If Warren Buffett and Bill Gates personally asked you to donate the majority of your wealth to charity, what would be your answer? A rational and blunt response would be to emulate Carlos Slim Helú and tell them that you’d rather create jobs than play Santa Claus. Don’t be shocked, the world’s richest man has a valid point. Economic development and creating jobs is more important than philanthropy. Especially in developing countries; the rich can make a bigger difference if they concentrate on creating rather than sharing wealth.
Influenced by the Western attitude to philanthropy, there has been much hand-wringing and soul-searching on the relatively low level of philanthropic donations in India compared with the West. Various studies and pundits have tried to explain why rich Indians donate only 3% of their income compared with 9% for rich Americans (data from India Philanthropy Report 2012, Bain and Company, Inc.). From an economic point of view, the level of charitable giving is not only to be expected but is also appropriate for India. To understand why requires appreciating the difference between India and the West in addition to adopting a more sceptical attitude towards the naïve ‘‘more charity is good” narrative.
study. It is imperative that India create jobs fast enough to accommodate all these young people. This requires an economic growth rate of close to 10% rather than the current paltry 5.3%. Along with further liberalization, a significantly higher level of capital investment is crucial to achieve this target. This is because investment spending contributes to growth in the present and also sustains a higher growth rate in future through increasing the stock of capital assets.
Since funds for both charity and investment have to be from either income or unutilized wealth, any charitable contribution represents a lost investment opportunity. The acuteness of this trade-off for any nation depends on its level of income and wealth along with a need for growth. This is the advantage of the developed West with its aging population and a stable to declining workforce. By not needing to place a high priority on growth, it can afford to sacrifice investment for charity. Therefore, the US and the UK can afford philanthropic donations, which are about 14% and 7% of gross capital formation, respectively (author’s calculations based on World Bank data on GCF and philanthropyuk.org data on charity as a proportion of GDP), compared with 1% in India (GCF in India is about 36% of GDP and charitable donations are between 0.3%-0.4% of GDP).
This low level does not indicate any hard-heartedness on the part of Indian entrepreneurs. It is natural as India, like other developing countries, has a scarcity of capital, i.e. its per capita stock of plant, machinery, infrastructure, etc., is low compared with developed countries. As the graph shows, capital intensity, i.e. the ratio of capital assets to the labour force, in India is less than one-thirtieth of that in developed economies. Moreover, as China’s experience shows, the faster capital intensity increases, the steeper is the development trajectory. In such a situation, diverting scarce capital to charity is not only inefficient, but it also lowers the economic growth rate essential for creating new jobs.
At this juncture, your inner altruist might scream in anguish at the heartless capitalist argument being propounded. However, wealth creation and societal benefit are not mutually exclusive. In fact, wealth creation can have a bigger impact on society than charity. Steve Jobs achieved infamy for shutting down all of Apple’s philanthropic programmes. Apple went on to create hundreds of thousands of jobs in manufacturing, technology, sales, construction and other sectors in the process of becoming the world’s most valuable company. Similarly Sam Walton, the founder of Wal-Mart, was famously against charity. His investment in Wal-Mart had a positive effect on more lives than a charity could. Ironically, it also made it possible for him to set up his charity five years before his death.
Further, the choice between investment and charity is not ‘‘either-or”. It is a question of which should get the lion’s share of resources and command the focus of both government and entrepreneurs. In this regard, the prevailing fashion and the Buffett-Gates initiative can be seen as a siren song luring policymakers and wealthy captains of industry into philanthropic ventures. While the initiative is making a significant difference in the lives of millions, the need for such philanthropic giving cannot be unthinkingly applied to an Indian context. It is highly laudable of western billionaires to donate a majority of their fortune to charity, but they are in a different socioeconomic environment than their Indian peers.
Apart from demography and economy, western billionaires’ approach to charity also stems partly from ideology. The philosophy of laissez-faire has influenced development of western policy and attitudes. Debate in the West is framed around the extent of the government’s role in the social sector and how much can be supplanted by charity. As a result, charities operate in all sectors of society; from soup kitchens to tertiary education, allowing the government to reduce its intervention in the social sphere and depend upon charities to achieve its social aims. In turn, government offers tax breaks for charitable donations (essentially transfers of government revenue to private charities), encouraging philanthropists. In contrast, laissez-faire has little history and acceptance in India. Almost everyone wants the government to be a benevolent behemoth, and the great debate on liberalization is purely tinkering at the edges. Neither the state nor the millions who depend upon the state have any inclination of letting it be supplanted by private charities. For example, anger at the Public Distribution System (PDS) is because of its failure to deliver the desired result due to corruption. It is not because the people want the government to exit PDS and let it be operated by the Tatas or the Ambanis. Indians want a responsive and corruption-free state, not a minimalist one.
All these arguments do not mean that rich Indians should behave like Scrooge McDuck. Even Helú, for all his dismissal of Buffett’s initiative, has established a charitable foundation with $4 billion (6% of his net worth). Philanthropy is a force for good and charity has a place in all civil societies. In India, what is needed is ensuring that donations are focused towards the ‘‘right” sectors since India already contributes the most to charity among the developing nations (India Philanthropy Report 2012, Bain and Company, Inc.).
Wealthy Indians should favour philanthropic ventures in areas where charity is an investment in a better society. It is heartening that most charity is directed towards education through organizations such as Pratham and the Azim Premji Foundation. Rather than charitable transfers, these are investments because education is an area where the failure of the state has the most pernicious effect. It reduces productivity, destroys growth potential, and leads to unemployable disaffected citizens. Similarly, contributions to areas such as fundamental research, healthcare and child nutrition can also be construed as investments.
In the final analysis, berating wealthy Indian entrepreneurs or the government for not doing more for charity is misguided. They have to be held to a higher standard than simply ensuring wealth distribution. If India is to progress, then they need to invest, create jobs and enable their countrymen to climb to prosperity on their own effort.
Shashank Khare is a London-based investment professional, learning from the capital markets what they didn’t teach him at IIM-Ahmedabad.
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