Sachin Agarwal provides context for the reasons NGOs are necessary. They fill in the gap by providing services that neither the government nor the private sector undertake.

In a utopian world, non-governmental organizations (NGOs) would not exist. NGOs provide services that fill gaps left by the private and public sectors. To better understand why this gap exists we have to understand the incentives of the different stakeholders of society.

Elected politicians are driven by short-term interests that do not always align with long-term social goals. With policymakers thinking about the next election, democracies produce public policies that are often shortsighted at the national level and weak at the local level. Controversial issues are ignored till they reach crisis proportions. In autocracies, the benefit of the population at large is often not even a factor in policymaking.  NGOs are left to provide services that would otherwise be provided by the government.

On the other hand, the services the private sector can provide are limited to what can be monetized and generate profit. As economist Milton Friedman famously said, “the social responsibility of business is to increase its profit.” Services that are difficult to monetize, and therefore outside the realm of what the private sector provides, include products for the lowest economic strata of society.

Examples of NGOs that fill these gaps include the National Geographic Society, which generates awareness on cross-border environmental and anthropological issues. The Bill and Melinda Gates Foundation funds work related to the eradication of malaria; these efforts are targeted at the poorest people in society, making them very difficult to monetize.

The third major role NGOs play is undertaking high-risk business models where the returns on investments are too uncertain to justify returns for shareholders. An excellent example of this is the X-Prize Foundation that sets out measurable goals that are intended to lead to the creation of industrial sectors. Virgin Galactic is a direct result of the first X-Prize.  Another example is the testing of the micro-finance model through NGOs before it was scaled up by for-profit corporations.

Globalization adds another dimension to the role of NGOs

Consider this scenario: it is the 1970s, and in the search for lower labor costs Nike outsources production of footballs and shoes to South Korea and Taiwan. However, soon it finds that wages are rising in those countries.  In particular, labor unions are in a position to negotiate higher wages and better working conditions. Nike transitions its production to Indonesia and Vietnam where labor unions are prohibited. The extensive negative publicity that follows from the use of child labor in sweatshops is well documented.

Through all of this, Nike complied with the laws of the countries that it operated in. The ease with which it was able to change countries limited the role of governments. Multilateral organizations, like International Labor Organization in this case, can provide guidance on standards. However, they are bound to show deference to the sovereignty of its member nations.

To fill the power vacuum left by governments, a slew of NGOs such as Vietnam Labor Watch launched an international campaign of awareness. The efficacy of this campaign was based not on legislative action or violence, but on reduced sales for Nike. This forced Nike to take action, enforce its code of conduct and improve the monitoring of its contractors in these countries. Similar high-profile cases offer parallels in other industries such as genetically modified organisms, with Monsanto, and oil production, with Shell.

Angels or Frauds?

The need to prove the purity of their motives is highest for NGOs because their very existence is dependent on a relationship of trust. On one hand, their work often entails working closely with people that they are trying to help. Not having a seller-buyer relationship but a trust-based relationship allows NGOs to get closer to people’s lives than any private sector organization could. Microfinance institutions that use social peer pressure for loan recovery are a classic example of this phenomenon.

On the other hand, funding for NGOs is less predictable than either that of the government (which lines its coffers through taxes) or private corporations that can modify their products and services based on which sells best. All NGOs can count on is the credibility to donors of their promise to provide a service that is insufficiently provided by the public and private sectors. Any time donors feel that delivery is not living up to its expectations, funding can be cut short. This is the most effective check on the service that NGOs deliver.

What does the future hold for NGOs?

Sustained capital constraints, increased proliferation of technology and increasing globalization are three emerging trends that NGOs should watch out for.

Times are tough for all segments of society. This has increased the need to accomplish more with fewer resources. A recent trend brings together NGOs with profit-seeking businesses to leverage the best that each has to provide. Leadership on this is provided by organizations like Ashoka and TechnoServe, which use NGOs to de-risk business models and private sector businesses to provide the scale required for meaningful impact.

In the coming years, NGOs will have to increase the level of transparency they operate with. An increasing number of corporations are purporting themselves to be ‘triple bottom-lined focused.’ This requires them to publish sustainability reports on their investments in society and environment and the resulting non-monetary impact. These reporting services are often delivered by NGOs that must then report back on a well-defined set of metrics. This increased scrutiny is further enabled by almost instantaneous dissemination of information through global technology media.

As transparency increases and funding becomes more restricted, NGOs will have to become a bit more cutthroat. This does not mean they will have to compromise on their objectives. However, they will need to be managed more professionally. There will be an increased focus on measuring impact, and funding will be closely tied to achieving promised metrics as opposed to feel-good reports. They will be judged not as angels or frauds but on the basis of whether they achieve the goals they set themselves.