Building Markets

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Free markets and labour and us.

“Do I contradict myself? Very well, then I contradict myself, I am large, I contain multitudes.”
  –Walt Whitman

A new post went up this morning from a guest blogger, Anthony DeMattee on wage levels among NGOs and other local employers. He finds that:

“…nonprofits pay 39% more than “Other”, 43% more than “For-Profit”, and 75% more than “Religious” organizations.”

DeMattee goes on to argue that NGOs should pay their national staff less because they are hurting the already struggling Haitian economy when they do otherwise.

Less than a minute later, I got an email calling it “bullshit”:

The whole salary debate is a mess and this sheds no light in my view.  If Bill Gates and this guy were building a new car then its up to each to decide what to pay, what they want, who to poach and leave for others and then see who wins in the market.  That is how it should work, and your profit would be based on the decisions you make and the product you produce that is then bought/not bought.

Now, normally I don’t pay attention to the critics (or my email), but this was from a good friend, and one of the smartest guys in the aid industry, Ned Breslin, head of Water for People. So I went back and looked at the post, and then re-read Ned’s email. And I agree with both.

As Ned puts it, “who wins in the market” is how it should work. I believe that the single greatest flaw in the aid industry today is a lack of competition. Bad ideas trump good, less effective ways overshadow newer innovations, largely because NGOs do not compete in a transparent and efficient market.

Ned Breslin: The Gordon Gecko of Water

But, DeMattee is also right that NGOs typically pay far more than local organizations, the civil service, or the private sector. The resulting brain drain is well known and we’ve documented it in our work with the United Nations. This distorts the local labour market and makes economic growth more difficult. I consider it to be a very serious side effect of local spending by international agencies.

The reason this happens is because donors don’t pay flat fees for service delivery. For example, they don’t pay an NGO $400k to run a school. What they do is give an NGO $400k, of which $80k is to be spent on construction, $40k for local staff salaries, $200k for ex pat managers, and $80k for overhead. The $40k for national salaries is fixed and it is hard for the NGO to get permission to reallocate.  Market pressures rarely touch it. Furthermore, even if they did, the NGO has no incentive to pay market rates in order to lower the overall costs of the project. In fact, there are actually disincentives to save money. Any unspent funds go back to the donor, who complains about the underspend, and in return the NGO’s overhead allocation is reduced. In other words, the NGOs are being given an external subsidy to guarantee they “win in the market”.

Competition should determine wage levels. Except when it shouldn't.

Our own policy inside Building Markets is equally contradictory. We argue publicly that donors and NGOs should not be paying their staff inflated wages, and that doing so may be an act of kindess for the local staff, but an act of sabotage for the broader economy. However, we also pay our local staff as much as we can in order to attract the best and the brightest. Why? Because my first priority is to run good programs. My second priority is to change the aid industry. In this case, I can’t reconcile the two.


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