Why the poor needs capital, not charity

A HEADLINE in 2006, which read “Buffett donates US$37 million to charity” saddens me.
Not that he seems to have actually donated it yet.
The report said “(Warren) Buffett will hand 10 million shares in his Berkshire Hathaway firm to the Bill and Melinda Gates Foundation”.
He might have done so already but, according to the Forbes list of billionaires, Buffett still ranks in third place with a fortune of US$47 billion, behind Carlos Slim and Bill Gates, both with US$53 billion.
More recently, this headline caused me to sigh in despair: “Forty billionaires sign up Gates and Buffett’s charity drive”.
Apparently, “40 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 Buffett and 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: “Gates and Buffett will, next year, approach a group of India’s richest to enlist their support for and views on setting up fundraising initiatives in India, the billionaire duo said last month, after organising a first-of-its-kind charity dinner for China’s billionaires.”
Why are we claiming this is sad?
The simple reason is this. Buffett and Gates 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 are good at.
For Buffett, it was his ability to pick out good companies from the bad.
Gates was able 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 did not become rich due to receiving charitable donations from wealthy benefactors, but, I will get to that later.
We do not know much about Gates’ life story but, based on what we have read about Buffett, 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 Gates and Microsoft.
Microsoft started out as a tiny software company with just a handful of employees in the late 1970s.
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 other Microsoft cohorts.
The business acumen and selfish pursuit of wealth would not have been possible if it was not for one crucial ingredient … capital.
Without capital – either yours or someone else’s – investing is impossible.
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.
Buffett believed he knew the secrets of identifying value in companies.
His investments, and his influence over the companies he invested in, have 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 US$60 or so per share in the 1960s to more than US$123,000 per share today!
But, now, Gates and Buffett have convinced themselves that entrepreneurialism is not the best way to spread wealth and well-being.
It seems their egos have gotten the better of them.
You would think that, with their first-hand experience of building companies from the ground floor upwards, they would understand the importance of capital, investment and the drive to succeed.
Charitable organisations have been trying to save the poor in the third world for decades, and, what have they achieved?
Maybe, someone else knows the numbers better than we do but, in a head-to-head contest, we will 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 is keeping poor people poor is not that they cannot get food or water. It is because they do not have access to the most important thing needed to create wealth – access to capital.
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 have 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 US$14 billion on health programmes since 1994.
Which, again, does not 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 are not self-sufficient for food, not just African nations.
However, most nations have the ability to trade for food.
If they cannot 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 cannot produce, say wheat or corn.
The trouble is, if you do not have access to capital, you cannot produce goods or services to be exported. And, if you cannot export goods, then the country is not producing an income.
If it is not producing an income, then it cannot feed itself. And, if it cannot feed itself, then it starves or relies on charitable donations.
Sure, advances in healthcare are wonderful, but are the health needs of developing nations really that much different from those in the West?
To some degree, perhaps, but largely they are 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.
What is more important to the well-being of any nation is the support and encouragement of entrepreneurial activity to achieve wealth. And, for that, it is the access to capital that is the most important ingredient.
Without capital, nothing happens.
It is for that reason that I dislike the fad of billionaires throwing money at charities in order to boost their own egos. – onlineopinion

*Kris Sayce is editor of Money Morning. He began his financial career inLondon as a broker specialising in small cap stocks. In late 2006, he joined the Melbourne team of the leading CFD provider in Australia.