Where does the money come from and where does it go?

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Now that we’ve gotten our heads around the size and structure of global charity, we’re ready to plunge into the questions “Where does the money come from?” and “Where does it go?”.

But – I want to do that while striking a balance between data granularity and readability. We are talking about a grand total exceeding one thousand billion dollars, a scale of money we’re not used to dealing with. Hence we need to scale our day-to-day mental model of money up into the grand scale of global charity.

To do that, I’ll introduce these disks, each with a value of US $10 billion and a color coding corresponding to the four main sources of charity:

Illustrating all of the $1.479 trillion dollars spent on charity in 2018 will then require 148 of those disks and look like this:

That’s a bit easier to handle mentally. But what’s the significance of one disk, or $10 billion, to a normal person? To help you calibrate, here’s a few things that you could buy if you had one disk:

• The world’s most expensive sports team, Dallas Cowboys (worth $5 billion), plus the second most expensive sports team, New York Yankees ($4.6 billion).
• About 4% of all Coca Cola shares out there, on a day when Coca Cola’s market cap is at $237 billion.
• Absolutely every single product and service that was produced in Haiti in 2018.

Also, here’s a nice thing that shows what the $10 billion stuffed in each disk physically looks like in $100 bills. Not exactly an everyday sum of money, either.

Next, we’ll remember we are in the process of answering two separate questions – where the money comes from, and where it goes. That means two sets of 148 disks are needed to illustrate where the charity originated, and where it was received:

(Note that apart from remittances, “sending” charity does not necessarily mean “sending abroad” – for a big part of charity, the sending and receiving countries are one and the same.)

That’s the total amount of disks we need: 296. Still manageable. Now we have scaled our mental model of money into a scale in which understanding the full scope of charity becomes a bit easier.

The geographic lens

Let’s distribute the two sets of disks on a world map and see who’s paying and who’s receiving (click for the full-size image):

Nice. A lot to unpack here. Let’s see what the chart tells us.

On a quick glance, no region seems very similar to any else. Even if the amount of disks in two sets of stacks were alike (compare for example Latin America and Sub-Saharan Africa), the mix of charity is different (received charity in in the former is mainly remittances, while the latter receives the most balanced mix of charity out of all regions). The landscape is far from dull and random, however.

For example, did you make sure to acknowledge the ridiculous amount of disks on top of Northern America? See what happens if I go full Al Gore and stack everything up all the way:

See my point?

Another thing to notice is that there aren’t many big “sent” piles apart from that skyscraper in Northern America and that on top of Western, Northern and Southern Europe (the kind of wine red region with a not-too-bad sent pile). Something similar seems to be happening around the received-piles, with a single notable tower in Southeastern Asia apart from the one in Northern America.

It seems there really are only three groups of regions on the map: the big senders, the big receivers, and the rest. This is a bit easier to see if we translate the map chart into a bar chart as below. Can you identify all three groups? (Note that we’re still counting in disks of $10 billion.)

You already know the first member of the big sender club. Northern America absolutely dominates the picture – both in terms of sent and received charity, so it in fact belongs to both the big senders’ and receivers’ club. But having each foot in a different club doesn’t prevent Northern America to also become the number one region sending charity to other regions on balance with net 23 disks sent (received charity minus sent charity). Game, set, match, Northern America.

Next comes Western, Northern and Southern Europe, grabbing the second seat in the big senders’ club, both in absolute terms and on balance. It makes do with less charity received, however, and prefers to sit with the normal crowd with “only” 11 disks received.

The big receivers’ club is joined by Southeastern Asia, who received a massive 26 disks and cleared 19 of those on balance. It’s the clear winner of net received charity. There’s obviously something interesting going on in this populous region including countries like India, Pakistan, Bangladesh, Philippines and Indonesia.

A further interesting region is Middle East and North Africa, which is a relatively strong charity sender, and the last clear net sender region with net 5 disks sent. The most likely next member of the senders’ club, if not already in.

Note also the 10 disks designated to “multilateral institutions / unspecified”. This stack captures money that was donated to third party multilaterals, such as the United Nations, as well as private donations to international causes without a specific destination. In reality a lot of this money eventually ended up somewhere in the regions, but due to data limitations it’s difficult to know exactly where.

