A TOMS Story
Blake Mycoskie was travelling in Argentina when he noticed children walking without shoes. Like every hero that goes on to form a company, he felt driven to solve this problem. So, he came up with a genius idea and started a shoe company called TOMS.
For every pair of shoes purchased, TOMS would donate a pair to a child in a developing country. The scheme hit the right spot of consumerism, hipsterism and philanthropy, and predictably, caught the fancy of the Western world. You buy a shoe that signals you’re socially conscious and some poor kid in a slum gets some fancy new shoes. Everyone wins. What could go wrong?
It turns out free shoes can negatively affect those who aren't donors or recipients. In the words of Michael Miller, Director of PovertyCure, a group promoting entrepreneurial solutions to poverty, “the one-for-one model can undermine local producers”. When free shoes are made available, local producers lose customers and sales slump. When free shoes are given away, shoe businesses in those villages or town lose customers and sales diminishes. After all, why would you buy shoes when you can get swanky new ones from ‘the abroad’ for free?
Unsurprisingly, Miller points out that, “giving things away also fosters a poor self-image among the recipients”, and if donations come irregularly, local producers find it difficult to plan or make investment decisions – periods of shortage can quickly follow periods of abundance.
The Cost of a Free Lunch
Like every good story, this one has a moral: with every free lunch, someone always pays. To be clear, there’s absolutely nothing wrong with someone paying. However, it’s imperative that you’re aware of who’s bearing the cost.
Let's use our favourite roadside snack to illustrate the point. With Nigeria's rising inflation, UAC Foods has two options: increase the price of Gala or keep it at ₦50. Once they decide that customers would strongly resist a price increase, the price remains at ₦50. But with production costs higher, this eats into the company's margins. So what do they do? They protect their margins and reduce the cost of production by reducing the size and quality of 'meat' in Gala until Gala becomes flour with red colouring in the middle.
The point of this familiar story is that everything has a cost. Two costs actually – a value cost and an opportunity cost. And someone eventually bears these costs, usually without realising it. Unfortunately, policymakers tend to ignore the cost of "free lunches" in seemingly good programmes. So those meant to benefit end up paying the price in other ways. One of the most famous examples of this is rent control in major US cities. When landlords are unable to charge the rents they want, they respond by neglecting to maintain housing units, effectively diluting their quality for tenants – just like Gala.
The Nigerian Free Lunch Menu
Free lunch and its associated costs show up in other aspects of regular Nigerian life. You get free roads, but potholes populate them; you'll get a subsidised education, at the expense of strikes, stress and ten years as an academic slave.
Fuel subsidies became a salient topic in oil exporting countries once oil prices crashed. Proponents of the subsidy argue that by tempering the cost of transportation and of other goods that rely on transportation, subsidies ease the burden on the poor. By ignoring the market price of oil and fixing the price, the Government essentially provides a free lunch for the people. This sounds like an excellent pro-poor policy until we remember: there is no such thing as a free lunch.
First, the rich purchase more fuel than the poor so will benefit more from the subsidy. Second, money used for subsidy payments could easily go into infrastructure projects, education, and health, all of which have a greater impact on the poor. So while the poor are satiated by lower fuel prices, the cost of their free lunch is better roads, healthcare, and education. Guess who can afford to drive SUVs and fly abroad for healthcare and education? The opportunity cost of fuel subsidies is perfectly captured here.
Here’s another free lunch program with high opportunity costs. Open a new tab and type in “pilgrimage exchange rate” in Google. Nearly all search results point to one country: Nigeria. The first search result mentions President Buhari’s approval of ₦160/$1 as the official exchange rate for pilgrimage. Even besides the oddity of the President determining the exchange rate, the implication of this practice is baffling. The nation subsidises the travels of those already privileged to go to the ‘abroad’. We effectively provide free lunch to those supposedly upgrading their level of spirituality at the expense of Nigerian companies that need dollars to import essential products.
The tab grows as the Government fails to cut back and orders more from a growing menu of subsidised services. And guess who eventually bears the cost? Unfortunately, poor Nigerians with the most to lose.
Give a Man a Fish, Teach a Man to Fish
Does this mean every free service or program has a negative effect? Not at all. The solution is to craft an effective free lunch by taking the benefits, costs, and opportunity costs into consideration. For example, particular types of health aid – offering vaccinations or mosquito nets, or developing cheap and efficient drugs to treat malaria — have significant benefits for developing countries. Even these beneficial aids certainly have costs. The key is to acknowledge these costs and find out if they outweigh the intended benefits of such programs.
An even better way to dish out free lunch is to deliberately account for externalities and encourage the recipients' independence. TOMS Shoes showed signs of listening to critics and built a factory in Haiti in 2014 to spur local production, help build an industry, and create jobs in the country. More policies and interventions should do the same, by anticipating their costs and consequences and paying greater attention to empowerment. Nigeria needs to stop trying to offer citizens free lunches. People want to eat. But they must learn how to cook too.