1.6 Economic Growth with Nonprofits
Although for-profit business, government and nonprofits are separated into their respective sectors, each depends on the others to survive and to grow and develop the entire economy. The table below (Table 1.4) illustrates how each segment interacts with each other to accomplish their goals.
Area ‘a’, the overlapping of nonprofit and for-profit firms, represents the many related for-profit subsidiaries of nonprofit operations. Nonprofits, being chronically starved of funds, sometimes develop related or unrelated for-profit businesses under the parent nonprofit to boost revenues. Area ‘b’ represents contracts between the government and nonprofits. These two sectors coalesce in “voluntary failure” situations described in the previous section. Nonprofits also contract with the government for local development projects, oftentimes competing with for-profit firms. Area ‘c’ symbolizes contracts between the government and for-profit firms, in which governments fund development projects and the for-profit firms operate the new assets resulting from that development.
It would be rare for an organization to fill area ‘d’. However, joint-ventures between all three sectors are possible as certain goals require the cooperation of all sectors of the economy.
Organizations can also travel between sectors. The sale of cooperatives or other nonprofits to private investors is common since funding can be unpredictable and insufficient for the nonprofit to continue operations. As noted earlier, governments can take control of nonprofits following the “voluntary failure” theory. Governments frequently privatize or devolution (turn-over federal programs to the state level) federal programs and institutions to nonprofit and for-profit firms. Besides the transfer of ownership or control, funds and personnel commonly roam between and through all three sectors.
The third sector both cooperates with and works independently of the other sectors to develop local initiatives that encourage growth and development for the entire economy. Some scholars argue that local initiatives are “useless because we live in a global world” (Gunn, 2004, 8). Although our economy is much more global than it was fifty years ago, there is still healthy demand for local initiatives in those communities not benefiting from the global economy. Development is rarely even across all cities, town and communities. While some are growing at extraordinary rates, other urban and rural communities are suffering from chronic underdevelopment. The individuals within such communities tend to lack the resources necessary to direct or organize community development; collective action is therefore needed. Public programs are a necessary first step, but private and nonprofit projects complement and enhance any local initiative. “Nonprofit corporations and cooperatives have proven to be organizational forms within which collective entrepreneurship can take place and new capital can be formed” (Gunn, 2004, 9).
Just as the private sector has its “economic entrepreneurs” and the government has its “political entrepreneurs”, there are individuals within the third sector who demand control over what services their nonprofit organization offers, who has access to those services, how much of those services will be provided at what price, etc. These people are referred to as “social entrepreneurs” (O’Neill, 2002, 50). Christopher Gunn (2004) has recognized five areas of community development on which social entrepreneurs tend to focus. These areas are social surplus creation and retention, providing jobs at a living wage, operating in environmentally sustainable ways, creating dynamic multipliers and meeting basic needs.
Social surplus creation and retention is vital for any community development project. Social surplus refers to the process of setting aside some form of asset, property, cash, labor, etc. for the use of future generations. Poor communities lack the human and financial capital necessary to accumulate any surplus. The surpluses that are able to be created are not retained with the residents. Instead, the surplus goes to the wealthy out-of-town real estate owner who collects rent from the building and stock and equity from the businesses. What these communities need is new business that is owned and operated by the people who live there. Nonprofit religious institutions, credit unions and cooperatives may be the answer for these deteriorating communities. The wealth and human capital improvements from these institutions stay in the community so future generations will have a surplus to finance further development.
The creation of jobs is also important for community development. The notion of providing a “living wage” (Gunn, 2004, 54) in addition to job creation has caused much debate in several North American communities. The minimum wage is hardly sufficient for an individual to afford the basic necessities of living, such as adequate food, housing and healthcare. Paying below the living wage means that those minimum wage earners not receiving health benefits may find it necessary to accept subsidies from the government; these are paid for by all tax-payers. The working poor who wish to escape “government handouts” often turn to nonprofits as advocates for social change. This has happened at the Alternative Federal Credit Union in Ithaca, NY (Gaul and Borowski, 1993). During a campaign to support living wages, the credit union realized they were not paying living wages themselves. The upper management agreed to exchange pay cuts for staff solidarity so the credit union could afford living wages for entry level positions. The pressure has now turned to two of the largest employers in Ithaca, both nonprofit schools, to match the credit union’s living wage policy. If that happens, the residents of Ithaca will see a dramatic change in their local economy. Although the tight budgets and reliance on volunteer labor somewhat impedes the ability of nonprofits to offer living wages, the case of the Alternative Federal Credit Union proves it is possible and rewarding.
Since nonprofits tend to be locally based, their actions and operating procedures directly affects the local residents. This obliges nonprofits to adopt environmentally sustainable practices. Sustainability here is defined as “development which meets the needs of the present without compromising the ability of future generations to meet their needs” (Brundtland Commission in Gunn, 2004, 55). Development often comes with external costs, such as pollution, congestion and the depletion of non-renewable resources. The cleaning-up of this “development” is often left for nonprofit business owners, who have a strong desire to meet the needs of the present and future residents of the community. Nonprofits not only repair the damage already made; they also try to limit the damage their development may cause. This is done with environmentally sustainable operating procedures. The organic farmers’ cooperatives exemplify this ideology; however, any nonprofit is able and duty-bound to function in a similar manner.
A multiplier is a ratio that measures how much change in income results from a change in expenditure (Gunn, 2004). Nonprofits can clearly bring new resources and wealth to a community. Those resources are then expended within the community to buy other goods and services. The money passes through the hands of several local entities as more products and services are purchased. The passage of resources and the creation of new wealth is the way economic growth multiplies. Although a business from any sector has the potential for the same outcome, nonprofits are preferred for community development because of their ties to the community. A for-profit firm might produce new wealth, but it is likely that the wealth will leave the community before it has a chance to affect the residents.
The last way Gunn proposes that social entrepreneurs can promote community development is to meet the basic needs of the people. This is the core of what nonprofits do; they fill the gaps from economy’s growth and meet their members’ needs. Basic needs can be achieved by the simple act of providing living wages, which was discussed above. However, as a community continues to develop, the meaning of “basic needs” changes from mere food, water and shelter to encompass things such as television, computers and automobiles. Nonprofits serve not only the poor, who require the most basic of needs; they can match the stride of development, providing the basic needs no matter the definition at the time.