Nuno S. Themudo is Assistant Professor at the Graduate School of Public and International Affairs, University of Pittsburgh.

Nonprofits in Crisis

Economic Development, Risk, and the Philanthropic Kuznets Curve

By Nuno S. Themudo

Indiana University Press

Copyright © 2013 Nuno S. Themudo
All rights reserved.
ISBN: 978-0-253-00685-1

Contents

Preface,
1 A Cross-National Philanthropic Puzzle,
2 A Risk Perspective on the Nonprofit Sector,
3 Economic Development, Risk, and the Nonprofit Sector in Cross-National Perspective,
4 When Crisis Hits,
5 The Long-Term Impact of Economic Risk on Nonprofit Sector Strength,
6 Nonprofit Sector in Crisis: Broader Implications and Strategies for Risk Management,
Notes,
Bibliography,
Index,

CHAPTER 1

A Cross-National Philanthropic Puzzle

“Sometimes things get worse before they get better”—Doña Mica reflected during an interview. 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. 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.

This book focuses both on the nonprofit sector in general and on specific cases studies of Mexican nonprofits like Fovaso, which tried to work and survive—not always successfully—in a risky environment. Study of these organizations’ local vicissitudes generates broader lessons about philanthropy and the nonprofit sector, which perfectly complement wider cross-national statistical analysis. The main argument proposed here is that the apparently simple notion of risk helps explain the fundamental and contradictory influence of economic development on the nonprofit sector. When economic development leads to increases in macroeconomic instability, nonprofits tend to face rising levels of economic risk, and nonprofit sector strength tends to decline. In contrast, the nonprofit sector tends to become stronger when economic development decreases macroeconomic instability and the risk nonprofits face. In other words, risk resulting from the process of economic development is a major influence on nonprofit sector evolution. Such risk is a powerful, yet largely neglected, influence on philanthropy and the sector.

The trajectory of nonprofits such as Fovaso over the past two decades provides a vivid example of the Mexican nonprofit sector’s travails. Annually, Mexicans donate a smaller fraction of national income to the nonprofit sector than citizens in any other country, around half a billion purchasing power adjusted dollars. They also volunteer less than anyone else does. Accordingly, Mexico has the weakest nonprofit sector in the world, employing only 0.4% of its labor force (Salamon et al. 2004). A different assessment ranked Mexico lowest globally in terms of nonprofit sector capacity and impact (Anheier and Salamon 2006). In sharp contrast, the nonprofit sector is burgeoning in the United States, where it is a significant part of the economy and culture. Most Americans are born in a nonprofit, and it is in nonprofits that they go through many of life’s most critical moments: getting a degree, marrying, practicing their faith, recovering from sickness, and participating in the policy process. Consequently, 92% of the adult population belongs to at least one nonprofit and about 75% to more than one (Anheier 2005:76). It is not surprising, therefore, that Americans give over $300 billion annually (slightly over 2% of GDP) to the nonprofit sector, which employs close to 10% of the labor force in the United States, twenty-five times more than in Mexico even when adjusted for labor force size. Of course, the nonprofit sector is hardly an American phenomenon. The Netherlands and Sweden, for example, enjoy even higher levels of philanthropy, while Canada and Ireland have larger nonprofit sectors as a proportion of their labor force. Mexico’s philanthropy and nonprofit sector are small when compared to such countries, but what is astounding is that they are smaller even than in poor countries such as Tanzania, Kenya, and the Philippines as well as ex-communist countries such as Romania and Hungary.

Why does Mexico have the weakest nonprofit sector in the world? Mexico’s nonprofit sector anemia is surprising because current theory predicts that a country with intermediate levels of economic development and welfare spending, significant protection of civil liberties and political rights, and a favorable legal framework for nonprofit organizations should encourage significant philanthropy and a medium-sized nonprofit sector. Why are Mexicans less generous than others? Why are they less likely to make donations and volunteer for social causes? More generally, why do some countries have a vibrant nonprofit sector and others do not? The experience of countries with weaker nonprofit sectors, such as Mexico, is very relevant to general questions about the sector in other countries (see Hammack 2002). It offers a valuable opportunity for the study of the causes of nonprofit sector weakness and an important contrast to most existing research, which has focused on the much more developed nonprofit sector in rich countries. Indeed, study of this apparent outlier generates new theoretical insights that can subsequently be tested against broader cross-national evidence, thus revealing more general explanations than are currently available.

