Posts Tagged ‘markets’


Wednesday, August 11th, 2010
Civet cat

What are CIVETS?

By now, you’ve probably heard of the BRICs, the “developing world” economies that are pretty well developed, and flexing their muscle on the world economic and political stage: Brazil, Russia, India, and China.

Well, get ready for an even sillier acronym, courtesy of our friends among the financial analysts: CIVETS, the next BRICs. (That’s a civet cat to the left there.) Hard to believe it’s been 10 years since the BRICs were coined by a Goldman Sachs analyst, but now it appears there’s a new cluster who are following in their footsteps. This time it’s HSBC that’s out in front on the creative acronym: Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa. Given that my family’s from Colombia and I just visited South Africa, I’m tickled. But how real is this grouping, and what kind of influence are the CIVETS going to have in the near future?

More to the point, what kind of philanthropy might we expect from the CIVETS? The BRICs have some pretty interesting giving trends going on: GIFE, the Brazilian analog to the Council on Foundations, has been going strong for years, and a Chinese billionaire made his own version of the Giving Pledge a few months back. What about the CIVETS? Colombia has had a robust corporate philanthropy sector for at least a decade; I recall attending a civil society conference while studying there in 1996 that had a good deal of domestic funding. What about IVETS? Might be a good place to start exploring the international side of one of my two questions: what is the role of philanthropy in a democratic society?

Image from


Varieties of capitalism, varieties of philanthropy (part 4)

Friday, July 16th, 2010

So last time, I wondered: what kinds of innovation might an emerging hybrid CME/LME nonprofit economy be good at? Such an economy would be like a European coordinated market economy in that standard setting would happen cooperatively instead of competitively and labor relations would be “sticky” (it’s hard to fire people), but like an Anglo-American liberal market economy in that financing would happen in a public market with publicly available information and workers would continue to come in with general rather than highly specialized skills.

Coordinated market economies are good at incremental innovation, and liberal market economies are good at radical innovation, according to Hall and Soskice. Why should that be? Here I’m reminded of one of the key methodological lessons I learned from grad school; when thinking about causality, focus on the mechanism. This is one way to get across the gap between correlation and causation: try to tease out and classify the chain of events by which one thing causes another.

For example, in my dissertation, I argue that politicized security forces – in which the army and police have roughly equal resources, the army is more professionalized, and politicians have control over police at the local level – make a government characteristically susceptible to a particular type of armed challenge: insurrection from below. The mechanism I adduce for this is the incentives such a security-force configuration generate for potential armed rebels at the local level. If the police are captured by politicians and are not very professional compared to the army, there is a higher probability that when faced with insurrection from below, they will defect and join the rebels. (This happened a fair amount in Colombia during the La Violencia civil war of the 1940s and 50s, which was my case study.) And if the army is not that much stronger than the police in terms of resources, then they can’t simply crush rebel-affiliated police. This creates an opening for potential rebels, and in a country with politicized security forces, like Colombia in the 1940s and 50s, you’d expect to see more insurrection than other types of armed challenges, like military coups. (These, I argue, are likelier to happen in a country with militarized security forces, like Chile or Argentina.) The mechanism is the incentives that the configuration of control and power among army, police, and politicians creates for potential armed rebels.

So what’s the mechanism for radical vs. incremental innovation in coordinated vs. liberal market economies? For Hall and Soskice, it’s the incentives that labor relations and inter-firm relations create for workers and firms (think nonprofits).

  • In a coordinated market economy, job security, peaceful labor relations, and high levels of skills give workers the freedom to try new things in the confidence that there will be uptake from management and that firms will be willing to share ideas with each other in the interest of improving overall processes.

How does that work in a hybrid model? You have relative job security, labor relations (at places outside large nonprofits like hospitals and universities) are generally peaceful. But are nonprofits open to new ideas from their workers? And do they share new ideas with each other?

  • In a liberal market economy, the job market is much more open, which means that firms wanting to try something new have the latitude to hire workers knowing they can easily lay them off if the new project doesn’t work out. Financing is also more open, so established firms can acquire other firms doing innovative things (think Microsoft or Google hoovering up the startups that created Hotmail or YouTube) – which is a mechanism by which there are incentives for entrepreneurs to create startups that try radically new things. (This is not always a good thing; I remember meeting someone when I lived in the Bay Area in the late 90s who worked for a startup whose idea was “smell over the internet.” You would put a USB doohicky on your monitor that would emit different scents based on the webpage you were on. The doohicky was shaped like a nose.)

