One Philosophy on Philanthropy: Kiva, ROI, and solving the knowledge problem

For some time I have been struggling to come up with a personal philosophy toward donations and philanthropy. Growing up, I always felt some sense of social obligation to be donating to the guy on the corner, the Red Cross, poverty in developing countries, or one of a million things. But how does one choose?

Until recently, I have resisted giving more than a couple dollars here and there. I've always felt a bit stingy about it but my end goal isn't to not be blindly charitable at any cost, it is to give to causes that I understand in a way that supports values that I believe in.

I also resisted because I felt, as a kid, my job was to become educated and be able to get a good job to support myself and my family. Being able to donate a couple dollars in college is fine but I hope that it doesn't compare to what I am able to give throughout my adult life.

Much like an investment philosophy, I want the highest return on my donation and think it is appropriate to ask: Why should I spend one dollar on aid today if I can invest it and have the ability to give several times that amount to similar problems in the future?

Furthermore, the government gives tax breaks to certain types of philanthropy so I need to ask myself what distortions this causes and how to approach them. Do tax-incentivized methods of giving offer the best return on philanthropy or are there other methods which do better?

This is largely a personal question. Each of us will value the problems we see in the world differently, so the answer I have come to shouldn't be viewed as an absolute answer, but what best fits this description based on my values, my understanding of how the world works, and my current circumstances in life.

So what works best for me?

The best way that I have found to give is to enable creative individuals in low-income countries by giving entrepreneurs micro-loans in areas where governments tend to distort incentives and leave these people at a disadvantage.

While I don't wish to over specify, I also try to make several of my loans to entrepreneurs in the agricultural industry. These entrepreneurs frequently have the comparative advantage in economic terms but face both local and international political challenges as developed countries use protectionist measures to subsidize international competitors and local governments use agriculture boards and a hodgepodge of other regulations to transfer wealth from the agricultural export industry.

ROI as a Micro-lender

Let's say you donate $25, 4 times a year to the guy hanging outside Whole Foods. Very nice of you, but unlikely your money goes much farther than that. It will likely be consumed by that individual and return little more than that. In 10 years time, you will have donated a total of $1000.

Year Calculation Donation
01 4*25 100
02 4*25 100
03 4*25 100
04 4*25 100
05 4*25 100
06 4*25 100
07 4*25 100
08 4*25 100
09 4*25 100
10 4*25 100
Total $1000

But, if you donate $25, 4 times a year through the Kiva loan system, not only are you enabling a motivated individual who is pursuing an idea to create value in society (that will give back at a local level in their community) but you slowly get your money back and can re-invest it in other entrepreneurs. In 10 years, being generous with the same amount of money, (my rough and slightly improper math suggests) you will have donated (invested?) around $5500:

Year Calculation Donation
01 4*25 100
02 4*25 + 100 200
03 4*25 + 200 300
04 4*25 + 300 400
05 4*25 + 400 500
06 4*25 + 500 600
07 4*25 + 600 700
08 4*25 + 700 800
09 4*25 + 800 900
10 4*25 + 900 1000
Total ~$5,500

Awesome? I think so.

In celebration of an elegant solution to the knowledge problem: Join the Kiva Team Information is Beautiful.