Social capital Institutions

Posted March 1996

Cooperatives in the Context of Globalization and Liberalization

by Michael Cracknell
FAO Cooperatives Consultant

WITH THE END of rivalries between the Western capitalist system and the Soviet collective one, the way now seems open for unfettered private enterprise, trade liberalization, and a hands-off role for governments. IMF and World Trade Organization statistics would demonstrate the economic success of such policies.

But liberalization is not a "free-for-all". The weakest members of society - be it society-at-large or a cooperative society - have a perfect right to claim some form of protection in law from the stronger. Deregulation cannot excuse governments from their responsibility to ensure a minimum of equity. Withdrawal of support to cooperatives - almost invariably a positive factor for cooperative development - should be planned and announced well in advance. When it takes place suddenly in response to some foreign diktat, the economic and social consequences will usually be disastrous.

The other face of structural adjustment

On the face of it, agricultural cooperatives seem well-placed to occupy an important place in the new economic situation. According to International Cooperative Alliance (ICA), virtually all Sweden's dairy production is marketed by farmer-owned cooperatives; in Norway, 75 per cent of forest products are processed and marketed by cooperatives; in Italy, 60 per cent of wine is cooperatively produced. Fourteen farmer-owned cooperatives in the USA are among the 500 largest corporations and no fewer than 8 of the 10 largest Canadian firms are cooperatives. But are they still cooperatives?

In the developing countries, equally impressive figures can be quoted: a major share of India's milk is marketed by the AMUL dairy cooperatives, in Bolivia 60 per cent of chickens, in Kenya 87 per cent of pyrethrum and in Brazil 40 per cent of cotton are cooperatively marketed. Twenty-five per cent of India's fertilizer is processed in cooperative factories.

The reality behind this rosy picture of domination of market share and rubbing shoulders with the corporate giants is less impressive. In advanced countries, cooperatives may have gained an advantage over other businesses thanks to their success in obtaining fiscal privileges. Elsewhere, cooperatives' dominant position has been built up through artificial means, such as monopolies granted by government. In some countries they have benefited from huge capital injections from foreign donors and thus now own substantial assets. But are they able to maintain and manage these assets without continued outside support? In China, the pervasive rural cooperative system seems to be collapsing under economic liberalization: according to an unofficial estimate, 40 per cent of agricultural supply and marketing cooperatives are virtually bankrupt.

Increasing competition is a major threat to cooperatives used to thriving on government-conferred privileges. Birgegaard and Genberg (1994) have pointed out:

"Unless the cooperatives can meet this competition, they will end up in down-turn spirals of decreasing volumes of business, deteriorating profitability of their operations, reduced capacity to pay remunerative and competitive prices and provide useful services to their members, continued flight of members, still further decline in volumes of business..."
Lethargic movements are ill-prepared for this and it is hard to see where pressures to become more efficient will come from: not from management, which has had little exposure to decision-taking since they operated under official diktats; not from the government, basically unwilling to see cooperatives develop into strong independent organisations which escape its control and could even pose a political threat; not from the membership, which is often largely indifferent, especially where satisfactory alternatives are available to them.

However, as cooperatives lose their privileges and slim down, "hard work and devotion" will be only way to keep afloat. And as they slim, they will become far less attractive for the sharks and hangers-on who abused of them previously. Less money means less corruption: perhaps this will allow the spirit of mutual assistance to rise again among the members.

It is appropriate here to mention the down/up structure of the cooperative movement, starting from the members, through their primary societies, to secondary unions or federations, up to the apex organisation, and beyond that to various international structures including what might be called the global apex: the International Cooperative Alliance. Where this structure is functioning well, it constitutes a solid web of mutually-reinforcing bodies; all too often, however, some intermediary structures can become ineffectual but remain in place, a burden on the movement as a whole. Solidarity within the global movement is expressed through manifold forms of movement to movement collaboration, including cooperative to cooperative trade and also technical assistance, training, funding, and many others.

