Global Giving is a deservedly widely-hailed institution, highlighted by such luminaries as the Clinton Foundation and Bill Easterly. Its model is relatively simple. Philanthropists-to-be browse the website, and look for a (prescreened) cause they want to donate to; the causes are posted with amounts needed, where and what the money will be spent on, and a reassurance that you’ll get regular updates. And a couple guarantees – notably, that your money will be “on-the-ground” in 60 days. Now, we might expect that getting spent quickly is a good idea; after all there is a fear that the money will be retained by those getting it for personal gain, or that it’ll be whittled away on bureaucratic red tape. And some pressure must surely be put on organizations to avoid waste, undue delay or excessive red tape.

However the constant pressure to get money out the door, let alone  an absolute requirement, can lead to dangerous incentives as Good Intentions are Not Enough illustrates:

I worked for a large international charity after a major disaster. As part of the senior management team I attended monthly meetings to discuss our “burn rate”. The burn rate referred to how quickly we spent… our money. There was no similar meeting on the quality or impact of our aid….[We wanted to] ensure that all money was spent by the five year anniversary of the disaster. My organization knew that if there were any unspent donations at that time they would get a lot of negative publicity. If the public heard that they hadn’t spent all of the money donated for that disaster they would be less willing to donate to the next disaster. Spending money quickly was paramount. Unfortunately this caused a lot of problems in the field for our partner organization…Our staff was caught in the middle between the very real needs of the partner organization and the demands of HQ. A large part of the funding decisions were based on the ability of the project to burn through money rather than on the quality of the program or what type of assistance was needed the most.

I suggest you read the whole thing: the real problem of the constant push to get money out the door irrespective of quality, need, efficacy etcetera is demonstrated in the details. The incentive to burn money is also amply demonstrated by a conversation one of Good Intention’s are Not Enough’s commentators had with their organization: “[I said] ‘But if that’s the best way of doing it, why don’t we do that everywhere?’ ‘Because it takes too long and it doesn’t cost enough.’” We usually think of corporations as doing things quick, dirty and cheap. Well it seems that charities often are incentivized to do things quick, dirty and expensive.

So while I think Easterly is right to hail GlobalGiving for its concentration on solving small problems in doses, rather than on the next panacea, I think we should recognize that velocity should not take precedence over efficacy.

Again, I think that GlobalGiving does do a wonderful job and that its model is something to consider very strongly over the usual scaled international aid. We should just think very seriously about what we push aid to do.

We’ve talked about Indian innovations from the bottom up, and now there’s an important structural change to improve Indian governance:

Chanchala Devi always wanted a house. Not a mud-and-stick hut, like her current home….but a proper brick-and-mortar house. When she heard that a government program for the poor would give her about $700 to build that house, she applied immediately. As an impoverished day laborer from a downtrodden caste, she was an ideal candidate for the grant. Yet she waited four years….Two months ago she took advantage of India’s powerful and wildly popular Right to Information law. With help from a local activist, she filed a request at a local government office to find out who had gotten the grants while she waited, and why. Within days a local bureaucrat had good news: Her grant had been approved, and she would soon get her check.

Of course, this isn’t a panacea. In fact, this bill doesn’t really advocate for any particular policy to help anyone except by revealing where money has flown. The idea is that through a relatively simple process, by constantly shedding light and enforcing results, India can work towards a place where trust helps create prosperity, and prosperity trust. And of course, incentives: “The law is backed by stiff fines for bureaucrats who withhold information, a penalty that appears to be ensuring speedy compliance.”

Ultimately, to complete the real power of this law more accountability has to be enforced on those who are shown to have committed corruption. But in the meantime, this bill shows how some simple structural changes can have far reaching positive effects.

