How to organise an alms bazaar

Gani Aldashev 10 July 2007

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Aid for development has been at best ineffective and at worst harmful. Bill Easterly makes this point extremely clear in his recent book: the problem is not the quantity of aid, but how aid is organised.

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 Alas, we know surprisingly little about alternative ways of organising aid.  In particular, we know very little about the way that has been growing ever more popular – non-governmental organisations.

The popularity of NGOs has been increasing among all players of the international aid community.  The international organisations have been implementing ever-larger fractions of their projects through the NGO sector.  Take the case of the World Bank.  Between 1973 and 1988 only 6% of the World Bank-financed projects went through NGOs.  By 1994 this share was over 50%.

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 Developed countries’ governments, too, have been increasingly relying on NGOs.  One-quarter to one-third of Swedish, Swiss, and Norwegian official development assistance goes through NGOs, and so do 41% of the US overseas development funds.

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 Private donors, especially the super-rich, also like the NGO sector.  Here the shift has been from giving to domestic-cause charities to development-oriented NGOs.

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Thanks to all of these, the NGO sector has been booming.  Already in 1995, a UN report on global governance stated the existence of about 29,000 international NGOs.  To this, one should add a much higher number of NGOs that raise funds only in the country where they have been established.

There is a downside to this boom. NGOs have to compete with each other.  Your mailbox around the Christmas time can testify – it is overloaded with appeals to give for thousands of good causes.  Such appeals do not come for free.  Each unanswered appeal letter that ends up in the trash is development money lost.  Given that the response rate to fundraising letters is low and that NGOs spend up to 10% of their revenues for fundraising

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, isn’t it too much money wasted?

At least in part, such high spending on fundraising is caused by tough competition for donors.  This raises the question: is society organising its aid through NGOs in an efficient manner?  Is decentralised competition good for beneficiaries in developing countries?  Or should we curb the unrestrained competition between NGOs by promoting concerted actions such as those of the British Disasters Emergency Committee or the

United Way
in the US?  These are the questions that inspired Thierry Verdier and me to explore the effects of competition between NGOs, in “Competition and the Markets for Development Donations.”

Highly motivated but different views

What really motivates NGOs?  By their very nature, they are not profit-maximising firms. NGOs are founded by motivated people who deeply believe in a certain idea, and such people are the main resource of the NGO sector.

At the same time, each NGO considers itself different from other NGOs.  Each NGO “entrepreneur” has a distinct idea about how development should be made.  While profit-driven mergers among firms are quite common, extremely few NGOs merge.  This reflects the fact that NGOs are mission-driven enterprises, whose founders are extremely reluctant to move away from their missions.  On these considerations, we built our model with the view that each NGO maximises the effect of its own project.

How does competition come into the picture?  Each NGO tries to persuade donors that its project is more valuable than those of other NGOs.  However, even the most motivated people are not ubiquitous: one hour more spent writing and mailing appeal letters means one hour less spent vaccinating sick children.  The resource that an NGO has – its members’ time – is fungible: it has to be split between working on the project and raising funds.

Donors also have their views on which aspects of development should have priority.  The closer the match between the ideals views of a donor and an NGO, the more likely is the donation from the former to the latter.  Fundraising activity of an NGO serves to persuade donors that its project is close to their ideals.

Two paradigms of fundraising

However, giving to one good cause often means not giving to another one.  The competition for donors implies that more fundraising by one NGO is reducing the effectiveness of other NGOs’ projects. In this “bad competition” paradigm, there are too many NGOs on the market – because of these negative externalities, each NGO’s project is too small with respect to the socially optimal number.  This view is certainly not novel – back in 1982, Susan Rose-Ackerman described this effect in her paper on charity competition and excessive fundraising.

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 In this paradigm, the right policy is promoting joint fundraising appeals such as those of the

United Way
in the US.

The importance of this effect is undeniable: in recent surveys, for two years in a row charitable fundraising professionals have been putting competition with other charities as their main challenge.

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This view, however, gives an overly dark picture of NGO fundraising.  After all, not everyone is an active donor.  The overall size of the donation market is not fixed, and competition is not a zero-sum game.  Fundraising by one NGO may serve to “awaken” potential donors to give, and among these, not all will end up giving to the NGO that “awakened” them.  Some may decide to give to other NGOs.  The donations market increases in the total fundraising effort put by NGOs.  Thus, through fundraising, NGOs can impose positive externalities on each other, and these positive externalities can outweigh the negative ones. Under this view, there are too few NGOs on the market, as they do not fully internalise the externalities that they impose on each other.

Clearly, both types of externalities matter in real life, and the right policy towards the NGO sector should depend on the relative importance of the two types.  If positive externalities generated by fundraising are quite small – i.e. the donation market size is inelastic with respect to total fundraising – we are closer to the first paradigm, and curbing fundraising competition is the right policy.  If, instead, fundraising is effective in attracting new donors, then competition between NGOs should be fostered.

Disciplined good will?

The above discussion implicitly assumes that NGOs are run by honest people and that the issue of accountability is absent.  This is far from being true and disregarding accountability issues means losing out a crucial aspect of the reality of the NGO sector.  After all, NGOs are run by human beings, and these – in the absence of accountability mechanisms – can be tempted to pocket a part of the funds raised.

If so, what is the role for competition? Surprisingly, stronger competition can actually lead to more money being pocketed.  The idea is quite simple.  An NGO entrepreneur cares both about her project and the perks.  She considers the opportunity cost of pocketing the money from the budget.  When the competition for funds is weak, the NGO has to spend little time for fundraising, leaving most of the time for the project.  This means that the opportunity cost of pocketing money is quite high.  When, instead, competition is tough, the NGO has to spend a lot of time doing fundraising; this implies that very little time is left for the project. In such case, the opportunity cost of pocketing money is low.  Thus, tougher competition also implies a larger part of funds being misused.

Competition: a double-edged tool

Governments that want to rely on NGOs for channeling development aid through the NGO sector have various policy instruments: matching grants, tax deductions, tying grants to past performance, and so on.  Each of these instruments may induce more or less competition for funds.  However, policy-makers should keep in mind that incentives matter, even for highly motivated people working in the NGO sector, and that competition between NGOs can be a double-edged tool.



[1]

Easterly, W. White Man’s Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good. Penguin, 2006.

[2]

Hudock, A. NGOs and Civil Society: Democracy by Proxy? Polity Press, 1999.

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US Agency for International Development. Foreign Aid in the National Interest. USAID, 2002.

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Micklewright, J. and A. Wright. Private Donations for International Development. WIDER Discussion Paper No. 2003/82, 2003.

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The Economist, “Sins of secular missionaries”, January 29, 2000.

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Rose-Ackerman, S. Charitable Giving and Excessive Fundraising,” Quarterly Journal of Economics, vol. 97, 1982: 193-212.

[7]

Association of Fundraising Professionals. State of Fundraising 2004 Report and State of Fundraising 2005 Report. Alexandria, VA: AFP. Available at: http://www.afpnet.org.

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Topics:  Competition policy Development

Tags:  NGO, charity

Gani Aldashev is Assistant Professor of Economics at the University of Namur (FUNDP), Belgium, and Associate Fellow at CORE, Université Catholique de Louvain.

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