Social capital Institutions

Posted February 1998

Challenges before cooperatives in South Asia: Building a comparative advantage

by Krishan K. Taimni
Management consultant
Pune, India
Extracted from the study, "Cooperatives in the new environments: Role of the Registrar of Cooperative Societies in South Asia (Bangladesh, India, Pakistan and Sri Lanka)", FAO, 1997.

COOPERATIVES THE WORLD OVER are in a state of flux. In almost all parts of the world, cooperatives face one or more of the following crises: crisis of capital, crisis of ideology, crisis of credibility and crisis of management. The question that is candidly asked is: why cooperatives?

The collapse of the centrally planned model, rapid globalization of the world economy, rise of the multi-national corporations, formation of trade blocks, spurts in the information technology, integration of world capital markets are some of the recent developments that have forced world cooperative leaders to pause, ponder and devise ways to strengthen their flanks.

Reflecting the perilous state of cooperatives globally, the International Cooperative Alliance (ICA) has approved a Statement of Cooperative Identity. The Statement defines a cooperative, codifies values which underpin management and operations of cooperatives, and lists a set of seven Cooperative Principles. As a whole, the Statement provides the necessary framework, at the global level, to cooperatives for meeting the challenges and demands of the 21st century.

Among the distinguishing features of the cooperative form of organization are its voluntary and democratic character, participatory nature and, above all, its commitment to high ethical standards such as honesty, openness and social responsiveness and caring in all its dealings and activities.

Combating exploitation, reducing disparities, improving social conditions and gender sensitivity, and helping to create a more just society with pronounced concern for environmental protection and sustainable processes of development all tend to make a cooperative a preferred and more socially desirable form of organization.

Whether these values and principles also tend to make a cooperative an equally economically efficient enterprise remains to be seen. It is this aspect of a cooperative that will determine, in the new emerging environment, if it can and will survive in the free market and compete equally effectively to retain members' loyalty and confidence.

Increase in size and vertical integration of cooperatives

Apart from responding appropriately to the changes incorporated in the Statement of Cooperative Identity approved by the ICA, cooperatives in the South Asian countries will be called upon to sort out two other issues. The first issue concerns the basic shift that is taking place in the very nature, scope and size of cooperative activities. The hitherto small-sized credit-disbursing, village-based, primary cooperative is slowly and yet steadily yielding its central place to the large-sized, advanced-technology-employing, integrated agro-processing cooperatives. Unlike the service orientation of credit cooperatives (which was provided by the state-owned banks/institutions), these new types of agro-processing cooperatives are focused on directly increasing members' incomes by undertaking value-added activities. In a way, it is a natural evolution of cooperatives toward maturity in the South Asia region. It is a shift, which is fundamental but also bodes well for cooperatives. Once governments opt to switch to alternative channels for disbursing credit for agriculture and rural development, most cooperatives, at present solely dependent on government disbursed credit, will find their very base suddenly disappearing.

The other issue that cooperatives in the region face is related to the far-reaching changes that governments in the South Asia region are gradually introducing in the economy in the wake of structural adjustment programmes. Trade barriers are to be lifted, foreign capital is to be wooed and local enterprises are gradually getting integrated into the global economy. Markets, financial systems and products and services are being globalized. However, globalization, for the most part, shall yield benefits to larger private corporations with linkages to foreign markets, as compared to the smaller businesses. The inward oriented enterprises like agricultural cooperatives, which are tiny by global standards, will find themselves placed in a disadvantaged position in the new environments.

In general, governments in the region are not only redefining their position in relation to markets, private and public enterprises, and options to mobilize and deploy resources, but are also under pressure to display greater concern for resource efficiency, productivity and effectiveness. Consequently, governments have recently shown a questioning disposition towards cooperatives. The governments which have sponsored, supported, guided, supervised, financed and protected cooperatives now appear to be under pressure to refrain from any intervention and let cooperatives stand and fall on their own strength in an open, competitive market.

An immediate and direct corollary of these developments for most types of cooperatives is likely to be that, instead of excessively "government friendly" as at present, these would have to become more "market friendly" and "members friendly" without becoming "government unfriendly". A great deal of soul-searching - internal adjustments, structural changes, improved decision-making processes, greater emphasis on value-added operations, mobilization of members' capital, deployment of advanced technologies but, above all, introduction of improved, cooperative-values-based management practices - will have to be done - and quickly - by cooperatives in the region. The common measure that will be applied to judge their performance shall be the effectiveness in the use of resources and efficiency of their services to members. Ideological considerations need neither to be overlooked nor subordinated to these vital considerations. Re-interpretation of cooperative principles to suit sector-specific demands and re-prioritization of what are usually alluded to as economic and social goals of cooperatives, however, might become inescapable.

Thus, the central challenge before cooperatives will be to find, as distinct, socially aware, responsive and people oriented institutions, constructive ways to build and retain comparative advantages in the market place.

Thoughts on a viable strategy for cooperative development under free market conditions

The real challenge before cooperatives today is how to build and/or retain their competitive advantages and establish their relevance. The following elements of a viable strategy, if avidly and earnestly followed by cooperatives, can help tide over what may otherwise prove to be a calamitous situation.

Cooperatives in the South Asia region will have to strive to:

The last element in the strategy will remain crucial, at least in the short run, not so much because of what governments should do as for what they must desist from doing.

Improving business efficiency of cooperatives

It will be pertinent to recall here the suggestions made in an ICA-sponsored draft Report on Cooperative Adjustment in a Changing Environment in Africa. The summary report suggests:
VIII. Improving business efficiency

28. Improving business efficiency of cooperative organizations is the outstanding task in a short to medium-term perspective. The specific blend of the measures suggested below will vary from situation to situation.