How does this work in a hybrid model? (The labor and firm relations, not the nose thing.) It’s relatively easy to hire nonprofit workers, but firing them is difficult. If financing were to become more open, more based on publicly available information, would we see established nonprofits “acquiring” other nonprofits doing innovative things?

It’s a fascinating possibility – a social-service agency that realizes it needs to do policy advocacy to really have impact on education “acquiring” a grassroots community-organizing effort that’s developing new advocacy tools. But it’s difficult enough for nonprofit mergers to happen, let alone nonprofit acquisitions.

Would this change with a social capital market? I’m not sure, because what the “varieties of capitalism” approach teaches us is that the systems of financing, labor relations, education, and inter-firm relations are connected, and their incentives shape and reinforce each other in powerful ways. So to change the financing structure without looking at the other systems might lead to some strange unintended consequences. I’ll explore those in a future post.

Varieties of capitalism, varieties of philanthropy (part 3)

Thursday, July 8th, 2010

All right, let’s recap this series:

  • There are different kinds of capitalism, different ways of organizing a market economy. According to one model from Hall and Soskice, two of the major ones are “liberal market economies” (LME) like the U.S. and England, and “coordinated market economies” (CMEs) like Germany and Japan. The main difference is in the level of coordination among firms, government, and labor: in CMEs, coordination is high; in LMEs, coordination is low.
  • Different varieties of capitalism are good at different things; in particular, according to Hall and Soskice, CMEs are good at incremental innovation while LMEs are good at radical innovation.
  • In applying this framework to philanthropy and nonprofits, thinking of nonprofits as firms, it looks like the U.S. nonprofit economy functions as a kind of CME within the broader LME of the U.S. economy. Which brings up the question of convergence; will nonprofits respond to incentives in the overall economy and start becoming more LME-like?

To get at this last question, let’s look at coordination in more detail. Hall and Soskice contrast Germany and the U.S. in terms of the relationships among four systems that impact the firm: education and training, corporate governance, inter-company relations, and industrial-relations (or labor relations).

System German Coordinated Market Economy U.S. Liberal Market Economy
Financing Obtained behind the scenes, enforced by reputational monitoring Obtained on public markets, reputation less crucial for monitoring
Education/training Develops highly skilled workers who are guaranteed employment Develops workers with general skills
Labor relations Secures places for highly skilled workers by moderating wage claims and promoting labor cooperation Easy to hire and fire workers, labor has less natural power
Inter-company relations Standard setting and technology transfer happen through cooperation Standard setting and technology transfer happen through competition

Again, it looks like nonprofits, in their relationship with foundations, operate in many respects like they’re in a coordinated market economy.

  • Financing, that is, grants, are obtained not on public markets, but through private negotiations using information that’s not publicly available, and where “reputational monitoring” underlies the relationship – e.g., program officers talk to each other about their grantees.
  • In terms of labor relations, nonprofits tend to find it hard to fire people, and it can be difficult to pay competitive salaries, so it’s not necessarily easy to hire and fire workers.
  • Standard setting and technology transfer, to the extent they happen, tend to be fairly cooperative, with infrastructure organizations like NPower being open to lots of different kinds of nonprofits.

Where the comparison doesn’t hold up is in the education/training system – there, a lot of nonprofit workers come into the field as generalists, and only specialize over time.

So does it look like there’ll be convergence? Will the nonprofit economy start to look more like the LME of the overall economy? I think convergence, if it happens, will be partial: new models of financing are emerging and multiplying, and we are moving toward social capital markets that will be based on publicly available information. But I don’t know that standard setting and technology transfer are going to start becoming more competitive, necessarily. If anything, the trend is toward greater coordination – witness the merger of TechSoup Global and Guidestar International, and the cooperation among Charity Navigator and other nonprofit rating agencies about getting beyond the primacy of the overhead ratio.

It’s worth considering what kinds of activities – what kind of innovation, for example – this kind of hybrid CME/LME model might be good at.

Varieties of capitalism, varieties of philanthropy (part 1)

Monday, May 17th, 2010

One item on my to-do list is to look into whether there might be “varieties of philanthropy” to go along with “varieties of capitalism.” The latter is the idea that U.S.-style capitalism is not the only or best kind, and that other kinds, like the Continental-Japanese model, are not only distinct but not necessarily converging on the Anglo-American model in the context of globalization and trade liberalization.

