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The ABCs of NFPs: Decoding The Economics Behind Grassroot Organisations

Picture of Nicholas Tan

Nicholas Tan

2023 Mannkal Scholar

This article originally appeared in The Spectator Australia

It’s not often that we acknowledge the not-for-profits that run within our local communities, providing volunteer services day-in and day-out. From working at aged care centres to teaching children vital mental health strategies, charities have a substantial positive impact in our society but shockingly, their services often go largely unheralded.

A closer inspection, however, may be applied to their quantitative economic impact on the Australian economy. In a 2022 report by the ACNC (Australian Charities and Not-for-Profits Commission), the charity sector employed 1.38 million people, equating to approximately 10.5 per cent of all Australian employees (greater than even the second biggest employer – retail services). Clearly, NFPs are not only the great community-builders of our day; bringing together groups of people under a common charitable mission, but also have a wildly significant role in sustaining the Australian economy.

Breaking down how charities impact the economic bottom line is a topic often left unaddressed in the classrooms, likely because of the difficulty in quantifying the ‘price’ of volunteer work or social impact created. Add to that the qualitative improvements in one’s mental wellbeing, job satisfaction, or stress from volunteering, and the positive benefits to society quickly accumulate. Even at a macro-level the value-add of charities is staggering, with a total economic contribution equal to 4.8 per cent of Australia’s gross value added, outpacing supposedly ‘pillar’ industries like tourism (3.2 per cent) and agriculture (2.8 per cent).

The question comes then, how do these charities – many of them whose goal is to support basic human needs – continue to exist in a country where the government spends billions of dollars a year on exactly these same things? The Public Goods Theory developed by Weisbrod (1978) attempts to answer this, arguing that the government provides public goods to a level satisfactory for the median voter, with the remaining unsatisfied demand for goods greater than the median being supplemented by charitable organisations.

This theory is supported in an analysis of how the Australian government currently funds the charitable sector, with most of its money spent on education and PBI (Public Benefit Institutions, which work for the relief of poverty or distress). Both of these areas work to satisfy the basic needs of those ‘slipping through the net’ of government-distributed public goods. Clearly, these privately-run organisations exist to create social impact at a community level which just cannot be met by the highly bureaucratic mechanics of public goods distribution.

Instead of relying on highly inefficient government funding, a focus on encouraging private donations by corporations and individuals (which currently only compose 8.2 per cent of charitable revenue compared to 45 per cent funded by the government) – particularly to community-level charities – would serve as a catalyst in improving distribution of social aid. This would ensure that capital is distributed only to the charities which can best demonstrate their social impact with their target audience, while also encouraging healthy competition and innovation within the NFP environment, resulting in a greater diversity of needs being met. It is easy to simply say: ‘let us donate more’, however, without giving thought to the consequences of how the donations will be spent, and thus I will caution that many of the community-level charities often do not have the financial acumen to grow their organisations in the long-run. Naturally then, a donation of not only money but also the time and knowledge of ‘business-savvy’ corporations and individuals would help micro-charities in being able to effectively use their new capital to grow and sustain their organisation in the long term.

Having worked in numerous NFPs as a volunteer – from nationwide organisations to community-level charities – I’ve been able to observe the impact large and small that they can have on the community around us, tangibly moving the needle through their work. It is high time that we should support a concentrated charitable effort from the private sector to support a crucial, but overlooked sector of our economy: pioneering positive change from the grassroots, up.

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