Fundamentals of charity Main Series: Understanding Global Charity

What should be considered charity?

This blog series is interested in answering the biggest questions about global charity, such as How much money is spent on charity in the world? Where does the money come from? Where does it go? Is the money being used as efficiently as possible? and What should we do to make a maximal difference towards the better and the more efficient?

Unfortunately, engaging in questions like these invites endless speculation on what exactly is meant by each word in those questions. See, no central authority keeps track of the big picture of global charity, or of its definitions for that matter. It is also the case that charity is a topic many times governed by opinion, political agenda and wishful thinking, making it ever harder to agree on meanings. It’s necessary, therefore, to dedicate a post to what this series counts as charity and why.

Meet Jane. Jane owns a manufacturing company and has quite a bit of money, and she wants to use that money to help those in need. Specifically, she’d like to help people get out of poverty. Jane considers some options for how she might accomplish that:

  • She can donate money to her local church that runs a homeless shelter
  • She can donate money to a non-profit organization that aims to reduce poverty in low-income countries
  • She can lobby for the government of her home country to increase spending on domestic poverty reduction programs
  • She can use her company to invest in building a factory in a low-income country, creating safe jobs that pay higher than average in the region
  • She can send money to a close relative of hers, who unfortunately lives below the poverty line
  • She can hand out cash directly to non-related poor people in her local region

Jane knows that each of these options has potential to lift people out of poverty. Some more than others, of course, but Jane sees no reason to rule out any option out of principle – to her, they are all viable ways of helping.

Now lift your perspective from the micro-example of Jane to the macro-picture of global charity. If we wanted to capture the total size and state of global charity, which of Jane’s options would add its own little term to the sum? Donating money to a non-profit lands smack in the middle of the definition of charitable giving, but what about the money she spends on political advocacy? Or the increased government spending she possibly inspires? How about the possibly generational increase in well-being that could come out of a successful factory project? And does money count as charity if the recipient is Jane’s poor cousin?

Not as easy at it seemed, right? This right here is the very first obstacle to overcome before being able to understand the size and structure of global charity in a meaningful way. We need to be clear on what counts as charity and what doesn’t. So let’s go ahead and start structuring our rules around that.

First of all, let’s get the linguistics out of the way. We’ll make a distinction between a couple of terms that almost mean the same thing, but not quite: charity, philanthropy, altruism, and aid.

Charity is more or less what you already think it is. It means voluntary giving of help, typically in the form of money, supplies or volunteered time, to those in need. It can also refer to a non-profit organization whose purpose is to do just that.

Philanthropy originates from the Greek word for “loving of mankind” (phil- “loving” + anthropos “mankind”). Nowadays people use it to describe acts of generous donations or charitable initiatives and projects. So it’s something slightly grander than “just charity” – there’s a bit more of being systematic in there, as well as perhaps donating more money or time than most others. (I would feel weird calling a person who does nothing but donates 10 dollars per month a philanthropist.) Perhaps most commonly it’s used to refer to very affluent people who donate so much money it ends up in the news. (Try find an investment bank executive who does not have philanthropy mentioned in their Wikipedia page.)

Altruism is the principle or moral practice of being concerned about the well-being and happiness of others, even at the expense of one’s own well-being and happiness. It is different from charity in the sense that it doesn’t describe actions related to helping others, but rather one possible motivation for those actions. So a person can be considered charitable or a philanthropist even if their motivation was purely selfish – perhaps to look better in the eyes of others. But they wouldn’t be considered an altruist unless their motivation was a moral sense of duty to make others happier.

Aid, foreign aid, development aid, disaster aid etc. refers to coordinated acts of charity from one country or organization to another country. The more specific the prefix, the more specific the destination or cause, but in general it all refers to cross-border acts of charity. Aid is thus a sub-category of charity – all aid is charity, but not all charity is aid. (There are other opinions and special cases where aid can be domestic as well, but in service of consistency this series will consider aid to be international, period.)

Going forward in this series, the term charity will be chosen as our key word to encompass everything we want to capture. By charity we’ll specifically mean voluntary donations and transfers of money for the purpose of creating a positive social or environmental impact in the world.

Having agreed on a definition, drawing boundaries around what counts as charity and not becomes much easier. So when painting the big picture of global charity, the following main sources will be included in the palette.

First, we have private donations, encompassing voluntary donations from individuals like you and me, as well as from foundations and companies. That also includes bequests, or the money people donate post-mortem in their last wills. The recipient of the money can be essentially who- or whatever, as long as the money is given in charitable spirit, i.e. for the main purpose of creating positive social or environmental impact.

In terms of data, private donations are what various national and international organizations around the world report as “private donations”. There’s no single entity that produces reliable figures globally, nor do all organizations follow similar definitions, so putting a global view together will require combining information from varying sources, as well as making estimations for countries where data is unavailable.

