Non-Profits and Communities

Prof Liliana Gelabert, IE Business School, sheds light on what makes welfare-oriented non-profits effective at a community-level in the fight against income inequality.

In a two-part feature, Prof Liliana Gelabert, IE Business School, sheds light on what makes welfare-oriented non-profits effective for communities in the fight against income inequality.

Related research: Understanding community dynamics in the study of grand challenges: How nonprofits, institutional actors, and the community fabric interact to influence income inequality, by Pascal Berrone, Liliana Gelabert, Frederica Massa-Saluzzo, Horacio E. Rousseau; Academy of Management Journal.   

Recent research has moved towards the investigation of grand challenges – that is, large complex, unresolved societal problems – and the role of organisations in addressing these effectively. Among the multiplicity of such complex social ills, the sustained growth in income inequality is at the top of western governments’ policy agenda.

Barack Obama called income inequality the “defining challenge of our time,” and the World Economic Forum and the International Monetary Fund have described inequality as one of the greatest problems the world will face in the coming years. Although reducing community income inequality is a daunting task, many organisations are focused on addressing this ‘grand challenge’, most notably: welfare-oriented non-profits. But what is it that makes them effective?

A mutual relationship that never was

Prof Gelabert’s research reveals how issues of competition, institutional alignment and community support in the context of grand challenges, particularly income inequality, are more complex than originally thought. Their study – collected from 245 US communities – reveals how community dynamics influence the ability of welfare non-profits to eradicate income inequality. Although it would be natural to assume that a high density of welfare non-profits would benefit a community, Gelabert’s study finds otherwise.

While such organisations are beneficial for reducing community equality, this is so up to a point after which competition for resources decreases their effectiveness. Furthermore, such non-profits prove to be more effective when they operate in communities with strong law enforcement capabilities and less so in politically conservative local communities. Contrary to expectations, however, Prof Gelabert found that welfare non-profits are less effective in demographically heterogeneous communities and when the government provides effective social policies, hinting at a possible substitution effect.

What’s even more interesting is the effect of the presence of financial institutions and thus, more financially oriented citizens. Turns out, that in such a context welfare non-profits fare even better and are more effective. And finally, the study finds that racial diversity, and both the presence and the lack of it, tend to enhance the positive effects of non-profits, and that a conservative political ideology tends to diminish them.

One non-profit, too many

Prof Liliana Gelabert, IE Business School, sheds light on what makes welfare-oriented non-profits effective at a community-level in the fight against income inequality.

While evidence finds that a greater density of welfare non-profits is beneficial for reducing income inequality at the community-level, the benefits of agglomeration do not continue indefinitely. At a certain point, greater density spurs competition for scarce resources and produces an inefficient shift in resource allocation. This inefficiency results from the diversion of resources from programme-related initiatives to activities such as fundraising, and advertising aimed at ensuring the non-profit’s survival and continued operations.

Non-profits compete for donations and grants, volunteer time, and community attention. This sort of competition unfolds not only among non-profits attempting to address a specific grand challenge but also with other non-profits with different goals and constituents. Elite non-profits – non-profits which focus on arts, culture and education issues with an aim to enhance the local cultural context while preserving traditional values – also threaten the continued operation of welfare non-profits since they appeal more to the pockets of status-enhancing elite citizens in the community.

Not in this all together, institutionally

Prof Gelabert’s findings regarding local institutional context are even more surprising. She finds that governments can become a double-edged sword for non-profit organizations tackling grand challenges. She reveals, on the one hand, that welfare non-profits are more effective in communities with greater government enforcement capabilities. Through actions such as enforcing labour laws and employer obligations, governments level the playing field and set appropriate rules of corporate behaviour.

This facilitates the actions of welfare non-profits. However, on the other hand, weak government social policies also tend to increase welfare non-profits’ effectiveness. A plausible explanation, Gelabert claims, is because non-profits arise partly to compensate for market and state failures, and a lack of government intervention signals to community constituents that social problems remain unaddressed, thus increasing the legitimacy of and perceived need for welfare non-profits.

Unions: Not a match made in heaven

The institutional fabric of a community is also defined by its labour and financial institutions which have an unexpected relationship with welfare non-profits’ effectiveness, Prof Gelabert divulges. Central among labour institutions are unions, which share with welfare non-profits the common goal of protecting and empowering an economically vulnerable category of individuals.

However, their research finds that despite sharing this common goal, labour institutions do not seem to significantly increase the effectiveness of welfare non-profits at reducing income inequality. “A plausible explanation for this”, Prof Gelabert hazards, “might be a declining degree of trust between welfare non-profit organizations and unions, which prevents both sides from taking advantage of their shared goals and potential congruence”.  

Gelabert further explains that a decline in trust could be a result of the recent shift of unions toward recruiting members in community-based welfare non-profits. Moreover, she points out that welfare non-profit leaders have grown quite sceptical about the unionisation of their labour force, not only for financial reasons but also because of the consequences that a culture of unionisation would have on the non-profit sector.

Unexpected support  

Prof Liliana Gelabert, IE Business School, sheds light on what makes welfare-oriented non-profits effective at a community-level in the fight against income inequality.

While similar goals may not be conducive to a welfare non-profit’s mission, it isn’t surprising that seemingly contradictory goals then, are. Prof Gelabert and her fellow researchers found that the presence of financial institutions had a positive effect on the effectiveness of non-profits at reducing income inequality. Local financial institutions are prominent community actors that can influence individual attitudes, including civic behaviour and willingness to participate in civic initiatives.

This phenomenon has been coined as the ‘financialization of daily life’, wherein citizens adopt a portfolio view of society, and let go of their sense of community bonds and relationships while considering talent, friends, homes and communities as potential securities. Prof Gelabert bridges these seemingly disputing contexts by bringing in evidence which suggests that financial institutions are, however, increasingly willing to support community non-profits provided that these organisations have “a track record, fiscal discipline, good recordkeeping, and committed volunteers” – all features supported in the current trend towards non-profit professionalisation. What’s more, financial institutions rationalise their support as a way to increase community goodwill and to promote their business in the local market area.

A question of community: Ideology and diversity

Non-profits and their impact on communities

How the community fabric impacts the effectiveness of welfare non-profits is in the same vein –unexpected. Prof Gelabert reveals that racial diversity – both high levels and low levels – tend to reduce non-profit effectiveness. At high levels of diversity, the benefits of heterogeneity and integration seem to be outweighed by the effects of segregation and racial prejudice.

As a result, social cohesion and civic engagement in communities are undermined, therefore reducing the effectiveness of welfare non-profits. What is interesting, is that at the same time, a low level of racial diversity also diminishes the effects of non-profit density, probably because non-profits then need to invest greater resources in generating awareness. Finally, and as predicted, Prof Gelabert found that political conservatism reduced the welfare-oriented non-profits’ effectiveness. This stems from the fact that conservative ideology is usually linked to a system of psychological needs and motivations, some of which are opposed to those advocated by non-profits.

Part 2 of Prof. Lilian Gelabert’s feature will be posted on September 1st.
Prof. Liliana Gelabert

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