There is no intrinsic reason why a cooperative enterprise should not be efficient and business-like, provided it has dynamic and imaginative management. But there seems to be a consensus that the movement must be rebuilt from the grass-roots, primary societies that comprise its base. Primary societies should be small enough for members to be able to relate to them yet large enough for efficient operation. This clearly poses a dilemma: at what point do member cohesiveness and efficiency of operation diverge? Some believe even the village, a typical unit for a primary cooperative, cannot generate enough business. Imaginative solutions must be sought to overcome this problem. Whatever their territorial base, primary societies are easier to manage and control than the unwieldy top-heavy structures built-up by government decree, or born of the need for business efficiency. Renovated primary societies can then recreate secondary-level unions, and up, once they feel the need.

The secondary unions, be they district, provincial or regional, are there to serve their primary society members in terms of bulk supply, transport, marketing, accounting and so forth. Tertiary societies typically provide banking and (international) marketing services to their members, usually secondary societies. Secondary and tertiary societies are important for the development of the primary societies and where they are working efficiently, they will continue to do so. Where they have patently failed in their mission, they should not be maintained artificially, but this should not pull their primary members with them.

Are cooperatives inevitable?

While large government-dominated cooperative structures have been slow to adapt to the new situation, many other rural institutions have shown more dynamism. The various types of voluntary rural associations, formal or not, and the self-help cooperation networks they create among themselves, constitute the essential framework of social capital in the countryside that supports the emergence of truly democratic and participatory institutions that are in stark contrast to the slow-moving, unresponsive organs of official political democracy. The more such organisations there are, the greater people's choice, and the more chances there will be for wider democracy to work in the new decentralised set-up.

Small informal groups appear to be the most successful and resilient of rural institutions. Their major weakness lies in their isolation and frequent lack of structured horizontal or vertical links to similar groups. Under the former cooperative regimes, being a "pre-cooperative" was often the only way small rural groups could gain access to certain inputs and services, and indeed obtain a degree of acceptance and protection from the authorities, even though their members may have had neither the intention nor the desire to be eventually incorporated into the officially-sanctioned cooperative system.

Convinced cooperators tend to apply a reductionist theory to third world rural institutions: once a few people form a self-help group, they have engaged on a path which will inevitably lead them to become a full cooperative.

It is legitimate to question this hypothesis. Why should efficiently-functioning rural people's institutions be caught up in the web of cooperative legislation, bureaucracy and formalism? Cooperatives are one form of rural institution, but they are not the only form. That other forms of rural organization have a rightful place should be recognised by government - and by cooperatives.

"Where the government comes in"

Just as governments have played a crucial role in cooperatives' submission, so they hold the key to their liberation, inter alia by creating a favourable legal and policy environment in which genuine cooperatives can develop. But aside from this, governments also play a more active role, for instance by focussing technical assistance and available financial support on strengthening local cooperative management capacities and enabling cooperative self-reliance to become a reality. Such a role is played, for instance, by the National Cooperative Development Council in India. This would reverse past errors whereby bureaucratization and paternalistic centralisation had the effect of disempowering cooperative society managers by leaving then precious little to manage or decide upon.

Government control usually entails, or stems from, various forms of support. But it also served as an excuse for interference and this, in turn, is an excuse for the non-accountability of management and discounting of members' views. Interference disempowers the members. Cooperative legislation has reflected this approach.

In former British colonies, the registrar had extensive control over cooperative operations and decisions (right of veto, political nominees to the Board). K.K. Taimni, in his study of the role of the cooperative registrar in South Asian countries, humorously points out that Indian critics of the institution often compare it

"...with the mythological Indian god-trinity Visnu (the 'creator'), Mahesh (the 'preserver') and Shiva (the 'destroyer') of cooperatives".
As a consequence, cooperative staff, considering themselves as government employees, tend to lack respect for members whom they do not recognize as the owners of the enterprise. Similarly, the managers consider themselves accountable to government, which they view as their paymasters, rather than to the membership.

As government capacity for intervention declines, legislation governing cooperatives should be redirected. Legislation has a major impact on the operation of cooperatives and this can be negative or positive. In many countries, as in Tunisia, cooperative legislation is dispersed among many texts and needs codifying. Elsewhere, as in France, legislation goes into much detail for different types of cooperative, leaving few areas for bye-laws to handle. Again, in French-speaking Africa, "too much stress is laid on legal formalism", according to one observer.