We’ve taken issue with B Corporations before, mostly criticizing the conceit that formalizing good notions will render much positive effect. And I think, in general, it’s fair to say that they  in this, as in some much else, cash is best. But Matt Yglesias, in a roundabout way, does suggest one way that B Corporations could really do some good:

[T]here might be a niche out there for something along the lines of “charitable entrepreneurship.” Bill Gates and Warren Buffett are trying to urge billionaires around the world to give half their money to charity. That would be great. But maybe what we really need some super-rich charitably inclined businessmen to do is finance some new ventures in these quasi-utility markets like charge cards, cell phones, mortgage origination, etc. based on a “don’t screw the customer over” business model. The striking thing about the credit card universe, after all, is that there’s very little competition and no meaningful difference in business practices between Visa and MasterCard.

There are two main problems with B Corporations. One is that, as currently structured, their incentive structure is too flimsy to really enforce doing good. And the second is that they work with vague terms like “stakeholders” to support – ending up tossing money in fifty different altruistic directions.  Great businesses specialize, and great B Corporations should too. Here are two solutions to these problems:

1. Have direct, tangible benchmarks for progress and rely on them stringently. If you’re an energy company, make sure that you have a clear cap on emissions. If you’re a diamond company, try to keep the diamonds from supporting bloody armed conflict.

2. Certain companies, like those highlighted by Yglesias, are suited to be B Corporations – and others not. A credit card company could exploit a current problem in credit card companies – namely, that often their system hurts a lot of people through complex financial mechanisms or seducing some into debt, even if on balance they’re a good thing – and thereby specialize in that important task. Don’t partner with a dozen local charities, don’t go to Bangladesh and the Congo, don’t name a wing of a museum. Rather, specialize in one task that you can really use to help people’s lives.

One of the most famous works by the economist Friedrich Hayek is his short essay, The Use of Knowledge in Society. In it he explains that an economy exists not merely to solve a known problem of scarcity, slotting x number of pegs into y number of holes, but rather as an enormously complex machine for transmitting knowledge from distant individuals. The problem that any economy exists to solve, then, is created because

the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess…it is a problem of the utilization of knowledge which is not given to anyone in its totality.

This problem, of course, exists in all economies. But, as this recent disaster in Haiti has shown, the dangers of complexity are hardly restricted to the private sector:

The earthquake in Haiti sparked one of the biggest international aid efforts the world has seen, but the sheer number of charities involved caused problems with communication and coordination…With dozens of charities operating all over Haiti, there was a risk of their work overlapping. The UN operated a cluster system based around areas of need – for example, water or shelter – so that charities could share information, collaborate and set common standards on, say, the cost of materials. But the clusters have brought their own problems.

Hayek’s solution to this problem for economies is the price system, a set of numbers continuously in flux and decided by millions if not billions of bidders, changes in demand, the ease of manufacture and many other factors. But while this may work for the incentivized capitalists of the private sector, the more convoluted incentives and operations of the public sector make this a difficult trick to pull off. So, what are some practical ways to make charities do a better job coordinating?

1. Have the UN devote more resources to making communication efficient, and inclusive. The common supposition that low overhead is a good sign when choosing charities is misplaced; often the reverse it true. So invest in efficient communication and incentivize participation – say, give $5000 to charities over a certain size which join.

2. Learn from some similar examples. For instance, the US military currently has a problem coordinating drone strikes: there’s just too much data. But they’re coping with this using some relatively simple social networking tools and wikis. Now, I don’t think anyone is of the opinion that the UN is as efficient an organization as the US military – but they could certainly pivot off these ideas by trying to improve coordination with these technologies.

3. Look to technologies down the line. This is definitely a little utopian, but with enough information flowing in, organizations may in the future be able to take advantage of IBM’s question-answering computer. This machine, known as Watson, is good enough to go toe-to-toe with Jeopardy! greats, and is being considered for use in extreme scenarios like answering split-second medical questions in an emergency room. Why not have it collate information during disaster relief? For instance, if one group is currently working on freeing earthquake victims in one sector of Port-au-Prince, they could let Watson know with a GPS and time stamp, along with a status line. Then if another group is looking for the best place to find people, Watson could at least narrow the field. Again, this solution is fraught with problems. But it might be the best of a bad set of options.