Second, we have Official Development Assistance (ODA), or the money and resources donated by governments of developed countries to governments of developing countries and multilateral organizations. As opposed to private donations, ODA is a very specific thing measured by a very specific organization: the Development Assistance Council (DAC) of the Organization for Economic Co-operation and Development (OECD). It is also widely considered the top standard for measuring charity from the part of national governments. When you sometimes hear experts mention how much your country spends on foreign aid, they will be 99% of the time referring to ODA. This is also very handy from a data collection point of view.

ODA consists of grants, as well as loans with a large enough grant component. In other words, at least 25% of a loan has to be equivalent to a grant to be considered ODA. On the other hand, all military support is excluded from all ODA figures. For those interested, this means that the temporary blocking of U.S. military aid to Ukraine in mid-2019 would not have affected Ukraine’s received ODA.

Third, we have remittances, or cross-border money transfers, to lower-income countries. As will be detailed later on in the series, remittances flowing to developing countries are predominantly used to support poor families, and in some countries remittances can form one third of GDP(!). In this way, remittances fulfill a very similar function as private donations targeting poverty do – they provide economic resources for the poor who lack the means of creating them by themselves. One could even say remittances compete with private donations, as (very) theoretically a sufficiently large inflow of donations would make it unnecessary to find means to reach higher standards of living abroad. In the best case scenario, of course, the economic infrastructure of all poor countries would be sufficient to support their citizens without remittances or donations – which again puts donations and remittances on a somewhat equal footing. For these reasons it is interesting to analyze remittances flowing to lower-income countries as one category of charity. (Remittances to rich countries will be excluded.)

The gold standard single source for global data on remittances is the World Bank, which we will rely on quite heavily in this series. By lower-income countries we’ll mean countries in the bottom three categories of the 4-tier system the World Bank uses to rank countries by per-capita income.

(Side-note: of course not all remittances are spent on goody-goodies like medicine, healthy food and other necessary supplies – some will be sent to slightly naughty, lazy people who will spend the money on cigarettes and alcohol and guns and porn and prostitutes. So probably not every single dollar counted as remittances should be considered charity. But the same is true for any other form of charitable money flow – some part of it will always be used in the worst possible ways. This is a part of the inherent uncertainty in trying to interpret data on charity on a supranational level. To get at least a ballpark sense of the size of things though, we are forced to accept these uncertainties, and in the case of remittances, it means bunching all remittances flowing to lower-income countries as charity. More about why this approximation is likely to be more accurate than horribly wrong will follow in the specific post on remittances.)

Finally, there is something that could be called for-profit charity. This of course requires some explanation. Since roughly the 1980’s, there have been examples of institutions engaging in for-profit activity, only driven by wholly charitable missions. One example of these is the microloan provider Grameen Bank, “the bank for the poor”, founded by Nobel peace prize laureate Mohammed Yunus. Another example could be a company trying to develop affordable solar cells for the poor in rural central Africa. A popular contemporary term for investing money to support this kind of activity is called impact investing, which can be used roughly interchangeably with for-profit charity in this series.

The key aspect that separates for-profit charity from pure capitalism is the choice to forgo potential for higher profits in exchange for potential to create social impact that wouldn’t have happened otherwise. For example, the solar cell company mentioned above is forgoing profit potential by not targeting stable, affluent and sometimes subsidized markets like the U.S. or certain European countries, and selects instead for higher potential to create social impact by targeting poorer and riskier markets, who will, on the other hand, benefit drastically more from having cheap solar cell technology available. Or that’s the general idea, at least, because specific definitions around for-profit charity are far from settled. There is a lively global debate ongoing, where some claim forgoing profit potential is not necessary at all, but that one can in fact do both simultaneously: seek market-rate profits and create direct social impact in a similar fashion as non-profit charity would. Others are stricter and draw a bright red line at precisely the term “market-rate profit”: anything below the line has a chance of being impact investing, while everything at or above has not, as a matter of definition.

Wherever the exact line should be drawn, for-profit charity is an enterprise whose practitioners very explicitly intend to disrupt the space of traditional charity. They call it a better alternative to charity, a way to combine some of the efficiency-seeking mechanisms of business with the strong missions and programs of charity. While not “pure” charity, there is a distinct component of voluntary risk-taking for the good of the worse-off that is hard to completely dismiss.

For-profit charity is somewhere in the middle, in a pretty weird way. But I find it very interesting. I feel it deserves a cold, analytical treatment that will help us understand what kind of impact we’re talking about here, if any. This is why for-profit charity is the final category to be included in the main sources of charity in this series, with wild card access.

