RESEARCH CORNER

Economic principles and the not-for-profit sector

How does one go about promoting the charitable sector and contribute to the development of a civil society? This may sound like a hypothetical question for idle speculation and one of little interest to business people; however, it is a topic of serious inquiry-one that will have profound implications for at least 1.3 billion people.

On July 6-7th, The University of BC hosted a symposium on this exact topic. Entitled "Building the foundations for a harmonious society - A Canada-China collaborative study on the development of China's Charity Enhancement Law," the symposium's purpose was to help China build the legal foundations for charities and not-for-profit organizations (NPOs). Among the 40 participants at this event were six high-level delegates from the Chinese government, including the DirectorGeneral of Legislative Affairs in the Ministry of Civil Affairs, Wang Lai Zhu. This interest shown by the Chinese government reflects the embryonic state of the country's charitable sector (for example, donations in China are estimated to be only 0.05% of the GDP, compared to 1% in Canada).

Symposium organizers asked me to contribute a paper focusing on the taxation of NPOs and related regulation. By the time I finished writing An economics-based approach to taxation and regulation of non-profit organizations: Analyses and recommendations for China* I was quite surprised at how large a part economic principles could play in the not-for-profit sector, especially given that the world of business and the field of economics are sometimes seen or portrayed as cold and calculating-the very antithesis of the not-for-profit ethos.

I concluded that governments should follow three principles: 1) allow people to choose which NPOs to organize and to which organizations to contribute time and money; 2) use information conveyed by these choices to identify NPOs worthy of government support; and 3) use grants and tax relief to reward the organizations that help achieve a fair distribution of resources among members of society.

These three principles, in turn, led to several recommendations; for example, I suggested that it would be more effective for governments to provide matching funds for private donations than use the same funds in direct government programs or fixed dollar grants-the rationale being that a community's citizens know better than distant bureaucrats about the health and welfare needs of their community, and, by extension, which organizations deserve financial and other support to satisfy these needs.

Next month, I'll discuss some of the other recommendations in my report.

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