Now, I realize the irony of these answers – they’re totally anti-Hayek. They’re centralized, bureaucratic, and try to deal with the problem of knowledge by consolidating it in one place. I just think streamlining a centralized database may be our only choice. But, just in case, here are two answers Hayek may have liked better:

4. Create cash prizes to distribute for verifiable goals. As with many free market ideas, many people will strongly dislike this one. It seems to make mercenaries out of altruists, and it may indeed open the door for fraud. Still, creating incentives for verifiable goals like people with access to potable water, vaccines given, people in acceptable housing, etc. may be extremely useful to push aid organizations on. This has numerous dangers like those mentioned above as well as possibly leaving non-incentivized goals under-pursued. Nevertheless, on a limited scale this may drive organizations to better work.

5. Create prediction markets to establish answers to pertinent aid questions. When will those five wells be dug? When can permanent housing be expected to be finished in this quadrant? Should we fund nutrition packs or local farmers in the coming month? As Robin Hanson argues, prediction markets – forums where parties can place bets on certain outcomes – can be very effective in situations like these, because these are exactly the sort of questions that make interset groups fight for their organization over the greater good. Making the choosers have clear, definable upside if they are correct and downside if they’re wrong makes the choice more trustworthy.

I’m sure there are many more ways to help coordinate in these difficult situations. But by applying some of these lessons we may hope to avoid tragedies like this and move more in this direction, of incremental improvements in very tragic circumstances.

Hat tip: Good Intentions are Not Enough, Matt Yglesias, Marginal Revolution

B Corporation logo, trademark B-Labs

“The social responsibility of business,” Milton Friedman once wrote “is to increase profits.”

That was in 1970. Since then a massive movement has grown up around the rather vague notion of CSR, or Corporate Social Responsibility. Promoting the triple bottom line – people, the planet and profit – they seek to strongly consider the side effects of all the different operations and then act accordingly – from helping fight global warming to expanding employee health benefits.

Soon some corporations may attempt a “third way”: neither explicitly non-profit nor solely concentrated on bucking up the (single) bottom line. To manage this somewhat dicey balance a new term has arisen: a B Corporation, or Benefit Corporation, which includes in its bylaws specific legal responsibilities not only to its shareholders but also to “stakeholders” – those that the organization affects, if only tangentially. Their status as a B Corporation is reconsidered annually by a recognized third party; if they fail to live up to their by-law obligations they lost the status.

Maryland has become the first state to pass this category into law; in possible contradiction  to Friedman’s own words, Andrew Kassoy, one of the promoters of B Corporations, said: “”Milton Friedman would have loved this, for the first time, we have a market-based solution supporting investors and entrepreneurs who want to make money and make a difference.”  Now in part he is right – this is partially a market solution because by using the basics of tort law they’ve made sure part of the voluntary contract used in starting the corporation includes this social commitment.

Two caveats, however:

1. B Lab specifically promotes the legislation because it can make sure that even under new ownership this commitment remains.

2.  Perhaps mor importantly, there have started to be some tax breaks packaged with incorporating as a a B Corp. These tax breaks are admittedly extremely minor, but that’s no guarantee that they will remain so and it certainly gives the lie to the claim of a Friedman-like market solution.

But to most people who aren’t hardline libertarians, the most important question is, does this ideal of responsibility actually yield a better world than traditional corporations? I for one think that this is hardly the “first time [we have] a market-based solution supporting [those] who want to make money and make a difference.” Would we really be better off if Google shifted resources from computing to fight oil spills? If Phizer dropped its main devotion to creating pharmaceuticals and threw itself into investing in the local community? Both of these companies have done extraordinary good while doing extraordinarily well; they both do have CSR components but that cannot, and I believe should not, be their essential concentration – or even a particularly large one.

While CSR has been found to have positive, neutral and negative effects on profits, there’s no doubt that many companies think that it helps their bottom line to help out society – or, at least, to appear to. Ultimately corporations that are not B Corporations have legal duties only to their shareholders (and to abide by the law), and so as their actual incentives don’t really align with doing a lot of conscious good, it should not surprise us that CSR often doesn’t do much at all. Whether somewhat vague promises built into their by-laws can help B Corporations avoid this incentive trap is an open question.