Let’s start by looking at the basic distinction in the varieties of capitalism literature, between “liberal market economies” (Anglo-American) and “coordinated market economies” (European-Japanese). This is from Hall and Soskice’s Varieties of Capitalism (p. 8):

In liberal market economies, firms coordinate their activities primarily via hierarchies and competitive market arrangements…Market relationships are characterized by the arm’s-length exchange of goods or services in a context of competition and formal contracting. In response to the price signals generated by such markets, the actors adjust their willingness to supply and demand goods or services…In many respects, market institutions provide a highly effective means for coordinating the endeavors of economic actors.

In coordinated market economies, firms depend more heavily on non-market relationships to coordinate their endeavors with other actors and to construct their core competencies. These non-market modes of coordination generally entail more extensive relational or incomplete contracting, network monitoring based on the exchange of private information inside networks, and more reliance on collaborative, as opposed to competitive, relationships to build the competencies of the firm. In contrast to liberal market economies (LME), where the equilibrium outcomes of firm behavior are usually given by demand and supply conditions in competitive markets, the equilibria on which firms coordinate in coordinated market economies (CMEs) are more often the result of strategic interaction among firms and other actors.

Now substitute “nonprofit” for “firm” in the above. Think about how nonprofits get their funding in the U.S. Doesn’t it seem like we operate in more of a CME model?

  • “Relational or incomplete contracting” => grants based on relationships with program officers with little provision of what constitutes success
  • “Network monitoring based on the exchange of private information inside networks” => just ask Lucy Bernholz or Janet Camarena about the struggle to make the private information inside philanthropic networks and organizations public.
  • “More reliance on collaborative, as opposed to competitive, relationships to build the competencies of the firm” => Capacity building and technical assistance provided by funders for nonprofits, long-term funding relationships where impact and capacity are not necessarily the central criteria for determining continued funding.

We operate in perhaps the quintessential liberal market economy (and liberal here means Adam Smith-style “classical” liberalism, aka laissez-faire), but the political economy of nonprofits in the U.S. looks more like a coordinated market economy. Why does this matter? Hall and Soskice again (p. 9):

In any national economy, firms will gravitate toward the mode of coordination for which there is institutional support.

What is the “mode of coordination” being supported in the U.S. philanthropic market today? A key question in the “varieties of capitalism” literature is convergence: will European CME economies ultimately end up looking more like the U.S. LME economy? This is a cross-national comparison, and the answer so far seems to be, “not necessarily.” A key question in the study of “varieties of philanthropy” might be intra-national: will the CME model of nonprofit funding in the U.S. converge on the LME model of the overall U.S. economy?

Freedom isn’t free

Monday, April 26th, 2010

One of the straw men I’d best dispense with at the outset is the one that conflates the freedom of markets with the freedom of democracy. I know no one sensible actually subscribes to the position I’m about to critique, but I feel like some version of it underlies a lot of our assumptions when we talk about the role of philanthropy in a democratic society, so here goes.

Free markets and democracy are often understood as going hand in hand, but in fact there’s a fundamental incompatibility between them, or at least a fundamental tension. The freedom of free markets involves surrendering collective outcomes to the operation of the invisible hand. While this frees individual economic activity from government regulation, it puts collective outcomes at the mercy of the logic of the market. A form of control is given up. This control is at the heart of a certain vision of democracy, of which I happen to be fond: that it involves citizens intentionally making collective decisions that effectively shape the conditions of their lives (I know, laughably quaint, right?). Do you see the tension? Either you give up on the prospect of intentional collective action, or you admit that market logic isn’t infallible and instead should sometimes be contradicted for the public good, to generate a more democratic outcome. A lot of people may be willing to take the first option; stubbornly, in my heart I’m not one of them.

Like I said, a bit of a straw man I’m tilting against here, but I think it’s important to sound a note of skepticism about free-market fundamentalism. There are all kinds of problems with the positions I’ve laid out here, like the distinction between positive and negative versions of liberty in the work of Isaiah Berlin, which I’ll get to at some point if I know what’s good for me. But for now, let me posit as a baseline for much of what’s to come a feeling, a suspicion, a stubborn refusal to accept that markets and democracy are naturally compatible. Whether or not philanthropy is a corrective or an accomplice to this tension is one of the things I’ll explore in this blog.