Do the donated NFL losing team shirts destroy local economies?

I've recently become aware of the fact that the NFL prints both championship teams' shirts in advance to satiate incredible demand -- but instead of destroying the losing teams' shirts like they used to, they instead donate them to developing countries. But the thought of flooding these local economies with free shirts, which doesn't create jobs, GDP, and hurts local clothing business, seems like it would be terrible for the economy. Is this indeed the case?

My answer is no, it doesn't hurt the local economy. This seems like an example of the "Broken Window Fallacy":

Suppose, when nobody is looking, I break all of the windows in my neighbour's house. This creates a bunch of work for a glazier who might otherwise have been idle. So it seems like, by going round smashing things up we can provide a boost to the economy. Surely this must be wrong!?

Indeed, the problem with this logic is that we have to think what would happen if I had not broken the windows. My neighbour, not having to incur the expense of replacing his windows, would have some extra money to spend on a hair cut or a new bicycle, creating work for a barber or a bicycle maker. If the windows are broken then those guys miss out.

So the glazier earns some extra income and gains; the barber earns less income and looses. But these two things "cancel out": this is just a transfer of wealth from one person to another rather than the creation of new wealth. My neighbour, on the other hand, definitely loses because he doesn't get a hair cut any more. So overall, the broken windows are a net loss to society.

The reason I think this is relevant to your question is that we could reframe it as: "if we burnt the shirts [broke the windows] instead of giving them away for free, wouldn't that create work for a tailor and therefore make society richer?"

I think the answer is no because, freed from the need to buy a shirt, people have more income to spend on food, educating their child, taking care of their health, etc. All of these things create jobs in the local economy to replace the lost jobs in the clothing industry.

It is true that the tailors lose out at the expense of the farmer, teacher, or nurse. But over long time horizons people will adjust to this by training to do the jobs that pay.

tldr; Destroying real resources may create winners and losers, but is almost always bad for society overall.

• I see your point, but wiping out an entire industry, even if the wealth were to be transferred to other industries or families' pockets, can't be good overall, correct? Long-term, doesn't an economy need to be diverse and thrive in all different industries? – K_7 Aug 18 '16 at 19:58
• @KartikChughヅ No. In fact, mainstream economics explicitly says that countries should not try to thrive in all industries. Instead they should specialise in the industries that they are most competitive in and then trade with other countries to get goods not produced domestically. This is one of the principles about which economists most strongly agree (igmchicago.org/igm-economic-experts-panel/…). For more information, read about "comparative advantage". – Ubiquitous Aug 19 '16 at 6:55
• Thanks for the link, I understand now. Just out of curiosity, do you think Middle Eastern countries or perhaps Russia take this concept too far, by relying too much on oil revenue? – K_7 Aug 19 '16 at 14:40
• @KartikChughヅ Good question. The models that predict specialisation are, generally, a bit "naive" in the sense that they do not allow much role for fluctuating demand (and therefore fluctuating prices for the goods a country produces). Especially with a good like oil, whose price is quite volatile, being so heavily specialised indeed exposes a country to very large price fluctuations. In this respect, some diversification is probably a good thing: it trades some short-run efficiency in favour of long-run protection from price shocks. – Ubiquitous Aug 19 '16 at 15:43
• @Ubiquitous 1) In your example they don't "cancel out"; there is a net loss. We need to account for the labor to clean up the broken windows, the labor and resources to produce the windows, and the labor to install the windows. 2) You said the dumping of shirts does not harm the third-world economy but say in your above comment that countries should specialize in industries that they are most competitive. Let's say that the third-world nation has comparative advantage; doesn't the shirt dumping negatively affect the more efficient economy meaning that the answer is "yes"? – Mathematician Aug 21 '16 at 18:58

It Depends.

We first need to decide on which country we are going to analyze.

1) If we look at the country producing the shirts, that country just spent the resources, labor, etc. to produce both types of shirts. The industry could pile all the wrong shirts and burn them, but that would be a waste of the resources and labor that have already been used to produce the shirts. Thus, it would be bad for the first-world nation to destroy the products. It would be better to use the shirts in some capacity. With other items, this comes in the form of selling the products to regain some of the cost of production.

