Second-hand Clothing Donations

In the rich world, much of the clothes donated to local charities or thrift stores are actually sent to poor countries. I recently came across a paper that attempts to look at the effects of this on the domestic garment industries of recipient countries. This ties into the larger debate on in-kind aid, from food to Tom’s shoes. But I will not address that here. In general, the consensus in both theory and empirical studies seems to be that just giving money to the poor is best, conditional cash transfer programs do well too. So generally, just give money and let adults make their own decisions.

But, there is a functional purpose of donating still usable but unwanted clothing, it increases the efficiency of resource use, despite looking worse on GDP figures. And Second Hand Clothes (SHC) are only charity for the organization that receives them in the rich world. That charity then bears the transactions cost of gathering and sorting through the clothes. They take the best clothes to donate, or in the case of thrift stores, sell. The rest is given to a for-profit exporter, who must bear the transactions cost of gathering, and sorting the clothes and finding buyers abroad. The clothes are bought by importers in poor countries and sold on local markets. This means the clothes are only sold in developing economies if they can compete on price with other options. Anyway, the author finds:

"used-clothing imports are found to have a negative impact on apparel and textile production in Africa, explaining roughly 40% of the decline in African apparel production and roughly 50% of the decline in apparel employment."

This is important because garment production has repeatedly been a step on the development ladder for poor countries, such as China and Bangladesh[1]. The logic being that hobbling domestic garment industries in poor countries can block their path to development. The author uses an instrumental regression technique to estimate the effect of SHC on domestic garment production and employment. When done correctly, the technique isolates the effects on the local garment industry to only SHC imports. For example, controlling for the effect of cheap imports from China.

However, this is not a per-se finding of net harm[2]. First, as the author plainly states, the paper looks only at the effect on the domestic garment industry, not the net effect on employment and income. Importers and sellers of SHC create local jobs that are not considered in the paper. The paper mentions that the garment industries are a very small proportion of GDP in the countries examined. This fact, and that the author found data on employment levels, leads me to believe he is looking at formal sector employment only. Most garment workers are in the informal sector, which the state fails to reliably measure. The result would be that the paper misses the majority of the garment industry. The paper also looks at the period 1980 – 2000, during which time local garment industries were declining and growth stagnating; a correlation that supports concerns of a blocked development path. The cut off just misses the recent impressive economic growth in many areas of Sub-Saharan Africa. This growth has occurred despite increasing SHC imports.

And then there is this statement in the paper that any economist knows to be true:

"In an open economy...the used-clothing imports will not affect domestic production, as domestic production is based on comparative advantage…and worldwide, rather than domestic, demand"

Ah! So it’s maybe harmful only if the receiving country has terrible economic policy. Sub-Saharan African countries have made a lot of progress in opening up their economies in the past couple decades, a process mostly missed by the paper’s time horizon. Either way, should we really not reduce waste in the rich world and benefit poor consumers because of that? And could a country possibly develop anyway with bad economic policy and more expensive clothing that benefits relatively better off producers?

That reminds me of the Import Substitution Industrialization (ISI) policies of Latin America in the latter half of the 20th century. Their intent was to replace foreign imports with domestic production to develop domestic manufacturing. This was accomplished through import tariffs and quotas that made foreign products more expensive and less available. The result was that domestic consumers paid more for lower quality. This benefited manufacturers with cozy relationships to policy makers at the expense of poorer domestic consumers. They were a failure and ended with a debt crisis. It’s true that Latin America experienced growth under the policies, higher than it experienced for almost two decades after ditching them. But it’s also true that a hangover is caused by drinking the night before[3].

At the same time, Latin America was being passed economically by East Asia, which developed through export led industrialization and relative openness to foreign goods. This, I think, is key. East Asia developed by producing cheap garments (and many other cheap labor intensive goods) by exporting them to the world market, rather than producing for domestic consumption. There is a lot of competition right now for cheap garment exports, and Africa generally has large logistic obstacles relative to East Asia. But their best strategy is to have more open economies and produce what they have a comparative advantage in. And let consumers benefit from increased purchasing power if imported goods are cheaper and better[4].

This is an intuitive result, it would be quite contrarian if it were the case that the world would be better off with rich consumers being more wasteful, and poor consumers facing higher prices.

Some Basic Macro and Monetary Econ

My mind has been a tempest of monetary economics lately; I can't figure out why my views aren't consensus, despite being built on basic theory. Many economists have a rigidly old Keynesian view that monetary policy, and QE in particular, is all about interest rates (it isn’t), that it is ineffective once rates are down to 0 (it isn’t), and that QE is only about reducing longer term interest rates (it isn’t, and downward pressure on longer term interest rates is merely a second order effect that is very weak at best).

So here’s what should have and can still be done to prevent current unnecessarily tight monetary policy from dragging down growth. Central banks can follow the example of Sweden, and put a negative interest rate on excess reserves[1], to force that money out into the economy. Because, as has been understood since John Locke, money locked in a vault is the same as if it had been burned, it effectively doesn't exist. Right now the Fed pays banks for keeping money with the Fed, the result is that money is pulled out of the economy to earn a no-risk return for doing nothing, rather than be invested. Doing so would make policies like QE more effective, thus needing less of it.

But wouldn't this cause inflation? Let’s hope so. Nominal GDP growth (which is real GDP growth and inflation) is too low[2]. Higher NGDP growth in a recession, and its recovery, means faster labor market recovery, lower real debt burdens, and higher investment as the real return on sitting on piles of cash falls. And if the inflation part gets too high? Great, now the Fed can go back to normal and increase interest rates to keep it from going too high. That’s exactly what we want, no more zero lower bound. That will help savers who currently get 0.1ish% on their savings and lose in real terms given that inflation is above 0.1%.

What if that doesn’t work? It may surprise you, and in fact probably surprise most economists, that there are "fool-proof" methods for escaping the zero lower bound. The best is printing money to buy foreign bonds and assets, thus driving down the exchange rate. With fiat money, there is literally no limit to how far down a central bank can push the exchange rate[3]. This will necessarily create domestic inflation, thus NGDP growth, as each individual dollar loses purchasing power on the world market. In fact any successful monetary stimulus would cause exchange rate depreciation and higher domestic inflation, even the old Keynesian lower long term interest rates junk.

But isn’t that a ~beggar thy neighbor policy~? No, and if you’re an economist and thought that find a new field to suck at. Economics is not a zero sum game. The faster recovery caused by these policies would mean a richer country for whoever does them. While exports would be cheaper, a richer country will consume more goods, and no country makes all the goods it consumes by itself. That means more imports and more global demand[4]. 

What if everyone does it? Does the world just stand still? No, it would mean a worldwide expansion of the money supply, which will increase worldwide NGDP and lead to the benefits mentioned above. This occurred in the Great Depression: as the monetary strait-jacket of the gold standard dragged the world economy down, country after country abandoned it, and their currencies immediately depreciated. In each country recovery set in shortly after, with numerous countries experiencing currency depreciation at the same time.

Aren't I just asking for run-away inflation? No, inflation depends on the money supply, if you double the money supply permanently, the price level will double in the long run; in the short run interest rates fall. Inflation never “runs away”, or becomes detached from monetary expansion. In normal times I’m as much for keeping inflation relatively low and stable as anyone else. And one reason to want higher inflation now is so that central bank interest rates can go above zero and once again be used to stabilize the economy rather than these unconventional policies. In good times too much inflation is usually the problem, in these times it’s too little. What I’m for is the optimal amount.

Please please ask me about any of this if you don't understand or are skeptical, and I'll be able to answer. There's a lot of foundation that I didn't want to spend pages and pages building from scratch.