What is the Third Sector?
Helmut Anheier


Editors Introduction Where does the third sector lie? That it is located somewhere between the state and market is agreed upon. That it is a sphere hitherto neglected by the social sciences is also uncontroversial. The debate lies in defining the precise nature and role of the non-profit sector. Can it act as a corrective to government and market failure? How contingent is its success on different political models? Helmut K. Anheier, director of the Centre for the study of Global Governance based at the London School of Economics and Political Science, provides a wide-ranging and definitive survey of the debate surrounding the third sector.

The term "third sector" typically refers to the set of institutions and organisations located between the state, the first sector, and the market, the second sector. The term covers voluntary associations, charities, non-profit organisations, community groups, foundations and a broad range of organisations that are private, not-profit-distributing and voluntary. It excludes co-operatives and mutual associations although significant overlap exists among these types of organisations and the third sector category, particularly in an historical and cross-national context. The self-help groups pioneered among the poor in the Victorian era and co-operatives among small-scale producers in developing countries today, qualify.

Locating the third sector
"The third sector" is also taken to mean the non-profit and voluntary sector. The term non-profit sector is based on the System of National Accounts, which defines a non-profit institution as an entity that does not distribute profits, that is independent, and that receives voluntary support. In particular, "non-profit institutions are legal or social entities created for the purpose of producing goods and services whose status does not permit them to be a source of income, profit, or other financial gain for the units that establish, control or finance them." The voluntary sector refers to organisations that voluntary in a dual sense: they are non-statutory and they are not businesses. Yet another term is non-governmental organisation, which in Europe and North America typically refers to non-profit organisations active in third world development and international politics.

The leading empirical study of the UK third sector is that of Jeremy Kendall and Martin Knapp, which explores the role of charities and voluntary associations, offering a quantitative profile of their size, scope and revenue structure. They show the historical development of the sector and explore its recent policy position in areas such as education, social services or the environment. They also address the complex definitional issues in coming to terms with the British third sector, which they describe as a "loose and baggy monster", sitting uncomfortably between statistical systems that until recently tended to ignore much of it, and conventional social science models that tend to relegate it to residual categories, as suggested by the terms non-profit or non-governmental.

Not surprisingly then, cutting through the tangle of different definitions and sometimes conflicting terminology became a major focus of recent comparative research. An initial attempt by myself and Wolfgang Seibel to introduce regime-specific definitions for advanced market economies, transition economies and developing countries was supplanted another cross-national collaboration with Lester Salamon. We set out to test the applicability of a structural/operational definition to capture non-state/non-market actors both conceptually and empirically in 12 and later over 20 countries. Using this approach, third sector organisations are formal, private, self-governing, non-profit distributing and voluntary entities. Indeed, this structural operational definition is gaining currency in the field. But this does not imply that consensus for a weighty body of theory lies behind conceptualisations of the third sector.

The theory of the third sector
For a long time, the social sciences neglected the role of the third sector and put more emphasis on state agencies and market firms. This began to change gradually in the 1980s and many of the now classical essays of theorising the third sector are in Walter Powell's important collection of essays, The Non Profit Sector. Largely in a US context, the volume addresses some of the central theoretical questions: Why do non-profit organisations exist in market economies and competitive democracies? How do they differ from firms and state agencies in terms of behavior and impact? These questions continue to shape the research agenda in the field.

One particular theory, known as the "heterogeneity" theory is based on the notion of "market failure/government failure" in economics. This line of thought assumes markets have an inherent limitation in producing "public goods", that is, goods that are available to all whether or not they pay for them. This "market failure" justifies the presence of government, which exists to satisfy the demand for goods left unsatisfied by the market system. In a democracy, government can perform this role only when a majority of voters support the production of a particular public good. Where considerable differences in voter preferences exist about which public goods to produce, and which ones not, it may be difficult to generate such majority support, leaving unsatisfied demand for public goods as a consequence. Such "government failure" is most likely where considerable heterogeneity (religious, linguistic, or ethnic) exists in a population. In such circumstances, the establishment of voluntary associations and other types of non-profit organisations serves both as a vehicle of collective action in the formation of interests and as a mechanism to supply the public goods neither state nor market provide.

A related body of theory sees voluntary associations not only as a reflection of demand heterogeneity; instead, the theory emphasises the role of social and political entrepreneurs who seek to maximise non-monetary returns, i.e., followers, believers or members. According to this supply side theory, the presence of such entrepreneurs is most likely in societies with high levels of religious competition or basic ideological splits within the population. In such circumstances, activists have an incentive to form voluntary associations as a way to attract adherents to their cause by offering services that these potential adherents might find attractive, such as health care, education, or cultural events.

A third approach is based on the notion of information asymmetries in market economies. In many transactions, consumers lack the information they need to judge the quality of the goods or services they are purchasing. This can occur because the purchaser is not the same person as the consumer (e.g. the purchase of nursing home care by children for an elderly parent), because the service in question is inherently complex and difficult to assess, or the inputs of some are difficult to match with the benefits procuring to many. In such cases, purchasers or members seek alternative bases for trust in leadership performance or the quality of the resulting service. Voluntary associations offer a solution to this trust dilemma. Because of the "non-distribution constraint", i.e. the prohibition on distribution of profits to owners, voluntary associations may be more trustworthy, and more likely to serve client or member needs. Accordingly, non-profit status of voluntary associations functions as a proxy for the market, signalling trust in the quality of output.

A fourth approach emphasises how embedded voluntary associations are in the social, economic, and political dynamics of societies. As such, their evolution cannot be attributed to any single factor, such as the unsatisfied demand for public goods or the supply of social entrepreneurs. Rather, the emergence of voluntary associations in modern society is rooted in the broader structure of class and state-society relations. Some suggest four regime types of voluntary sectors, each with a particular constellation of social forces, specifically the social and economic importance of the state, measured in terms of social welfare spending, and the overall scope of civil society, measured as the size of voluntary sector activity.

The statist regime combines limited state activity and a weak voluntary sector. It is found in societies where the state assumes a controlling role, and where elites co-opt the middle class, thereby reducing the level of organising outside state structure and the market, with Japan being the most prominent example. The liberal model characterised by limited state activity but a well-developed system of voluntary association is found in countries like the United States and Great Britain. By contrast, the social democratic pattern in countries like Sweden, is characterised by relatively high levels of government social welfare spending and relatively small non-profit sectors in economic terms, ut with a very active voluntary component in terms of number of associations and memberships. Finally, in the corporatist model both the state and the voluntary sector work in cooperation with each other, whereby the state assumes the role of financier of activities offered by voluntary associations. A typical example is Germany, where a vast network of religious organisations helps implement government-funded programs.

Challenges to the third sector
Despite significant progress, the study of the third sector continues to face considerable challenges. Research on the third sector now looks more at the process of commercialisation of non-profit organisations and the complex relationship with government, increasingly as part of public-private partnerships. The third sector is also becoming an important part of the emerging fields of civil society studies, social capital, and on globalisation.

Copyright The London School of Economics and Political Science.