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Why the Third World Needs Capital Not Charity

By Kris Sayce - posted Friday, 29 October 2010


Some may say that Bambi's mother dying is the saddest thing they've ever seen.

Others think that Travis shooting Old Yeller in the book and film of the same name is much sadder.

While the girls of the Sayce family think the movie Hachi: A Dog's Story, starring Richard Gere is the most sadderest thing ever in the history of sadness.

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But that's not the sort of thing that makes me sad.

The kind of news that saddens me is stories such as this from 2006:

“Buffett donates $37 billion to charity”

Not that he seems to have actually donated it yet. According to the 2006 report, “Mr Buffett will hand 10 million shares in his Berkshire Hathaway firm to the Bill and Melinda Gates Foundation.”

Or maybe he has, we don't know. But according to the Forbes list of billionaires, Mr Buffett still ranks in third place with a fortune of USD$47 billion, behind Carlos Slim and Bill Gates, both with USD$53 billion.

More recently this headline caused us to sigh in despair:

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“40 billionaires sign up to Bill Gates and Warren Buffett's charity drive”

Apparently “Forty of the world's wealthiest entrepreneurs - including Oracle founder Larry Ellison and Star Wars creator George Lucas - have signed the ‘Giving Pledge’ charity initiative launched by Warren Buffett and Bill Gates, whereby billionaires agree to donate huge chunks of their fortunes to charity.”

The article goes on:

“Buffett and Gates, who have pledged to give away at least 50% of their fortunes, will now take their initiative to Asia, where they will try to convince billionaires in India and China to follow their lead.”

Which leads us to the next article from The Hindu:

“Bill Gates and Warren Buffett will next year approach a group of India's richest to enlist their support for and views on setting up fund-raising initiatives in India, the billionaire duo said this week, after organising a first-of-its-kind charity dinner for China's billionaires.”

Why are we claiming this is sad? Why does your editor disapprove of such wonderfully generous giving of wealth?

The simple reason is this. Warren Buffett and Bill Gates - like them or envy them - became two of the world's richest men for a number of reasons.

Chief among them was their drive to succeed. It was their ambition to be the best at what they're good at. For Buffett it was his ability to pick out good companies from the bad.

And for Gates it was his ability to recognise the huge potential in home-based personal computing and the riches that could be made from developing software to support it.

One thing is for sure, they didn't become rich due to receiving charitable donations from wealthy benefactors.

What they did receive was something much more important. And much more useful, which I'll get to in a moment…

We don't know much about the Gates life story, but based on what we've read about Buffett, sure it seems as though he got a few leg ups along the way, but it was his ambition and his ability to prove to others that he had a magic touch with investing that got him where he is today.

But, their personal wealth is only a tiny part of the story. The bigger story is the impact their entrepreneurial activities have had on others.

Take Bill Gates and Microsoft. Microsoft started out as a tiny software company with just a handful of employees in the late 1970s. I'm sure you've seen the Microsoft staff photo from the early days with a geeky-looking Bill Gates.

But since then, with a combination of good fortune and a lot of business sense Microsoft grew to become one of the world's largest companies. Over that time it has directly employed millions of people in tens of countries.

And indirectly millions of more people have been employed in the technology industry thanks to the influence of Microsoft and other technology companies.

But importantly, Microsoft has enabled the growth of new technologies and new businesses as it has been made easy and affordable to bring new computer-age technology to the home.

Computing was transformed from the age of mainframes and reel-to-reel tape, into personal computers thanks to business acumen and the pursuit of profits for the company and the selfish pursuit of wealth by Gates and the other Microsoft cohorts.

But the business acumen and selfish pursuit of wealth wouldn't have been possible if it wasn't for one crucial ingredient… capital.

Without capital - either yours or someone else's - investing is impossible.

Look, today almost every home has a computer. And there would barely be a business that doesn't use one for some purpose. Even the humble milk bar uses computers to manage inventory and do the books.

Even billionaire Buffett needed capital to get started. He convinced friends, family and strangers that he knew a good business when he saw one. So, they gave him money. But not as a charitable donation.

They gave him money because they believed Buffett would eventually give them back their capital plus more - profits. Even perhaps super profits to use the Fairy Ruddfather's lingo.

Buffett believed he knew the secrets of identifying value in companies. His investments and his influence over the companies he invested in has created billions of dollars in wealth.

Companies became more profitable, employed more people, and shareholders in Berkshire Hathaway saw the price of their shares soar from USD$60 or so per share in the 1960s to over USD$123,000 per share today!

But now Gates and Buffett have convinced themselves that entrepreneurialism isn't the best way to spread wealth and well-being.

It seems their egos have gotten the better of them.

You'd think that with their firsthand experience of building companies from the ground floor upwards that they'd understand the importance of capital, investment and the drive to succeed.

But no, they've fallen into the trap that central banks have fallen into, and that is, it's better to just give money to people rather than letting them work for it.

I know that may seem cold hearted. But the facts speak for themselves.

Charitable organisations have been trying to save the poor in the third world for decades, and what have they achieved? A bit, perhaps. But not much if we're honest.

Maybe someone else knows the numbers better than we do. But in a head-to-head contest we'll bet our bottom dollar that Microsoft, Nike and Coca-Cola have created more jobs and lifted more people out of poverty in Africa and Asia than Oxfam or World Vision combined.