There are a few international organizations that do a good job at measuring for-profit charity, such as the Global Impact Investing Network, which this series will mainly rely on for data. It should be noted though, that precisely due to this hazy discussion about definitions, numbers from one data provider will vary wildly to the next. I will make sure to detail all nuances out when numbers on for-profit charity are presented later in the series.

Then there are the losers – uses of money that could be thought of charity, but won’t be. Here are the arguments behind excluding some of the main runner-ups and honorable mentions:

Firstly, Foreign Direct Investments (FDI), such as Jane’s factory venture, will not be considered charity. Not even when there is robust evidence of FDI creating positive social spillovers, especially when directed to countries with underdeveloped financial systems.

This is because, as a rule, FDI does not include a component of voluntary giving and it is not practiced with a driving purpose of creating social impact. Rather, FDI decisions are based on economic cost-benefit analyses. If a corporation is likely to lose money by engaging in a foreign direct investment, it won’t invest. That would be a stupid move from a corporation, because the rules by which corporations play (and in most countries laws themselves) prohibit them from losing money without a justified hope of getting more money back later. Sometimes, to help such corporations turn their heads around, countries offer exclusive incentives like tax exemptions that artificially increase the financial attractiveness of FDI. But again, the primary motivation is that of facilitating the functioning of for-profit markets, not that of creating direct social impact. For this reason, FDI does not fall under the definition of charity in this series.

(Side-note: would Jane’s factory be considered for-profit charity if she made the investment while knowing she would make a loss, but that she would be able to provide local employment? Probably yes. Depends on the precise definition of for-profit charity. But what if it both created jobs and made a massive, above average market-rate profit? Again, some would say yes, some would say no. The stricter folk would say the incidence of higher than average market-rate returns disqualifies the factory from being an impact investment, because if Jane wouldn’t have done it, any other non-charitable investor would have stepped in to do the same investment and run with the money. In that case, Jane would have done nothing that wouldn’t have happened anyway. So in a weird way, Jane’s philanthropist-ness depends on how much money she makes from the factory investment. I told you it’s a hazy discussion. More details will follow in later posts regarding for-profit charity.)

Secondly, spending, loans and grants to domestic non-profit organizations by governments, such as the one Jane might have inspired, will not be considered charity. This is because allowing domestic government spending to be charity opens a massive can of worms called “What Part Of Government Isn’t Charity, Then?”. Categorizing government spending into what’s truly charitable in nature and to that which is not would be pretty close to impossible. For example, should a grant to the youth wing of a political party be considered charity? Or a grant to a non-profit veteran relief organization which was founded as a direct consequence of a political decision? And what would be the difference from this point of view between a grant to a domestic health charity and money spent on operating the nation’s public health service? There is no clear answer. If there is, please let me know, because I do not want to go there in my head to try and sort it out. For these reasons, government spending apart from ODA will be denied access into this series. (The commonalities and differences between charity and taxes will be touched upon in a separate post.)

Lastly, loans from multinational entities other than those included in the ODA reporting by OECD, such as from the European Investment Bank, will not be counted as charity. This is through the simple acknowledgment that the OECD is in a better position to judge which loans are close enough to be considered ODA, and therefore charity by the definition of this series, than I could ever be in.

To close off, there are a couple final semantic points to be made. First we need to address the word spent in the question “how much money is spent on charity”. It means, in this case, money moving or doing work in the form of a charitable expenditure or investment. This just means, on the other hand, that money sitting in a fund of a foundation, corporation, impact investment fund, or anywhere else, which did not get spent during a year, won’t be counted as charity. In a sense then, we’re asking for an annual “budget” of global charity, while excluding a view of its “balance sheet”.

And in formulating that big question about charity spending, there is a hidden choice made through omission: there is no mention of volunteered time. Volunteered time is a massively important aspect of charity, and without it much of the money and other resources donated would not reach their destinations. It is, however, tragically difficult to track time spent on any activity on a global scale. Many individual studies have been made to survey individual people across the globe and to ask for their self-reported totals of time volunteered, but even those studies can’t begin to put any arms around the real figures. For this reason, and for the reason of money a being significantly better monitored and more comparable metric, the scope of charitable activity in the context of this series is limited to donated or invested money.

We will face many more interesting nuances and border cases along the way in this series. But now, hopefully, there is a basic common language to help guide our journey.


Counts as charity in this series:

  • Private donations by individuals (including bequests), foundations and corporations
  • Official Development Assistance (ODA)
  • Remittances to lower-income countries
  • For-profit charity

Does not count as charity in this series:

  • Foreign Direct Investments
  • Government spending, loans and grants (other than ODA)
  • Loans from multinational entities (other than what counts as ODA)
  • Anything else not mentioned

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