2) Now we will look at the third-world nation who is receiving the shirts. You have already done most of the analysis. The market is flooded with free shirts, no additional jobs are created in the shirt industry, local clothing industries don't get the business, and many of these shirt businesses go bankrupt. All of this is true. The question is whether it is bad for that country's economy. Individuals from those countries would argue that it does harm the economy. One of the better resources describing this phenomenon is the book When Helping Hurts (there are starting to be many other resources, but this is the flagship). The argument is that third-world countries are not able to develop certain industries naturally because the industries are competing with "free" goods from the first-world country.

Let's look at an example. Let's say another planet produces a lot of technology, finds that it doesn't need it, and, instead of destroying it, dumps it on earth. The economy in any technology producing country on earth would suffer. Why? Because the country can't compete with free. It wouldn't be able to compete even if it had comparative/absolute advantage in that industry when compared to the other planet. Thus, the other planet would still produce technology despite the countries on earth being able to produce the same technology more efficiently and at a lower cost. This is bad for both countries.
Notice the parallels between the example above and the scenario you mentioned. A first-world country produces a lot of shirts and dumps them onto a third-world country at no cost. The third-world economy suffers because, even if it could produce the shirts at a higher quality and at a lower cost, the shirt industry cannot compete with free. Thus, the first-world country will still continue to produce the shirts even if the third-world country is more efficient. This is bad for both countries.

So, what is the solution?
As stated above, there are three conditions that need to be satisfied in order for us to find the best possible solution.
1) The first-world nation should use the shirts in some capacity.
2) The unintentional "predatory dumping" of shirts into the third-world countries does harm their economies.
3) Allow the most efficient country to produce the shirts.
The solution would be for the NFL to sell the wrong shirts to the third-world countries.
The solution allows for the companies in the first-world country to regain some of the resources used to produce the bad shirts (1), stops the dumping of "free" goods into developing nations (2), and encourages competition between the industries of the countries so that the consumers purchase from the companies that produce the highest quality shirts at the highest efficiency and the lowest price (3).

This isn't the case, because in the clothing market (much like in other markets) there is Product Differentiation. This is written on Investopedia as:

Product differentiation is a marketing process that showcases the differences between products. Differentiation looks to make a product more attractive by contrasting its unique qualities with other competing products...

...Product differentiation can be as simple as packaging the goods in a creative way, or as elaborate as incorporating new functional features. Sometimes differentiation does not involve changing the product at all, but creating a new advertising campaign or other sales promotions instead. Product differentiation determines what sets one product apart from other similar products, and it uses that difference to drive consumer interest...

In short, flooding the shirt market with the "losing NFL champion shirts" does not affect the market in any radical way, as NFL shirts are not substitutes for all other types of shirts as there are differences in styles of shirts.

• I somewhat doubt that though. In places stricken by poverty, with families desperately in need, I'm sure they would be happy with whatever they could get, and many wouldn't seek to purchase a sweater or suit if they had free shirts given to them, at least not in the short term. – K_7 Aug 14 '16 at 4:24

If I may, I shall rephrase your question more broadly (than just NFL shirts) as "All things considered, do donations of second-hand clothing (SHC) to developing countries harm those countries?"

As is often the case in economics, the answer here is, "It depends; we're not sure; more research is needed."

Some of the previous answers have already applied armchair reasoning, so here I'll quote from some who've actually studied this specific issue:

Those who tend to answer "Yes":

Used‐clothing imports are found to have a negative impact on apparel production in Africa, explaining roughly 40% of the decline in production and 50% of the decline in employment over the period 1981–2000.

This research concludes that over the time period from 2001 to 2012, SHC imports are responsible for roughly 19% of the annual decline of apparel production and roughly 12% of the annual decline of apparel employment in Africa. Also, a significant negative relationship between SHC imports and textile production is identified which is contrary to Frazer’s (2008) finding of no relationship. SHC imports are responsible for roughly 33% of the annual decline of textile production and roughly 6% of the annual decline of textile employment. Finally, a slight negative relationship between SHC and overall manufacturing employment is identified in Africa over 2001-2012.

