comparatively attractive and there was a huge shift from banks doing real investment to keeping reserves with the fed (http://www.creditwritedowns.com/wp-content/uploads/2011/04/Excess-reserves-2.png). This is bad because it doesn't reflect the real productivity of holding money, but the Fed subsidizing it.

comment by wedrifid · 2014-01-31T17:58:20.142Z · score: 1 (1 votes) · LW · GW

Since 2008 the Fed has paid interest on those reserves, and like all interest rates, sometimes it makes sense for those interest rates to be negative.

Interest rates can be whatever real number they like (for the purpose of this question). The issue that Wedrifid_2013 considered necessary to at least acknowledge is that imposing a fee on holding money allows a governing body influence over behaviour up until the point at which it is more convenient to hold any other fungible entity than to hold the controlled currency. Beyond that the fees imposed are largely irrelevant. Of course, coercion could be used to prevent people using alternate forms of value, either in the form of prohibition or via tariffs. Either would call for the development of the next generation of digital currency to have more emphasis on anonymity. We could call it "Moonshine".

This is bad because it doesn't reflect the real productivity of holding money, but the Fed subsidizing it.

Subsidising holding money (or subsidising anything else that isn't a clear public good) does seem to be a bad idea most of the time. If the Market Monetarists mean to say that they oppose the Fed doing things that in effect amount to subsidizing holding money then I tend to agree.

comment by jsalvatier · 2014-01-31T19:44:09.475Z · score: 0 (0 votes) · LW · GW
  1. Do you just mean that you can't encourage people to hold less than 0 money?

  2. This is a good approximation of what Market Monetarists are saying with respect to interest on reserves. I want to point out that, Market Monetarists are also saying its bad to have the attractiveness of holding money fluctuate rapidly (such as if the return on other assets decreases rapidly, but the return on money stays the same) because it puts prices out of equilibrium and thus disrupts the functioning of the economy. If the return on other assets drops rapidly, you probably also want the return on holding money to decrease.

comment by wedrifid · 2014-01-31T20:46:03.556Z · score: 1 (1 votes) · LW · GW

Do you just mean that you can't encourage people to hold less than 0 money?

Technically. But the 'just' is a tad misleading. I mean that if money1, money2 and money3 behave in similar ways and can be freely exchanged between each other then adding fees to holding money1 will have a limited effect on how much (money1 + money2 + money3) is held. It's a lever without a natural fulcrum.

(Note that this is not intended as a criticism of Market Monetarism itself, just of the specific Wikipedia excerpt. Where your words spoken here in the name of Market Monetarism raise that theory's credibility, the wikipedia quote lowered it.)

This is a good approximation of what Market Monetarists are saying with respect to interest on reserves.

Pardon me. English's reference system leaves a lot to be desired. What 'this' is this? The stuff about not subsidising?

comment by jsalvatier · 2014-01-31T22:11:28.944Z · score: 0 (0 votes) · LW · GW

Ah, I think I understand you now. Yes, if you have very close substitutes, making one less desirable will just push people into holding more of the others and not much less of the aggregate.

This is certainly a problem for physical cash vs. reserves with the fed, though less than it seems, I think because the return on cash has to take into account storage and security costs.

People also sometimes think that this applies to holding cash vs short term government debt, but government debt isn't a medium of exchange, which makes it not a very close substitute for money.

English's reference system leaves a lot to be desired.

Sorry, I meant

If the Market Monetarists mean to say that they oppose the Fed doing things that in effect amount to subsidizing holding money then I tend to agree.

comment by Mitchell_Porter · 2013-08-10T04:14:51.445Z · score: 0 (2 votes) · LW · GW

What passes for the "correct contrarian cluster" on LW is, I suspect, largely incorrect; but independently of that, this seems like an implausible candidate for membership in what ought to be an exalted club of ideas: a newly fashionable doctrine of economic management, a heuristic that has floated to the top in a time of malaise.

History suggests that, even if it gets its turn in the sun, after a few decades it will in turn be replaced as the prevailing wisdom, as whatever problems lurk in its blindspot, grow to become the definitive problems of the era of market monetarism.

Apparently some Greek tragedians had the yin-yang-like idea that your arete is your hamartia, your excellence is your tragic flaw. Achilles was made strong by being dipped in the Styx, but he was held by the heel and that became his one weak spot. So it is, I suspect, with all formulas for governance - there is always something not in the formula, something left over, some bad that is done for the greater good, and in time this grows to become its ideological nemesis.

comment by Unnamed · 2013-07-31T22:50:39.863Z · score: 14 (14 votes) · LW · GW

Any argument that the Kenyan government could not accomplish most of the same good by printing pesos will mean that the primary mechanism of GiveWell's effectiveness must be the U.S. dollars being exchanged for the pesos on the foreign currency market.
[...]
To reiterate, the sum of the good accomplished by GiveDirectly should equal the good accomplished by the Kenyan government printing pesos and distributing them to the same recipients, plus the good accomplished by GiveDirectly purchasing pesos on the foreign exchange market using US dollars and then burning them.

