Atlas: Nonprofits as Economic Organizations: Transaction Costs and the South African Nonprofit Sector by Martin Kaggwa

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ISTR Sixth International Conference
Toronto, Canada / July 11-14, 2004
Contesting Citizenship and Civil Society in a Divided World

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Nonprofits as Economic Organizations: Transaction Costs and the South African Nonprofit Sector
by
Martin Kaggwa
University of Witwatersrand - South Africa

The transaction costs approach affords economists with the opportunity to analyze institutions and organizational structures from a specifically economic point of view. The form of organization that minimizes transaction costs will be the one with superior economic performance in that; it will be able to provide goods and services at lower costs relative to alternatives. With the worldwide increase in the number and fields in which nonprofit organizations operate in developing countries, there is a need for a critical examination of the economic role and relevance of these organizations. Subjecting nonprofit organizations to transaction costs minimization analysis is one of the ways in which their existence and participation in economic activities can be evaluated. Based on the new institutional economic premises, this paper takes an economic approach in an attempt to justify nonprofit organizations in South Africa, using transaction cost minimization as the yardstick.

For most African countries, after 20 years of political independence, the hope for a better economic life has gradually faded away. Trust in governments and private business to create a better future has been lost. Many people are now looking at nonprofit organizations as a possible solution to their economic miseries. Given the competitive global environment within which different organizational forms operate, it is imperative to ask whether nonprofits can do a better job where other economic agents have so far failed. There is a need, therefore, for a better understanding of the economic role of nonprofit organizations in developing countries, if the failures of other organizational forms are to be avoided. New institutional economics (NIE) approach can be useful in fitting nonprofit organizations in macroeconomics analysis of developing countries. Cardinal to new institutional economics is the recognition that the economic world is not perfect as envisaged by orthodox economics and that both institutions and organizations of a particular economy do matter. Institutions, narrowly defined as the rules of the game, create the constraint set for organizations to participate in economic activity. Depending on the institutional framework, economic agents may find it valuable to use different organizations in economic activity. There is, therefore, a relationship between the economic outcomes of a country and its organizations.

The paper examines the South African nonprofit sector, in terms of organizational attributes that enables them to minimize transaction costs in the competitive environment in which they operate. Using survey results of the South Africa Nonprofit Sector study, the Civicus Index on Civil Society-South Africa Country Report and the South Africa Prodder Data Base, an examination of how the theoretical justifications and predictions of nonprofit organizations compare with the survey findings is done. The findings are interrogated and recast in the language of transaction costs analysis.

The study shows that, despite the inefficiencies associated with nonprofit organizations that emanate from opportunism and lack of incentives for their managers to be efficient, the organizational characteristics in the South African nonprofit sector show benefits that can counterweigh some of the above inefficiencies. Through incentive structures designed to minimize agency costs, allowing all stakeholders to participate in the project implementation, use of volunteers, project locations, and the nature of goods and services in which they specialize, nonprofit organizations in South Africa reveal a potential minimize transaction costs. The competitive edge through transaction cost minimization, however, can only be realized if the sector can control a range of organizational inefficiencies associated with lack of ownership and opportunism.

Date received: October 10, 2003