One last chart before doing a round of deep-dives in each region. It’s the same bar chart as above, only now excluding remittances. What I’m after here is to see what the picture looks like when only considering the “cleanly voluntary” part of charity.

Some very interesting things happen as we exclude remittances. Northern America and W-, N- and S-Europe still keep their top spots, but this time Europe overtakes America as the top region of net charity sent, now 11 disks against 7. Remittances we’re apparently doing a lot of work for Northern America’s rankings.

The rest of the regions, on the other hand, lose a mass of disks across the board. Southeastern Asia, previously the king of net received charity, becomes a nobody by losing a whopping 17 net received disks, and thus clearly would not be in the big receivers’ club had it not been for remittances. Latin America suffers a similar fate and gets cut by 8 net received disks and is left with only 1. It wasn’t a member of any club anyway, though, so it doesn’t really care. After the cuts, Sub-Saharan Africa manages to peek its head out and becomes the top net receiver with 5 disks.

Given these first observations, what’s really happening here? We’ve seen that only a couple of regions call the shots in global charity from their exclusive club houses. It’s also evident that different parts of the world are defined by different types of charity. Take another quick look at the map charts. See how the richer regions of the world have grabbed most of the blue private donation disks, while as a rule of thumb the other regions are all about orange remittance disks? That’s one of the biggest realizations I had, at least. There’s a huge amount of private donations happening in Northern America and Europe, but very little leak out to the other regions of the world. On the other side, what really moves the needle in the regions where the majority of the world’s poor live is remittances. The citizens of those regions are doing such a lot to help themselves – pulling a huge weight which we saw disappear between the two bar charts. And finally, even though Official Development Assistance and for-profit charity are a bit better in sharing the cake across the world than private donations, they are essentially buried under the massive volumes of blue and orange disks.

Next, let’s take a quick tour of what’s happening on a regional level.

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Charity in Northern America

The story of charity in Northern America is really a story of charity in the United States. The region consists of only one other country, Canada, and the U.S. beats their northern neighbors on charity spending by about 20 to 1. Canada does put up a fight though, and just manages to land a top-10 spot in the ranking of biggest sender countries in the world, with about $31 billion sent in 2018 (nearly 60% of which remittances).

It’s actually not too far fetched to say the story of charity in general is a story of charity in the Unites States. Have I mentioned that it utterly dominates the rest of the world in every category? That it alone sends more than 40% of all charity sent in the world?

See below how the U.S. compares to whoever is the second biggest donor, category by category. (We now descend to a level of detail where the $10 billion disks start to muddle nuances in data – hence we go back to charts with figures in $ billions.)

An amazing amount of private donations happen in the U.S., enough to dwarf the global number two, Germany, by about 15 to 1. And that’s not due to the simple fact that the U.S. economy is bigger than Germany’s. The U.S. is also much more generous. American private donations amount to 2.1% of GDP, compared to 0.7% in Germany. The average in all of Europe is about 0.5%, making the region a quarter as generous as the U.S.. The only other country that comes even close is Australia with 1.7% of GDP. So it is this quite uniquely strong tendency to donate coupled with the biggest economy in the world that really drives America’s top spot in the charts.

On remittances, on the other hand, the U.S. is average. Despite having the largest absolute volume of sent remittances, it only amounts to 0.7% of GDP. The global average is about 0.6%. (And there are several countries which send double digits of their GDP out as remittances!). The top three countries that stand on the receiving end of remittances from the U.S. are Mexico, India and China.

On ODA the U.S. unfortunately belongs to those least generous. While the average country donated ODA equivalent to 0.31% of their Gross National Income (note slightly different metric compared to GDP), the U.S. only donated 0.17%, or about half as much. But thanks to a huge economy, this is still enough to capture the top spot in absolute terms.

Finally, no surprise that the U.S. is a focal point of global for-profit charity. While the community of impact investors, microcreditors and the like is still relatively young and still debating its identity, it’s relatively safe to say most of the money currently comes from the States, at about $32 billion invested in 2018. Available data suggests the number two region to compete is Europe, which still clearly falls behind pace with $19 billion.

There’s a lot more I have to say about the reasons why so much charity originates in the United States, which I will include in a separate post.