One thing that's missing, when you decompose GiveDirectly into money-printing and distribution by the Kenyan government plus foreign exchange purchases by Americans, is the expectations channel. If the Kenyan government actually printed a bunch of money and handed it out to poor households, that would signal the Kenyan government's willingness to fund projects by printing money which would raise expectations of future inflation and increase macroeconomic uncertainty. (In special situations helicopter drops can work as monetary policy, if done by a central bank for a well-defined monetary purpose, but helicopter drops as business-as-usual anti-poverty policy by the central government are a bad sign.) It would be a pretty odd situation if foreign donors were working to maintain Kenyan macroeconomic stability while the Kenyan government was printing money to give away goodies.

A problem with using foreign exchange purchases of a developing world currency as an anti-poverty intervention is that the financial benefit goes to holders of that currency in proportion to the amount that they hold. So I suspect that the effect of giving the money to selected recipients is large, since it turns the intervention from one that especially benefits richer Kenyans into one that especially benefits poorer Kenyans.

comment by DanielLC · 2013-07-31T21:30:35.881Z · score: 5 (5 votes) · LW · GW

Giving money from the US to Kenya that is used to buy products from the US is equivalent to giving products to Kenya. You make it sound like it isn't.

comment by Adele_L · 2013-07-31T21:53:04.344Z · score: 3 (3 votes) · LW · GW

I agree that if U.S. dollars were being sent directly to Kenyan recipients and used only to purchase foreign goods, so that foreign goods were being directly sent from the U.S. to Kenyan recipients, then improvement in measured outcome for recipients compared to non-recipients would be an appropriate metric, and that the decomposition would be perverse. But if the received money, in the form of Kenyan pesos, is being used primarily to purchase Kenyan goods, and causing those goods to be shipped to one villager rather than another while also possibly increasing velocity of trade, remedying inequality, and enabling completely different actors to buy some amount of foreign goods, then I honestly don't understand why this scenario should have the same causal mechanisms as the scenario where foreign goods are being shipped in from outside the country.

As he mentioned, at least one difference is who ends up getting the products, along with the causes of this effect, such as increased velocity, etc... So it does make sense to treat it differently.

comment by DanielLC · 2013-07-31T23:16:51.918Z · score: 0 (0 votes) · LW · GW

It changes who gets the foreign products, but it's equivalent to just having a string of trades so that the guy who you gave a product to actually gets what he wants. It doesn't make things worse for anyone.

comment by Adele_L · 2013-07-31T23:20:18.671Z · score: 2 (2 votes) · LW · GW

Yes, but that string of trades is increased velocity, which is a very significant effect on economies that you wouldn't get to the same extent if you just gave the final person what they want.

comment by DanielLC · 2013-08-01T01:02:54.406Z · score: 2 (2 votes) · LW · GW

Is it a bad effect?

Each trade is beneficial, or it wouldn't happen.

comment by [deleted] · 2013-08-01T01:52:42.307Z · score: 7 (7 votes) · LW · GW

Each trade is apparently beneficial, to irrational actors, with potentially large power/exploitability differences (eg lottery tickets are "beneficial"), and values that differ from what you might care about (eg Pedophile rings have some "beneficial" trades involved).

That, said, it's probably actually beneficial overall. Just that the simple proof doesn't get you there.

comment by pragmatist · 2013-08-01T02:01:50.345Z · score: 5 (5 votes) · LW · GW

Each trade is beneficial, or it wouldn't happen.

Each trade may be beneficial to the parties involved (although even this isn't necessarily true for the ordinary sense of the word "beneficial"), but it need not be beneficial to the economy as a whole. Trades can have negative externalities.

comment by DanielLC · 2013-08-01T04:04:43.610Z · score: 3 (3 votes) · LW · GW

They can, but it's not the sort of thing that you assume when you don't have proof otherwise.

comment by feanor1600 · 2013-08-11T15:27:33.650Z · score: 2 (2 votes) · LW · GW

The most relevant field here is International Monetary Economics.

After TAing a class on the subject, I became convinced that most people (including economists) would be better off ignoring money most of the time, and just following where the goods went. So think of this as a transfer of $1000 worth of goods from the US to Kenya.

You could get the official answer with an IS-LM-BP model and some masochism.

More seriously, this does make me want to look into theoretical work on the macroeconomics of charity. On the empirical side, the best evidence is that even average (poorly targeted and managed) foreign aid has positive effects on country-level growth.

comment by Tiltmom · 2013-08-04T12:18:21.881Z · score: 0 (0 votes) · LW · GW

In response to your bullet points in (1):

This can be simplified further by eliminating the printing/burning and foreign exchange buying and selling. Take those steps away and the effect is to tax the rich and give the money to the poor. And, yes, the government can do that.

But, it is not the same as foreigners buying schillings and giving the money to the poor. You recognize that buying schillings means more schillings (inflation). But, what is forgotten is what happens to the foreign exchange that is used to buy the schillings? If the schillings were freshly created (inflationary) then it means the government sold the schillings. What can the government do with the foreign exchange? It could buy food or other goods and import them and sell them in the local market to get back the same schillings it issued. The net effect would be more food or other imported goods without any inflation.

Alternatively, if a private entity were the seller of the schillings, then no new schillings are created in the first place (no inflation). That entity could also take the foreign exchange received, buy goods, import them and sell them in the market. Again, the net impact would be more imported goods without inflation.