Those who tend to answer "No":

Depending on the substitutability between new and used clothing, the phase-out could prompt increased import of new clothing. It could also prompt employment losses and generate costs for the poorest consumers. In the longer term, the phase-out is unlikely to promote the development of the garment sector unless the existing constraints are properly addressed.

contrary to the assertion that associated used-clothing imports have deleterious effects on the apparel production sectors in sub-Saharan African countries [citations omitted] the evidence suggests that such products can help to improve small firms’ competitiveness relative to low-cost imports. The current trend in Ghana and across Africa towards banning second-hand products as the primary cause of industry decline does not take account of the fact that second-hand imports have potential to infuse entrepreneurial spirit.

Value added comparisons suggest the introduction of used clothing has raised national income. ... So a \$1,000 increase in used clothing purchases at the expense of an equivalent purchasing power reduction in the other channels increases national income by \$62 to \\$198. Moreover, the distribution of that income will not reduce earnings among low-income groups since the used clothing income accruing to low-income groups, the retailers and distributors, equals that earned in tailoring.

Mixed or inconclusive:

This study found that the importation of SHC had positive contribution on the lives of the poor namely: SHC were consumed by the poor bacause SHC were cheaper, good quality and fashionable. Also, SHC created employment and filled the gap during shortage of clothes and shoes in the region. Despite such contributions, SHC had negative impacts: on the revamping of the textiles and leather industries, on health of the consumer, on human dignity and on the African culture. For those reasons, the ban is justifiable and commendable. However, it should be noted that the influx of SHC into the region was not the core reason for the collapse of the former textiles and shoes industries in the region. Rather the reasons that directly effected the collapse of the industries in the region included: poor leadership, lack of capital, lack of skilled manpower, poor infrastructure as well as un-competitive business and investment environment prevailing in the region.

The trade has clear consumer benefits. This is especially true in countries with low purchasing power, and for poorer consumers, though in many sub-Saharan African countries it seems that almost all socio-economic groups are choosing to buy SHC. ... The trade supports hundreds of thousands of livelihoods in developing countries. These include jobs in trading, distributing, repairing, restyling, and washing clothes. Oxfam’s research in Senegal estimates that 24,000 people are active in the sector in that country.

... SHC imports are likely to have played a role in undermining industrial textile/clothing production and employment in West Africa, which experienced a serious decline in the 1980s and 1990s. However, such imports have not been the only cause. Increasingly cheap imports from Asia are competing with local production, while supply-side constraints undermine the efficiency of the domestic industry. These constraints include unreliable and expensive infrastructure; the cost and availability of materials; outdated capital stock and lack of access to credit; and inadequate training and management skills.

In several West African countries it is not clear that, even in the absence of SHC, local textile/garment production and employment would recover, as new imports from East Asia are cheaper than locally produced goods and there are serious supply-side constraints.

It is likely that SHC displaces exports from third countries, particularly from Asia. It is hard to estimate precisely, but if all SHC trade were replaced by new imports, rather than by production in destination countries, then the number of jobs created in exporting countries would be around 100,000.

Our experimental study among 979 households in El Salvador finds modest evidence to support the hypothesis that donated shoes exhibit negative impacts on local shoe markets. ... While all of our regression estimates lie in the direction of slightly negative impacts on household shoe purchases, they fail to reach statistical significance, and thus we cannot present conclusive evidence pointing to a negative impact on domestic markets from in-kind donations.

Many casual observers have linked the decline in African clothing manufacturing to the import of used clothing [citations omitted]. This issue needs to be explored critically and empirically and in relation to the recent history of economic liberalization in Africa [citations omitted], which has posed multiple challenges for African clothing industries. ... Approaching this problem exclusively through published economic statistics fails to reflect what has really occurred in Africa. ... Complex realities cannot be explained by running regressions without attention to the quality of data sets and the relevance of the models and instrumentation.

Used-clothes imports may cause economic damage in the presence of distortions and externalities; subsidising imports of used clothes for aid projects could increase this damage. Even in the case of targeting ‘the poorest of the poor’, who may have no effective demand for new clothes, more effective and better targeted aid projects are possible. Given used-clothes markets throughout the Third World, used clothes can be shipped without subsidy, and the sales receipts will cover the costs.

By the way, the East African Community is currently restricting or banning the import of used clothes -- see e.g. this 2017 NYT story. This has resulted in "Trump's Other Trade War" (2018 Economist story).