While anchored in a detailed analysis of the Mexican nonprofit sector, this book has broader, comparative ambitions. Cross-national research has been essential in expanding our understanding of philanthropy (e.g., Ilchman, Katz, and Queen 1998; Thomas 2004; Musick and Wilson 2008; Hammack and Heydemann 2009) and the nonprofit sector (e.g., Salamon and Anheier 1998; Hammack 2001; Glasius, Lewis, and Seckinelgin 2004; Salamon et al. 2004; Themudo 2009). Yet, because of the frequently abstract nature of current work in the field (Anheier 2004:3), and because the necessary data have only recently become available, few studies have tested the predictive power of nonprofit theories against cross-national data. Additionally, most of the studies that have examined cross-national data have limited their analysis to rich, Western countries. This has weakened our confidence in generalizations of theoretical insights across different geographical contexts, particularly across the Global North/South divide (Lewis 1998). By examining both Northern and Southern data, this book presents a rare angle on philanthropy and the nonprofit sector, contributing to the emerging field of comparative nonprofit sector research. It will show that research on Mexico’s philanthropic anemia helps us understand the broader causes and consequences of nonprofit sector weakness in Mexico and elsewhere.

At stake is much more than an embarrassing ranking for Mexico. Since a robust nonprofit sector is generally associated with the healthy functioning of democracy and the market, the country’s philanthropic anemia is likely to have political and economic ramifications. For example, a weak nonprofit sector might limit the opportunities for underrepresented groups to have a say in Mexico’s incipient democracy, contributing to the country’s low levels of civic participation. Nonprofit sector weakness helps to explain the paradoxical and troubling finding that the majority of Mexicans were disappointed with democracy even as in the year 2000 the country held its first free presidential election in over seventy years. Moreover, nonprofit sector weakness might contribute to low social trust and widespread corruption (Themudo 2013), which, in turn, is likely to hurt economic development and social stability (see Putnam 1993, 2000; Knack and Keefer 1997; Uslaner 2008). Consistent with this prediction, for the past two decades Mexico’s economy has been relatively stagnant, while crime rates have exploded. The country’s current social instability is a major threat to its citizens and even its neighbors, as the escalation of violence and crime along Mexico’s northern border powerfully illustrates.

In this chapter, I begin by uncovering the puzzle that lies at the heart of this book and the Mexican experience. Then I demonstrate the challenge it poses to existing theory and introduce the basic tenets of a risk perspective on the nonprofit sector, all the while highlighting the important implications for policy and research. I finish by laying out the plan of the book.

An Enigma Wrapped in a Puzzle: Mexico and the Philanthropic Kuznets Curve

Mexican researchers have hypothesized that the country’s undersized nonprofit sector is primarily due to the uniqueness of its political history (e.g., Verduzco 2003; Terrazas 2006; Layton 2009). This is a plausible explanation. Between 1929 and 1997, Mexico was a de facto single-party democracy. Throughout the duration of its rule, the Partido Revolucionario Institucional (PRI) was effective in co-opting and neutralizing (often through repression) any dissenting views (McAdam, Tarrow, and Tilly 2001). Such a political context, the argument goes, hampered the emergence of an independent nonprofit sector. However, while it is impossible to deny the importance of Mexico’s idiosyncratic political history, a comparative outlook suggests other key factors may be at play. Several other countries, such as Brazil, Hungary, and South Korea, which have very different political histories, also display a weak nonprofit sector. We must contrast, therefore, explanations based on Mexico’s unique political history against more general explanations of nonprofit sector weakness to assess their relative explanatory power and generate a more complete explanation for our puzzle.

A cross-national outlook also offers fresh doubts about the explanatory power of nonprofit theory. As detailed below, current theories predict a linear relationship between nonprofit sector strength and the level of economic development. The Mexican case, however, points to the intriguing possibility that this relationship might in fact be nonlinear. Surprisingly, cross-national evidence supports this supposition. Figure 1.1 plots the U-shaped relationship between philanthropy and level of economic development for countries included in the Johns Hopkins Comparative Nonprofit Sector Study. The predicted relationship is clearly nonlinear, with middle-income countries typically displaying the lowest levels of philanthropy.

