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While initially heralded as the "magic bullet" for development, NGOs have come under increasing criticism for their failure to deliver "development" as promised. Despite the plethora of new critiques, little systematic work has theorized how NGOs actually operate within the least developed countries as economic and social institutions, and what structural conditions are necessary for NGOs to operate successfully. Drawing on existing theories of the nonprofit form in a functioning three-sector economy, the Article argues the absence of certain economic conditions has a negative impact on NGO efficiency and efficacy. For NGOs to succeed, they must exist in an economy with a functional state and private sector. Attempts to use NGOs as substitutes for private and public institutions damage the NGO sector and its objectives. The absence of functioning private and governmental sectors not only weakens NGOs but actually impedes the development of these other sectors and perpetuates institutional failures. The concentration of human capital in the NGO sector diverts human resources away from more economically productive forms of entrepreneurship. Additionally, the channeling of funding and human capital into the NGO sector weakens the state, limiting its capacity and credibility. By attempting to bypass weak institutions and create viable development partners, donors are actually contributing to the continued weakness of the organizations they are building and to those in other crucial sectors.