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Nonprofits in Crisis: Economic Development, Risk, and the Philanthropic Kuznets Curve

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Why do some countries have a vibrant nonprofit sector while others do not? Nonprofits in Crisis explores the theory of risk as a major mechanism through which economic development influences the nonprofit sector. Nuno S. Themudo elaborates this idea by focusing on Mexican nonprofit organizations, which operate and strive to survive in a risky environment. The study of these nonprofits generates broader lessons about philanthropy and the nonprofit sector that complement wider cross-national statistical analysis.

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1 - A Cross-National Philanthropic Puzzle

ePub

“SOMETIMES THINGS GET worse before they get better”—Doña Mica reflected during an interview.1 She was apologetic about the fact that her new initiative, which focused on building the capacity of indigenous youth to develop microenterprises, was rapidly losing money. Yet she remained confident that Fovaso—a small nonprofit organization in Central Mexico—would soon be financially viable again. When Fovaso's financial woes began, the organization embarked on a major strategic reorientation, phasing out its philanthropic programs to focus on social enterprise. As she explained, the hope was that a commercial model based on lending and selling rather than giving to clients would offer a more financially sustainable and potentially more effective approach to fighting poverty. Her sanguine outlook, however, was hard to understand. Survival of small nonprofit organizations in Mexico is challenging in the best of times. But when I interviewed Doña Mica, Mexico was in the midst of the so-called Tequila Crisis, which “caused one of the worst recessions to hit an individual country since the 1930s” (Krugman 2008:32). The stock market had recently lost almost half of its value, unemployment was at record high levels, and Mexico's risk premium was the highest in the world.2 At the time, no one knew how deep the crisis was going to be. Eventually the economy did improve, and Fovaso experienced some temporary financial relief. Over time, however, Fovaso's troubles returned. Ironically, the new social enterprise model alienated supporters of the previous model and failed to attract sufficient new support, leading to a reduction in social impact and financial decline. The fate of Fovaso was important because it was one of the few nonprofits in Mexico dedicated to the welfare and empowerment of two of its most vulnerable groups: rural indigenous women and children with special needs. To witness the decline of this valuable organization, which at its peak had employed more than forty people, was devastating for its clients, already hard hit by the crisis. Learning that Fovaso closed its doors in the early 2000s was also difficult for me, because I had previously volunteered a great number of hours to the organization. After almost a decade since its demise, no organization has stepped in to fill the vacuum in poverty alleviation work left by Fovaso's disappearance.

 

2 - A Risk Perspective on the Nonprofit Sector

ePub

THIS CHAPTER PROPOSES a theoretical framework based on the influence of economic risk to explain variation in philanthropy and nonprofit sector size. In so doing, it will generate a hypothetical explanation for the PKC puzzle that is tested in subsequent chapters. Drawing on finance and game theory, it argues that risk fundamentally shapes the nature and extent of philanthropy and other contributions to the nonprofit sector. This framework extends insights from previous research on how risk influences the nonprofit sector. Research on nonprofit finance has highlighted the debilitating impact of financial vulnerability and risk on nonprofit organizations (e.g., Tuckman and Chang 1991; Keating et al. 2005; Young 2007). The impact of macroeconomic risk on the sector, however, is largely absent from past research, as is the impact of varying attitudes toward risk among organizational partners and individual supporters. This chapter employs theoretical analysis to help fill this gap.

 

3 - Economic Development, Risk, and the Nonprofit Sector in Cross-National Perspective

ePub

CHAPTER 1 PRESENTED a robust cross-national puzzle: the philanthropic Kuznets curve (PKC). Whether measured by giving, volunteering, civic participation, nonprofit sector employment, expenditure, or other correlates such as social trust and social tolerance, nonprofit sector strength invariably displays a U-shaped relationship with respect to the level of economic development across countries. Chapter 2 proposed that risk plays an important role in explaining this surprising nonlinear relationship. A major component of the way in which economic development impacts the nonprofit sector is by influencing the level of economic risk faced by nonprofit organizations and their supporters.

The risk explanation proposed offers insights into how risk influences philanthropy and the nonprofit sector. It captures the incentives driving individuals’ and other potential supporters’ choices that lead to nonprofit weakness, and points to some of the conditions under which the nonprofit sector should, or should not, flourish. To what extent are its predictions consistent with nonprofit sector evidence, and particularly the PKC?