Astonishingly, the U-shaped pattern can be found in every main operationalization of the nonprofit sector (such as nonprofit employment, expenditure, volunteering, and giving) and is also evident in every field of nonprofit sector activity for which we have comparative measures, namely culture, education, health, social services, environment, development, advocacy, foundations, international, professional associations, religion, and women’s organizations. To illustrate, Figure 1.2 depicts the relationship between prosperity and the two main measures of nonprofit sector size. It includes the scatter plot for the actual values of total nonprofit sector employment as well as predicted values for total nonprofit sector employment and expenditure.

Using a different dataset with twice as many countries, Figure 1.3 depicts the same nonlinear pattern in the relationship between civic participation, social capital, and economic development across countries. While this book focuses on philanthropy and general nonprofit sector size rather than membership, civic participation or social capital, Figure 1.3 shows that this nonlinear pattern is not a figment of a particular dataset or indicator of the nonprofit sector. Other studies have missed this important pattern in part because they have looked for a linear relationship or focused on the comparison of only two broad groups of countries: developed and developing. The profound differences between poor and middle-income countries, however, suggest the need for a more fine-grained portrait of the nonprofit sector globally, and especially of the “developing world,” than has been generally undertaken in cross-national research of philanthropy and the nonprofit sector.

In this book, I label this nonlinear relationship between economic development and nonprofit sector strength the “philanthropic Kuznets curve” (PKC) because its U-shape resembles the “Kuznets curve.” Half a century ago, Simon Kuznets argued that the relationship between social equality and economic development follows a U-shaped curve. He argued that at low levels, economic development leads to a decrease in economic equality, but at high levels, economic development contributes to an increase in economic equality (Kuznets 1955). More recently, researchers identified an analogous, nonlinear relationship between environmental conservation and prosperity, whereby environmental conservation first falls as the level of economic development rises, reaches a turning point, and then increases as the level of economic development continues to rise. Like the original Kuznets curve, this “environmental Kuznets curve” has quickly become a major area of research in economics (e.g., Binder and Neumeyer 2005; Acemoglu 2009). The PKC has cross-sectional and longitudinal interpretations; that is, it describes a pattern of change in philanthropy and the nonprofit sector as countries develop economically over time, as well as a pattern of cross-sectional variation at any one time between countries at different levels of economic development.

Evidence of a robust PKC is even more striking given the potential biases against the accurate measurement of nonprofit sector size in poor and non-Western countries. Civic groups in such countries are often dismissed as nonvoluntary manifestations of kin and clan relationships. Moreover, civic groups in poor countries are less likely to formally incorporate than their counterparts in rich countries and, despite their important social contributions, tend not to be included in nonprofit sector measures (Anheier 2005:82). The comparative evidence presented here demonstrates that the nonprofit sector can be as vibrant in poor countries as in rich ones, even according to several indicators of the “real” (read “Western”) nonprofit sector. Levels of nonprofit volunteering are much higher in Tanzania or Uganda than in some rich countries such as Portugal, Austria, or Japan and much higher than in middle-income countries such as Mexico, Brazil, or Poland. This fact is consistent with Musick and Wilson’s (2008:343) finding that alongside the United States the highest levels of volunteering can be found in some of the poorest countries in the world, namely Bangladesh, Tanzania, Zimbabwe, and Uganda. Moreover, levels of nonprofit expenditure as a proportion of national income in Tanzania and Kenya are on par with those in Italy and Austria, and much higher than those in most middle-income countries. Comparative nonprofit sector data lend support, therefore, to the minority view that civil society in poor countries is much more vibrant than generally acknowledged by academics and policy makers, who tend to view such contexts as the prototypical realms of “amoral familism,” dominated by relationships based on patronage and other forms of social coercion (Hann and Dunn 1996).

(Continues…)Excerpted from Nonprofits in Crisis by Nuno S. Themudo. Copyright © 2013 Nuno S. Themudo. Excerpted by permission of Indiana University Press.
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