Charity in Western, Northern and Southern Europe

Western, Northern and Southern Europe take the prize of having the most healthy, mixed and balanced diet of sent charity out of all the regions. Roughly 5% of the region’s total can be attributed to for-profit charity, and the rest of the cake is divided evenly between private donations, remittances and ODA. The region does especially well on ODA, as more than half of all governmental foreign aid in the world comes from European countries.

On a country-by-country basis, the region is like a fractal zoom of what the world looks like on a region-by-region basis. Again, a small number of big senders take care of most of the giving. In the case of Europe, the top-5 consists of Germany, the U.K., France, Italy and Spain.

What we can also observe from the chart above is that the balanced diet of charity is more or less copied across: there’s roughly a similar mix of all four charity categories coming from most countries. This is most likely due to common agreements and harmonizations made between the member states of the European Union. It’s what drives similar shares of ODA from each country (as mentioned above, about 0.5% of GNI on average), and it’s what created the free movement of labor within the EU. Once an initial entry into the EU has been granted, migrant workers have the right to freely move between EU member nations to find work, which means more economic opportunities are available to them, which in turn leads to steady amounts of remittances.

Charity in Southeastern Asia and Middle East & Northern Africa

I’ve chosen to cover both Southeastern Asia and Middle East & Northern Africa under the same header for a reason. As you can see from the map charts, one is a disproportionately large sender of remittances, and one a disproportionately large receiver. Yes, there is a connection.

Southeastern Asia received a huge total of 21 orange remittance disks in 2018. This is because Southeastern Asia is home to five out of the global top-10 receivers of remittances: India (the number one), Philippines, Pakistan, Vietnam and Bangladesh. Together, these five countries munch up 16 of the 21 remittance disks up for grabs in the region, leaving only 5 to be shared between the remaining twelve countries. India alone munches 8 disks.

While remittances alone cover 80% of what’s happening in the charity space in Southeastern Asia, there are two big points to be made about Middle East and Northern Africa.

Firstly, this region is a big sender of remittances because it hosts three top-10 remittance sending countries: Saudi Arabia (sending 5 remittance disks in 2018), United Arab Emirates (4 disks) and Kuwait (1 disk). And by now you can guess where those disks are headed: to Southeastern Asia. A truly mindblowing fact: nearly 90% of the roughly 10 million strong population of United Arab Emirates is foreign workers, and about 40% are Indian.

A big reason for why these oil rich countries are so popular destinations for migrant workers is that in the past decades there has been no shortage of fantastical construction projects. The migrant workers have been busy as ants building, for example, Dubai:

The second point about this region is that it receives a lot of Official Development Assistance. This is, again, due to hosting a lot of top-10 receivers: Syria, which is the biggest receiver of ODA with one full disk received (owing to the nearly decade long civil war), as well as Yemen, Turkey, Jordan and Iraq, who combined share another disk of ODA.

The regions with no club memberships

Latin America is a big net receiver of charity, as only two disks of private donations and one disk of remittances were sent in 2018, while a significantly larger pile of 12 disks was received. The region has its own huge players just like the previous ones. More than a third of all disks received in the region went to Mexico, mostly as remittances from the U.S.. USA-Mexico happens to be the single largest corridor of remittance flows in the world, with nearly $34 billion dollars sent across the border in 2018. Mexico is also the region’s largest sender of charity, with an estimated $6 billion of private donations, followed by Argentina and Brazil.

In Sub-Saharan Africa, one disk of private donations and two disks of remittances were sent, while a balanced mix of 10 disks was received. The two powerhouses of this region are South Africa and Nigeria – two countries with similarly sized economies. Nigeria however, with 200 million people, is inhabited by nearly four times as many people as South Africa, making it the most populous country on the continent. Both countries send roughly the same amount of charity, mainly a mix of private donations and remittances, but Nigeria alone dominates the charts in received charity. It received 5 times as much charity as the second biggest receiver in the region, Kenya, driven mostly by a massive $24 billion of received remittances. Most of the remittances come from the U.S., the U.K. and the neighboring Cameroon.

In Eastern Europe, Russia and Central Asia, which includes countries such as Ukraine, Romania and Uzbekistan, not too much is happening from the global point of view. Russia and Ukraine dominate due to being the most populous countries. The bulk of charity being moved relates to remittances flowing back and forth between Russia to Ukraine. Ukraine and Serbia help explain the one disk of ODA received in the region, as they received slightly above $1 billion of ODA each in 2018.

