Peter Nunnenkamp (Kiel Institute for the World Economy) Hannes Öhler (University of Goettingen)

1. Funding, Competition and the Efficiency of NGO Aid:An Empirical Analysis of US NGOs Engaged in Foreign Aid Peter Nunnenkamp (Kiel Institute for the World Economy) Hannes Öhler (University of Goettingen) New Directions in Welfare, 2011 Congress OECD Paris, France, 7 July 2011

2. Motivation • NGOs play an important role in foreign aid: • more than 40% of development aid by the United States is channeled through NGOs • …and are widely believed to be more effective than official aid agencies (e.g., McCoskey 2009) • Open question whether NGOs reduce administration costs of aid delivery • administration and management expenses of US-based NGOs engaged in foreign aid: 6.1% of the overall budget • Administration costs of official US agencies: 5.7%

3. Motivation, cont. • However, the share of non-charitable expenses varies greatly: • Expenses for admin. and management: 0% - 50% • Fundraising expenses: 0% - 40% • “Excessive” fundraising: “…from finding solutions and helping needy recipients to pleasing their donors and winning television coverage” (The Economist, January, 2000) • Perquisite consumption: • NGO entrepreneurs/managers may divert part of the revenues for private use • Possible determinants: • Competition among NGOs • Official funding

4. Hypotheses

5. Data and method • Cross-section of >500 US-based NGOs with foreign aid activity in 2007 • Data from the USAID registry: • Any US NGO has to register in order to apply for official funding • Costs of admin./management and expenses for fundraising as alternative dependent variables (% of each NGO’s total expenses) • Explanatory variables of main interest: competition and official funding • Official funding:share of public funds in total revenue of each NGO

6. Measure of competition • We measure competition with respect to the recipient countries in which the NGOs are active • Sum of the foreign aid expenditures of NGO j=1,…,N that overlap with the foreign aid expenditure of NGO i • Divided by the total population of NGO i’s country portfolio NGO j=1,…,N NGO i Burkina Faso Afghanistan Vietnam Nigeria Bolivia Cameroon Cambodia

7. Data and method, cont. • Various controls to account for NGO heterogeneity: • size, relative importance of foreign aid activity, degree of diversification (countries, sectors), experience, HQ location, characteristics of country portfolio, sector dummies • OLS / Tobit to account for the censored nature of the dependent variables (17 % of [small] NGOs do not report any fundraising)

8. Results

9. Results, cont. • Different sources of official funding (USAID, other US gov., other gov. and IO) have similar negative effects on fundraising, but USAID stands out in increasing administration costs • The negative impact of competition on admin. costs turns insignificant when we exclude NGOs with particularly high admin. costs (at least 2 SD above the mean)

10. Conclusion • It seems that competition among peers helps to improve the efficiency of NGO aid… • …as it does not lead to excessive fundraising, • …and tends to reduce administration costs. • Highly unproductive NGOs either reduce their admin. costs or exit the market • Implications for the debate on donor coordination and aid fragmentation: more coordination and specialization may come at the cost of NGO efficiency

11. Conclusion, cont. • In some contrast to conventional wisdom (Edwards/Hulme: “too close for comfort”), official funding may induce NGOs to spend more on charitable activity… • …as higher costs of administration are more than offset by lower expenses for fundraising • Higher admin. costs due to officially requested bureaucracy or softer budget constraints (perquisite consumption)?

12. Future work • Instrument the variables of interest with data of the year 2001 to mitigate endogeneity concerns • Specification in differences (2007 – 2001) to control for unobserved NGO heterogeneity • Follow-up study: Are less efficient NGOs less likely to survive? • Highly relevant for the NGOs themselves, the private and official donors of NGOs, and the aid receiving countries

13. Thank you for your attention!

14. Appendix A: Measure of competition

15. Appendix B: Baseline results

16. Appendix C: Extension and Robustness

17. Appendix D: Differentiation of official funds

18. Hypotheses and related literature • Rose-Ackerman (QJE 1982); Casteneda et al. (JLEO 2008): market entry/competition by NGOs leads to “excessive” fundraising • Aldashev/Verdier (JDE 2010): competition may even reduce fundraising if overall amount of donations is not fixed • Competition may reduce administration and management costs (e.g. Glaeser/Shleifer, JPubE 2001) • However, no evidence that donors choose more NGOs with lower admin. costs (Nunnenkamp/Öhler 2011) • Aldashev/Verdier: perquisite consumption may even increase with competition

19. Hypotheses and related literature cont. • Official funding of NGOs may have opposing effects on admin. costs and fundraising: • Andreoni/Payne (AER 2003): NGOs may reduce fundraising effort when receiving official funds • Official funding may increase admin. costs by (i) relaxing the budget constraint and allowing for perquisite consumption, and (ii) bureaucracy imposed by the official financier