Archive for July, 2014

By Thomas Henry Marcil

All industrial sectors of the economy—from insurance to wireless telecommunications—operate in a state somewhere between full competition and monopoly. The same applies to the non-profit services sector, including charities involved in humanitarian and international relief operations. Though it can be uncomfortable to imagine non-profit organizations, built around the kindness of individuals and governments, fighting for revenue and market share, this spirited battle is very much the case in the humanitarian sector.

Since it is difficult to directly measure competition in an industrial sector, economists and policy analysts (carefully) use concentration as a rough corollary. High and low sectoral concentration, depending on the nature of the industry, can offer either benefits or drawbacks to consumers. Industries that are highly concentrated—for example, automobile and cigarette manufacturers—can pass on savings to consumers given superior economies of scale and network effects, yet may also encourage needlessly high barriers to entry for other firms wishing to enter the market. On the other end of the spectrum, highly unconcentrated industries—like the residential and commercial construction sector—can benefit consumers by incentivizing superior quality at the expense of providing consumers an excessive quantity of choices.

Curious to understand more about humanitarian efforts, I wrote a paper for a class last fall identifying macro trends of non-profit international relief firms, including the concentration of this sector and implications for humanitarian aid delivery. All charities that file for tax exemption in the United States – including those who identify as international relief and humanitarian organizations – must file an IRS form 990, providing a useful source of information regarding this market. I used these data for my paper.

The chart included here plots the total revenue accrued by this sector and its Herfindahl-Hirschman Index (HHI) – a commonly used measure of industrial

Total revenue accrued and HHI Index over time for the international relief sector

Total revenue accrued and HHI Index over time for the international relief sector

concentration – as a function of time. Since 1989, when the Berlin Wall fell, there have been three major developmental stages in this sector in regards to the quantity of revenue humanitarian organizations acquire from donors, and where this revenue is being allocated.

  • From 1989 to 1998, humanitarian organizations went through a stage of capacity expansion, corresponding to the end of the Cold War, which saw a rapid increase in the number of humanitarian organizations. The HHI decreases during this period, reflecting the increasingly fragmented market.
  • From 1998 into 2008, the market saw a period of volumetric revenue expansion, where humanitarian organizations experienced a five-fold surge in funding. The corresponding rise HHI indicates this surge in funding was increasingly concentrated among the larger organizations.
  • Finally, from 2008 to today the market has experienced a period of volumetric revenue contraction, a result of the financial crisis of 2007 and 2008, and more competition.

Not being a seasoned expert in the sector, I was not sure how to interpret these results. I present them here as an observation about the relationship between the amount and the concentration of humanitarian funding. Further study to understand the state of competition in the international relief sector could help improve governmental policy, organizational strategy, and ultimately the quality of aid delivered to beneficiaries.

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