East Asia, comprising most prominently of China, Japan, South Korea and Hong Kong, is the fourth largest sender region in the world. Japan is the region’s largest charitable nation, thanks to a strong combination of sent private donations, remittances and ODA. China donates minimal amounts of private donations per capita, but due to its immense size this still amounts to a respectable $24 billion. More than half of everything received in East Asia is remittances to China, mainly from the U.S. and Hong Kong.

Finally, we have the smallest region in terms of charity, Oceania, where only four disks were sent and three received in 2018. 60-75% of all charitable activity in the region is due to domestic private donations in Australia. New Zealand is another notable, albeit small, contributor. Together, these two countries send significant amounts of support to the surrounding island nations, such as Papua New Guinea, Fiji and Samoa.

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The value chain lens

We now have a good overview of global charity through the geographical lens. There is still another way of answering the main questions of this post, by applying the “value chain of charity”-lens. By value chain I refer to how charity flows from its origins to its recipients, changing hands between various actors along the way. This is how it goes.

The value chain starts with the green supply side: individuals with enough resources to spare for charity. On the other end we have the demand side: individuals with needs, endangered animals, nature in need of preservation, science to be conducted, art to be made and so on – whatever the money ultimately gets used on.

Through few or many steps in between, charitable money flows simply traverse from left to right. Let’s trace all those possible routes, starting with the simplest cases:

Someone donating money directly from their pocket or bank account to another individual executes a person-to-person donation. That could for example a hand-to-hand donation made to a monk in Buddhist country in Asia, or even a person-to-person bank transfer in the western world if it gets registered as a charitable donation (data on such transfers can usually only gets captured if the donor actively declares the transfer as a tax-deductible donation).

In the case of remittances, individuals with needs have made a jump to the green side by moving abroad and finding better-paying work than is available in their home country. This allows them to save and send money back to their family or community staying behind on the demand side. An important difference to person-to-person donations from the value chain point of view is that a middleman is present: a bank, a post office or a money service provider (think MoneyGram or Western Union) will handle the transfer, ensure it finds its way across national borders, and charges a fee for the service. The total fee varies with country of origin and destination, and can in the worst cases be more than 20% of the sum being sent.

Then there’s the classic form of charity through non-profit organizations:

There’s two ways donors’ money can end up funding not-for-profit organizations (NPO): either by direct donation, or via a foundation.

What exactly is a foundation? One definition puts it like this:

Broadly speaking, a foundation is a nonprofit corporation or a charitable trust that makes grants to organizations, institutions, or individuals for charitable purposes such as science, education, culture, and religion.

(As you see, foundations sometimes make grants directly to individuals, e.g. to artists or students in the form of scholarships. This is fully OK by me even though it’s not reflected in the chart. Couldn’t make the arrows fit nicely in the final chart, you’ll see soon. Sorry.)

Strongly simplified, foundations are a bit like investment funds. Their function is to handle large amounts of capital, with the purpose of granting that money away to NPOs or individuals in a structured manner. They have employees like investment funds do, and they build expertise in making grants in their chosen niche, like those mentioned in the above definition. There are both public and private foundations, but the biggest ones tend to have been founded by super-rich individuals. Great examples include the Bill & Melinda Gates Foundation and the Stichting INGKA Foundation (the foundation of the late Swedish IKEA-founder Ingvar Kamprad).

After securing funding from foundations and individuals, NPOs turn the money they receive into programs and services. These could include for example a new department of a university providing specialized education and research, a homeless shelter run by a religious organization, or perhaps a vaccination program by a health charity in a developing country.

Next, we add ODA:

Governments collect funds from individuals in the form of taxes. Some part of those taxes are donated forward by governments who choose to participate in foreign aid. Most aid-sending governments run a specialized department that handles the allocation of aid, such as USAID in the U.S., DFID in the U.K. or SIDA in Sweden. The allocated funds will end up with either other governments (of developing countries), or multinational non-profit entities such as the United Nations or the World Bank (or any other NPO of the government agencies’ choice). These then go on to run programs & services that eventually benefit the demand side of the value chain.