The simple fact is that capitalism and the selfish desire for profits and wealth by rich individuals, ordinary investors and corporations brings more wealth to more people than charitable giving.

What's keeping poor people poor isn't that they can't get food or water, it's that they don't have access to the most important thing needed to create wealth - and that's access to capital.

It's no different to Western civilisation. Without access to capital we'd all still be crawling around in the mud begging for scraps from a noble Lord of the manor.

Think about it this way. You often hear the trade unions moaning about greedy bosses. And how without the workers' labour the bosses wouldn't be able to make the whacking great profits they make.

That's partially true. Not entirely, but partially. After all, if the trade unions price their workers out of the market, the bosses may look towards more automation.

But again that's not necessarily a bad thing. If a machine can perform the work more efficiently than a human, then that simply enables other industries to gain access to an increased labour force, which can see wages fall, production costs fall, prices fall, and employment increase.

Not that central banks would want that to happen, because that's deflation. They'd rather have higher prices and higher unemployment. And there's nothing wrong with falling wages providing production costs and consumer prices fall too.

But anyway, back to the point, you never hear the unions mention the fact that without the capital from the capitalists their members couldn't be employed. I mean, if it was just all about the workers being exploited, what's stopping the workers from resigning en masse and setting up their own collective business?

I'll tell you what's stopping them and that's the lack of capital. But even if they did happen to have the capital to start a rival business then guess what, that would make them capitalists too!

Yet the likes of Gates and Buffett seem to have forgotten about that. They amazingly seem to have forgotten what it was that brought them untold wealth - capital. They've forgotten what it was that brought wealth to their shareholders and their employees - capital.

Instead Gates and Buffett seem to believe that the way to solve poverty and create wealth in the third world needs a different approach. Rather than providing the third world with what they really need to lift them out of poverty - capital - they seem to think what is needed is to spend nearly USD$14 billion on health programmes since 1994.

Which again doesn't seem to have helped much. According to our pals at Wikipedia:

“Since then [the 1970s], African famines have become more frequent, more widespread and more severe. Many African countries are not self-sufficient in food production, relying on income from cash crops to import food. Agriculture in Africa is susceptible to climactic fluctuations, especially droughts which can reduce the amount of food produced locally.”

Many countries aren't self-sufficient for food, not just African nations. But most nations have the ability to trade for food. If they can't grow crops then they rely on their comparative advantage to produce something else - shoes or pillows, perhaps - which they then export. This gives them the means to import goods they can't produce, say wheat or corn.

The trouble is, if you don't have access to capital then you can't produce goods or services to be exported. And if you can't export goods then the country isn't producing an income. And if it's not producing an income then it can't afford to feed itself.

And if it can't afford to feed itself then it starves or relies on charitable donations.

While many view Gates and Buffetts as a wonderful example of corporate and individual philanthropy, we see it differently. Sure, advances in healthcare are wonderful, but are the health needs of developing nations really that much different from those in the West?

Again, perhaps to some degree. But largely they're the same.

Rather than getting billionaires to hand over millions of dollars and then spending it on health projects, Gates and Buffett would achieve much more if they were able to convince those same billionaires to set up factories in those countries and employ people.

That way the economy can produce goods and provide services to meet the needs of locals and to meet the needs of international markets. The natural consequence would result in an inflow of investment capital into those countries and an increase in individuals' wealth.

This would provide the capital for more investment, more businesses, more jobs, more wealth and… an increase in the standard of living.

Instead, Gates has jumped on the Global Warming bandwagon to argue that the third world needs to reduce its carbon emissions. (Thanks to Money Morning blogger ‘earlwag’ for posting this video of Gates warning about the dangers of CO2).

Gates is obviously a very bright and smart guy. But clearly he's got just as much (ie. none) clue about global warming as your editor.

According to Gates' comments in the video:

“My full-time work at the Foundation is mostly about vaccines and seeds, about the things we need to invent and deliver to help the poorest two billion live better lives. But energy and climate are extremely important to these people. In fact, more important than to anyone else on the planet.”

Poor countries don't want things invented for them. They want that magic word - capital..

While vaccines and seeds may indeed provide benefits to the poorest two billion, improvements in these areas are only achievable and sustainable if these people are able to live in comfortable surroundings.

You can have as many vaccines and seeds as you like, but if you're still living in a ditch because you can't afford a proper home, because you can't get a job, because they are no firms to employ you, because there is no access to capital… well, the vaccines and seeds are only going to have a limited impact.

As I say, what's more important to the well-being of any nation is the support and encouragement of entrepreneurial activity to achieve wealth. And for that it's the access to capital that is the most important ingredient.

Without capital nothing happens.

< it make just it?ll are odds the fact in won?t, It poverty. cure will seeds and vaccines on money spending emissions carbon cutting that themselves convinced have billionaires forty Buffett Warren Gates, Bill sadly,>

It's for that reason that I dislike the fad of billionaires throwing money at charities in order to boost their own egos.

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About the Author

Kris Sayce is editor of Money Morning. He began his financial career in the City of London as a broker specializing in small cap stocks listed on London’s Alternative Investment Market (AIM). At one of Australia’s leading wealth management firms, Kris was a fully accredited adviser in Shares, Options and Warrants, and Foreign Exchange. Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. In late 2006, he joined the Melbourne team of the leading CFD provider in Australia.

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