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The Economics of Too Much Money

A French non-profit disaster relief organization working on the Asian crisis is facing its own tsunami of "more than enough" donations, and consequently is turning away money. This makes for a strange economic story: the supply of donations has exceeded demand and so have lost value to their intended recipients.

If relief organizations can choose between increasing their supply of services (because demand for them has increased) or turn away donations, why would they ever choose the latter?

Institutional economists (e.g., North) have a better story and an answer. They point to the influence of legal contraints, particularly laws and regulations, that shape what is possible for an organization to do. In this particular case, donations are coming with conditions, contractual obligations that direct donations to specific programs. Ironically, relief organizations may find themselves with too much money for one program as another one starves. Some organizations have wisely anticipated these institutional barriers. "[M]ost German charities had been careful to broadly frame their aid requests so that they were not legally tied to providing specific assistance in one country" (Reuters). The result is likely to be a growth in the number and size of relief organizations, even as some fail to adapt to the changing circumstances.

The question of a UN representative aptly reflects the absurdity of the situation: "Could we wake up please to those 20 forgotten emergencies as we have woken up so generously to this enormous tsunami...?"

“The Economics of Too Much Money”