The final piece to add is for-profit companies:

Companies sell goods and services to individuals, and gain revenues. The chart is simplified by leaving company-to-company revenues out – this is because in the grand scheme of things every company in the world derives its revenues from products and services that ultimately are sold to individuals. A mining company couldn’t sell metal to a semiconductor manufacturer if they couldn’t sell semiconductors to a mobile phone manufacturer if they couldn’t sell mobile phones to you and me, and so on.

Out of all companies in the world, some subset chooses to engage in corporate donations. These are usually given to NPOs or foundations. Coca Cola is massive, so it has a foundation of its own, to which 1% of the company’s annual operating income is donated. Others are smaller and feel its enough to donate to other people’s organizations. Companies love to make a lot of noise about their generosity, but globally speaking these corporate donations do not amount to anything massive compared to money donated by individuals. In the U.S., for example, corporate donations form about 5% of all private donations.

Then, perhaps more significantly, there are companies whose business is to make investments. The ones who choose to have at least a partly charitable purpose will engage in impact investments, or for-profit charity. That means making investments and giving loans that these companies believe will make the world a better place. These investments manifest themselves as, for example, a microloan to a poor farmer in a developing country, a for-profit water-cleaning facility near polluted water sources in a remote location, or perhaps a solar cell project in a community without access to the electrical grid.

And that’s it, really. The chart looks a little messy from afar, but it’s a decent cheat sheet describing most, if not all activity taking place in global charity. It even links back to our main sources of charity by color-coding the relevant money flows. But then, so what? What’s the use of putting this framework into our heads? What did we just gain?

I like to think what we’ve just done is popped open the hood of charity. We’ve uncovered the engine and its parts. We’ve gained visual contact with the working components of the engine, which means we’ve also learned what it takes for charity to work properly. Or why it might be broken. See, each box and arrow represents something that has a role to play in the efficiency and effectiveness of charity. By being aware of how the components link to each other offers one further way to understand it.

We can suddenly answer very tricky questions about charity and at least sound knowledgeable. Say, for example, that the minister responsible of foreign aid in the government of your home country called you right now and asked: “What can I do to improve the effectiveness of our aid?”

How to answer? Just follow the ODA path in the value chain. First of all, if you wanted to turn every stone, you could start from the very left and recommend the minister ensures the country has a good taxation system which minimizes the amount of taxes evaded. This is because any reduction in tax evasion rates would increase the amount of taxes available for foreign aid (not to mention all the other good stuff). Next, the minister needs to make intelligent decisions about how to allocate the aid. Which governments should receive the aid? Which NPOs? He should have staff in place to ensure the recipients maintain high ethical standards and don’t embezzle the money should they receive it. They should help the minister understand what kind of programs and services potential recipients intend to run. Are they in line with the standards of the government, and what evidence will there be of their positive effects? Finally, the minister should be aware of who or what the intended benefactors of the programs will be. It should be ensured they actually want or need help, and that there isn’t some other, neglected group of recipients who could benefit even more from the same amount of aid.

There. Not the specific and final answers your minister needs, but knowing which are the right questions to ask is a great start. By following a similar logic, we can uncover a lot more interesting questions from across the charity value chain. A big part of global charity flows through foundations and NPOs: what are some of the biggest ones in the world and what do they do? Is what they do effective? Is it worth doing? Same goes for ODA: what do the countries that receive ODA do with it? How much of it actually ends up funding effective services and programs? Or what do the multilateral NPOs do with the money? How much do money transfer agents capture from all the remittances flying around globally, and wouldn’t lowering the cost of remitting be a huge benefit to the world’s poor? And so on. This – acting as a guideline for asking the next battery of pointed questions – is to me the greatest value of the value chain lens.

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In this post we’ve peeled off quite a thick layer of information around charity, and uncovered dozens of new rabbit holes to dive into. Before diving into them, I’m going to tackle one more topic in this section of the series, the Fundamentals of Global Charity, to finalize our primary education, so to speak. That topic is the question of “How much is enough?” In other words, if we could flick a wand and magically fund all the poverty programs, equality campaigns and natural habitat preservation efforts needed to fix all the remaining major problems we know of, how much money would that be? How much more would it be compared to what already flows within the charitable landscape? Who would get those extra resources? You’ll find my attempt to answer these questions in the next post.