In Uganda, a 1991 Statute had a positive effect: it stipulates that if audits are not carried out, elected officials are deemed to have relinquished their office; to avoid this outcome, officials ensured book-keeping was more accurate and management more efficient and this in turn left less leeway for minority domination.

What is needed to promote participation and democracy, and to allow cooperatives to compete with private operators is less regulatory legislation (no more fixed profit margins or obligations to be buyers of last resort), legislation which is easier for members to understand, less intrusive, and which aims at facilitating cooperatives' operation rather than controlling them. But most important, it should curb vested interests and defend the weaker members. Once efficient and democratically functioning structures have been established, cooperatives should be allowed to be self-regulatory, just as other private businesses are, within the framework of the law.

Cooperative legislation and practice in countries of the North, while not directly transferable, could provide useful guidance for adapting current legislation and regulations with a view to conferring greater self-regulatory powers on cooperatives at all levels. Unfortunately, reforms aimed at achieving the above objectives are not always undertaken enthusiastically. Governments jealously cling on to their power and when new laws are adopted, they are resisted in their application by those who have enjoyed sway over cooperative activities. So long as legislation remains vague and inconsistent, reforms will continue to be half-hearted and therefore unconvincing for rural people. Yet, there are some refreshing signs of change: cooperative laws are being reformed and interesting new efforts to bring about reform, in India for instance.

In 1992/93, India's Cooperative Development Foundation (formerly Samakhya) and the National Dairy Development Board established the Cooperative Initiative Project. The project's main aim is to influence in economic policy and cooperative legislation which will ensure cooperatives can benefit from liberalization on an equal footing with capitalistic companies. In May 1995, the cooperative legislation in Andhra Pradesh was completely overhauled and this has encouraged the promoters of the project to press for India-wide reforms.

Governments also have a legitimate role in supporting rural cooperatives for purposes of social equity, despite the constraints of structural adjustment. It is being increasingly recognized that market forces and the private sector are inappropriate to handle services due by society to the weaker, poorer and underprivileged sectors of the population and which they are patently unable to pay for. When it comes to rural cooperatives, special features which justify continued support include the often high level of poverty and illiteracy of their members and their geographical isolation (from markets, supplies, political decision-makers and technical innovations.).

Such support could be directed to strengthening a society's member service functions: this is especially important in outlying areas and can serve to attract new members or reactivate current member interest. Guarantees for loans is another area for legitimate support; presently, many cooperatives are not a good risk due to the poor state of their finances, which is at least partly due to debts accumulated as a result of government-imposed programmes: such debts should be written off.

The positive role donors could play extends to trying to influence relevant legislation and making support to rural development projects conditional upon involvement of associations and cooperatives, provided they are effectively member-controlled and financed. They could promote the transfer of functions such as education and training, marketing and other activities to secondary and tertiary level structures, associations and cooperatives, as soon as they are objectively in a position to take that responsibility. International "experts" will need to be trained to recognise such organisations and to have the patience to deal with them. Unfortunately, all too often, the donors' agenda is radically different from both the government's and, more important, from the rural people's.

Ideally, in providing support to cooperatives, governments and foreign donor assistance should leave the board and management, possibly after appropriate training and under directions from the members, free to manage the resources provided without imposing paternalistic interference.

Clearly, there will continue to be strong resistance to conceding greater freedom to rural organisations. The local elites, cooperative bureaucrats, local power networks, governments... all have their own reasons to maintain the status quo. The Birgegaard and Genberg study on sub-Saharan Africa has pointed out that rural society continues to be dominated by an interventionist policy giving government authorities a high degree of control over rural institutions. A similar study on Asia's cooperatives sees government intervention in cooperative business being maintained throughout the region, including Japan and Australia.

Suren Saxena, a former Director of ICA, has suggested developing an Autonomy Index for Cooperatives. The principle parameters of the index would be: management efficiency, adequate financial resources raised preferably from members, credibility in the surrounding countryside, and member participation. Perhaps such an index could provide a first step towards sorting out true cooperatives from those on probation and non-cooperatives.


Birgegaard and Genberg, Cooperative Adjustment in a Changing Environment in Sub-Saharan Africa, ICA, 1994.

Taimni, K.K., Cooperatives in the New Environments: Role of the Registrar of Cooperative Societies in South Asia, FAO (forthcoming).

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