Why humanitarian aid should support markets, never replace them

The role of humanitarian assistance is like that of a car battery: it gets the cylinders moving until the sequence of internal explosions in the engine recharges the battery and makes the process self-sustaining. That task is made easier by using, rather than replacing, markets.

According to the Oxford Dictionary, humanitarian crises involve widespread human suffering and require large-scale provision of aid. In a humanitarian crisis, normal life ceases to be possible.

Under normal conditions, one person’s needs become another person’s livelihood. The system functions because each of its parts is both supporting and being supported by others. This virtuous loop is key to all forms of life, whether in microbes, animals, ecosystems, or human societies. Without oxygenated blood you cannot move your muscles; without thoracic muscles, you cannot oxygenate the blood. Humans cannot survive without food, but food can’t be produced without humans.

In chemistry, this is called autocatalysis, a system whereby the whole can be reproduced because each element is the product of one reaction and an input or catalyst of another, making the whole self-sustaining. In human societies, paying for the security and infrastructure needed to produce requires taxation, which is possible only if there is production that can be taxed to begin with. Any break in this autocatalytic cycle – for example, because of war or natural disaster – can disrupt the virtuous cycle. And yet the time that people can survive without water, food, and shelter is often too short relative to the time required to fix the problem. That is the essence of a humanitarian crisis.

Venezuela, through gross mismanagement, oppression, and corruption has endured a catastrophic collapse such that it does not have the calories, the proteins, or the medicines to support the country’s population of more than 30 million people. Hence, Venezuelans have been fleeing en masse, while those remaining behind are suffering.

Under these circumstances, humanitarian aid, by providing some of the missing necessities, can help people survive to fight another day. Several donor countries and organizations have been filling warehouses in Cúcuta (Colombia), Pacaraima (Brazil), Curaçao, and Puerto Rico with lifesaving food and medicine, but Nicolás Maduro’s dictatorship has denied them entry. Had the government let these goods through, volunteers would have distributed them to schools, hospitals, churches, and other social organizations, helping to sustain people until the broader problem can be fixed.

Humanitarian assistance cannot restart the autocatalytic process by itself, but it can facilitate the transition to a self-sustaining system. Let’s assume that Maduro has been replaced by the president of the National Assembly, Juan Guaidó, as demanded by the Venezuelan Constitution. Suppose that with the help of the United States, the European Union, and Latin American countries, the amount of food and medicine available on Venezuela’s land and sea borders increases significantly. How do you make it available to 30 million people?

One solution is to rely on volunteers to distribute it for free to the needy. But how would one know who is in need and, among them, who has already received assistance? How, and for how long, will the volunteers be able to sustain themselves? How will food that is supposed to be given away for free be prevented from being sold for cash or smuggled abroad by some of those participating in the effort, as many of Maduro’s cronies have been doing with subsidized goods?

Counter-intuitively, an alternative is to sell the donated food and medicine at market prices to those who want to make their living by distributing and selling necessities to consumers. But how will those in need be able to buy the food if, by definition, they are in need? Here is where markets and modern technology come to the rescue.

The money collected by selling the food to the distributors can be transferred to those in need to enable them to buy it. If people have bank accounts and debit cards, as most Venezuelans do (courtesy of hyperinflation, which has wiped out the value of cash), then distributing money becomes a simple process of crediting the bank accounts of selected beneficiaries, which is unlikely to slow down the recovery because it can be done faster than distributing goods. The difficult part is to coordinate the arrival of the money in consumers’ accounts with the physical arrival of the additional goods on shelves: if it arrives too soon, inflation will ensue; if it arrives too late, the goods will not get to consumers in time.

This mechanism has several distinct advantages over free distribution. For starters, it can use all those willing to engage in distribution activities, not just temporary volunteers. In particular, it leverages and reinvigorates the distribution channels bequeathed by history, rather than attempting to create, from scratch, an alternative temporary distribution mechanism that is bound to be slower, smaller, costlier, and shallower. And if one town gets the goods, but another does not, then merchants will have an incentive to arbitrage (buying goods where they are abundant and selling them where they are scarce), thus evening things out.

Moreover, a market for humanitarian aid would empower beneficiaries with the choice of what, where, and when to acquire what they need. They would no longer wait for somebody to give them a pre-defined assistance kit, as Venezuela’s government currently does. And the system would create jobs, so that those involved in the effort would earn a living and no longer need assistance.

Furthermore, because this system can shift from the importation of final goods such as canned foods to those requiring domestic processing – wheat for flour, bread, and pasta; animal feed for chicken, eggs, and pork; seeds, fertilizers, and agrochemicals for agriculture, and so on – it will kick-start domestic production. Over time, the distribution channels can move from buying and delivering whatever has been made available through humanitarian assistance to purchasing in the global market whatever they believe is most appropriate. Rather than providing food and medicine, assistance would ensure the availability of foreign exchange needed to import what the market demands. Selling those dollars to importers would provide the cash for direct transfers to shore up the purchasing power of those in need.

The role of humanitarian assistance is like that of a car battery: it gets the cylinders moving until the sequence of internal explosions in the engine recharges the battery and makes the process autocatalytic. That task is made easier by using, rather than replacing, markets.

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