 

4 - When Crisis Hits

ePub

CHAPTER 3 SHOWS the remarkable association between level of economic development, economic risk, and nonprofit sector strength across nations. Does this relationship hold over time as well? At present, the absence of longitudinal data prevents a cross-national time-series reply to this question. To more closely examine the hypothesis that economic risk mediates the relationship between economic development and the nonprofit sector, and to better understand how it occurs and what nonprofits may do about it, this chapter and the next examine the evolution of the Mexican nonprofit sector in the 1990s and early 2000s—before, during, and after the Tequila Crisis. The crisis is described as having “caused one of the worst recessions to hit an individual country since the 1930s” (Krugman 2008:39). With Mexico's population of nearly 100 million people at the time, the crisis brought suffering to millions of Mexicans and presented significant challenges to the nonprofit sector.

 

5 - The Long-Term Impact of Economic Risk on Nonprofit Sector Strength

ePub

HOW DID THE Mexican nonprofits studied and the nonprofit sector more generally fare in the post-crisis period? To the surprise of most, Mexico's 1995 adjustment program worked to quickly boost the economy. The dizzying drop in the peso led to an export boom, so that by 1996 the economy was growing again. Private investment rebounded, and by 1999 it registered the highest share of GDP since 1970 (Pastor and Wise 2006). While it may be the case for some that, as H. G. Wells once said, “the crisis of today is the joke of tomorrow,” most Mexican nonprofits took several years to be able to fake a laugh, and many never got to laugh at all. This chapter looks closely at the evolution of Mexican nonprofits after December 1995 and examines the generalizability of its findings.

I begin by examining the dramatically different impacts the case studies experienced, despite their common exposure to the same macroeconomic recovery. I show how, in line with the risk framework developed here, the level of economic risk that nonprofits experience during macroeconomic recovery depends upon the sensitivity of particular resource flows to the macroeconomic cycle (i.e., their beta risk), resource diversification, financial reserves, relationship with the government, and attitudes toward risk among leaders and supporters. I then analyze the impact of economic volatility and risk on the broader nonprofit sector in Mexico, combining results from an original survey, with several independent macro-level indicators of nonprofit sector support and activity. I then consider the cross-national generalizability of these longitudinal findings by using comparative and historical evidence from Thailand, Argentina, Chile, and several rich nations, including the United States. The final section summarizes lessons from quantitative and qualitative evidence on nonprofit sector evolution. Two powerful impacts of economic risk on the nonprofit sector stand out: (pro)cyclicality in the short term and capacity erosion in the long term.

 

6 - Nonprofit Sector in Crisis: Broader Implications and Strategies for Risk Management

ePub

Broader Implications and Strategies for Risk Management

HOW AND WHY does nonprofit sector strength vary across nations and over time? This book identified and developed an explanation for the puzzling U-shaped relationship between nonprofit sector strength and economic development—the philanthropic Kuznets curve—which defies nonprofit sector theories proposing a linear relationship between economic development and nonprofit sector strength. Based on the intuition that historically high levels of economic instability could be a main cause of nonprofit sector weakness in middle-income countries, I began an investigation into the relationship between the nonprofit sector and economic risk. In stark contrast with research on business and public sectors, however, research on the influence of risk on the nonprofit sector remains surprisingly limited. This book revisits the relationship, developing a new theoretical framework for the study of the nonprofit sector based on finance and game theory principles. I developed a framework suggesting that the relationship between economic development and nonprofit sector strength is mediated by risk. Simply put, the framework argues that risk generally depresses social support to the nonprofit sector and weakens nonprofit sector capacity by leading to an increase in the rate with which contributors discount future nonprofit impact. The more distant the impact is likely to be, the more heavily it will be discounted. Risk should thus attenuate most incentives for philanthropy, increase “philanthropic friction,” and encourage government agencies to shift risk to nonprofit organizations. Risk should also weaken sector capacity by eroding existing financial, human, and social capital and discouraging startups and new capacity development. At the same time, rising risk should stimulate some nonprofit sector activities, most notably in short-term emergency relief, risk-sharing associations, and commercially funded organizations, in addition to providing a competitive advantage to the most resilient nonprofit organizations. Thus, risk should have a profound influence on the nature and size of the nonprofit sector.

 

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