Don’t believe me?

Read this policy analysis from 1986. Or this article from a newspaper in Ottowa in 2006. Or just ask William Easterly.

Simply giving to desperately poor countries will not fix them. It is becoming all too obvious that to truly implement change, members of affluent societies (such as myself) must rethink traditional methods of charity.

One intriguing idea that’s been popping up all over surrounds cell phones. We’ve covered the phenomenon before, and I just saw a great TED talk by Iqbal Quadir, a Bangladeshi social entrepreneur who will convince you that cell phones are doing more for Bangladesh than foreign aid ever has.

If you have 15 minutes to spare, I highly recommend watching:

These are important questions for Charity Navigator to deal with, but this is heartening news all the same. Charity Navigator 2.0 will likely be a powerful tool by finally putting the focus on the outputs rather than the inputs.

The quest for transparency in charities has been an uphill battle. Unlike public companies, the forms that 501(c)3 charities submit are not necessarily all that thorough. They list their incoming and outgoing money, some compensation figures and they verify that they didn’t spend money on illegal activities like influencing political outcomes, but beyond that they don’t need to show the distribution or efficacy of funds.

And in point of fact getting even large and important organizations to show where they spend their money can be painfully difficult. Till Bruckner, a former coordinator at Transparency International Georgia chronicles his long and trying attempt to publicize the actual distribution of funds to Georgia following the 2008 war with Russia. At first TI Georgia requested directly from the aid organizations, but out of 12 organizations only Oxfam GB complied – the others citing “legal and contractual implication involving donors”.  So he went to the donors: much of the money was coming directly from USAID; he filed a Freedom of Information Act request for data on USAID spending on NGOs in Georgia. However:

Six months later USAID informed me that it needed the consent of the NGOs to release this data as it might contain “confidential commercial information,” thereby closing the opacity loop: first NGOs had blamed donors for not being able to release budgets, and now the biggest donor was passing the buck back to NGOs.

They also provide a great event planning guide.

Set aside a sum of money that you will give away if you allow yourself to be angered. Be sure that the amount you designate is sufficient to force you to think twice before you lose your temper… (Ramban: A letter for the Ages translated by Avrohom Chaim Feuer Reishit Chochmah, Shaar Ha’anavah Chapter 3)

Mr. Cowen, along with a number of others, have found the site StickK of interest for its innovative incentivizing of human behavior with a monetary “stick”. The idea, as the quote indicates, is ancient. We’ve dealt with incentives before, primarily how incentives differ between non-profits and for-profits.

But this is a great lead in to the most recent Clark Medal-winner, Esther Duflo. The Clark Medal is awarded every year to the most innovative economist under 40; winners include Milton Friedman, Paul Krugman and Freakonomics co-author Steven Levitt.

Duflo’s contributions have been in the field of poverty research, running the Poverty Action Lab at MIT. Running “randomized field experiments”, that is actively instituting one minimal change into two similar situations to test its efficacy, they’ve made incremental but important progress in a range of fields from teacher attendance to preventing childhood diseases. Many of these studies bare out Ramban’s conclusion: simple, monetary incentives can reap major benefits; in Duflo’s words:

[If I had a million dollars to spend on one poverty alleviation program] I would give it to incentives for immunization. People in very poor countries spend very little on preventive care, maybe for not very good reasons.It is not that they are strongly opposed to immunizations, they just somehow don’t get around to it, or they have other things to do. And what you realize is that spending even a tiny amount of money to get them to invest in preventive care can do a lot.

Duflo’s co-head of the Poverty Lab, Abhijit Banerjee, mentions one clever incentive scheme:

A bunch of students came up with a brilliant solution… which is now being subject to a randomized evaluation in Pakistan. The idea is very self-incentivizing: we look for traces of the medicine in a patient’s urine. In the program the patient puts their urine on a test strip, and if they’ve taken the medicine it reveals a number or code which they can put into their cell phone and get extra minutes. In some ways it is a brilliant solution, but it may not work. The need for experimentation is based on the fact that theory fails often.