29. In many instances it is critically important to improve management. Managers without a business talent should be replaced and new managers should be offered substantial performance related rewards. The composition of boards at different levels often has to be changed whereby persons with business experience are made board members. Boards have to devolve considerable authority to managers to permit speed and flexibility in decision making. Training can be important in improving managerial capability but cannot replace entrepreneurial talent.

30. Weak cooperative organizations have strong reasons to simplify the management task. This is particularly important at the primary society level given the significance attached to improvement of performance at this level. Simplification can be achieved by concentrating on a limited set of core activities (normally trading in one or a few agricultural crops). Processing or diversification into other activities, including provision of credit, should not be considered until the trading activity has been made a lasting success. Weak cooperative organizations with non-viable processing and non-core activities should in many cases close them down.

31. All cooperative organizations will have to reduce their costs to meet competition on a liberalized market. The loss of monopoly is bound to mean a considerable loss of market share also for efficient cooperative organizations calling for considerable cost reductions. Weak organizations will have to make even larger cost reductions (Birgegaard and Genberg, 1994).

These are the hard steps that cooperatives in the region under study would be well advised to carefully deliberate, debate and act upon.

Role of federal organizations

It is assumed to be self-evident that redemption of the beleaguered cooperatives, particularly those at the primary level in the new environments lies in transferring the promotional, developmental and supervisory roles from the Registrar/government to cooperative federations. The underlying belief is that a cooperative federation being directly accountable to its member-cooperatives and amenable to direction and control of a board of directors elected by the primaries is ideally placed to support, strengthen and promote primary cooperatives. Don't these all, the argument runs, after all adhere to the same principles, share the same concern for the individual members and have common stakes in each other's success?

Recent experiences with the role and place of cooperative federation in countries with long and rich traditions in cooperative activities show that federal cooperatives, after what has been described as the foundation phase, soon move on to a phase of self-assertion (Brazda and Schediwy 1994). At this stage, the federal cooperatives seek to establish a distinct self-identity even if it might result in reducing primaries to a subordinate position. Jonnergard, on the other hand, has suggested that federative organizations pass through five stages in their organizational development. These five stages are: pre-foundation; foundation; the phase of justification; the phase of interdependence and the phase of reorientation. Failure to reorient results either in the death of the federative organization or its complete break from its affiliates.

To be effective and successful, a cooperative federation must continuously achieve two inter-related goals: strengthen the autonomy of its affiliates, enhance viability and improve ability to service its members; and remain an economically viable, innovative and competitive enterprise. Without achieving these twin goals, the federal organization loses its legitimacy and its trust and the member organizations cease to be purposeful members of the federation. A healthy relationship between the two can emerge and remain sustainable if federal cooperatives can accumulate capital, help reduce costs and increase efficiency of the primaries and enjoy the trust of their members; and the primaries are individually strong, viable and autonomous and enjoy the confidence and trust of their members.

Designing, creating and supporting federal cooperatives or including specific roles for them in the Cooperative Societies Acts, Rules and Bye-Laws by themselves are not sufficient to ensure that either these federal bodies will become effective and help improve the efficiency of their members or even survive as genuine federal organizations. The experience of the working of federal organizations in the region is as yet limited. Therefore, it should not be assumed that, once it is agreed or written that federal organizations will perform certain promotional and developmental roles, all problems, particularly of primary cooperatives, will be sorted out. In this context, a great deal of emphasis will have to be placed on the fact that all such member services will have to be financed from revenues generated by the federation. The supportive inter-linkages, management processes, decision-making organs and governance structures have yet to be evolved. Once role clarity is achieved attention must thereafter shift to these aspects. The federal cooperatives have to play a pivotal role, particularly during the transition phase; these, therefore, need to be properly "designed" and "managed" right from the beginning.

Improving efficiency of primary cooperatives through active members' participation: "exit" vs "voice" option

The theoretical case for the markets, as a means of imposing least cost and thus socially beneficial solutions on an investor-oriented economic enterprise, is very powerful and widely understood, recognized and now being encouraged (Brett 1993, 286).

Hirschman has discussed at length the concept of accountability in relation to business enterprises and how principals (owner-investors) and agents (managers) share an understanding of what constitutes an adequate performance and can measure it accurately and at an acceptable cost. Here the principals impose their will upon their agents through what Hirschman has described as the "exit" option - they can simply take their trade to an alternative supplier, thus driving all high cost operators out of the market. Freedom of entry and exit allows all those, among their investors, who have the resources and inclination to participate in an investor-owned enterprise. Freedom to exit therefore eliminates sub-optimal producers - and inefficient firms - and thus their claim on the use of scarce resources. The problem of evaluation of performance of the agents thus disappears and a clear policy prescription follows. Prices quoted in the stock markets are fairly widely used as indicators of performance of investor-owned enterprises and behaviour of investor-owners with their right to exit, influence and in turn be influenced by the stock market prices.

In the case of voluntary agencies and cooperatives, the exit option is replaced by the voice option. The principal, that is, the grower-members in a producers' cooperative, influences and puts pressure on agents, that is, the board of directors and managers, through a process of active and direct members' participation and democratic control. Grower-members in cooperatives seek to achieve what investors do in an investor-owned enterprise through the exit option or through the voice option. In most kinds of cooperatives, anyway, members seldom have any real option of exit. For a sugar-cane grower, or a milk farmer, dependence on his/her cooperative for marketing is nearly total. In cooperatives, it is only when members have the real possibility to participate and exercise the voice option that the accountability of the board of directors and managers is enforced and conditions are created to increase efficiency and improve performance.

It is true that in most developing countries the exit option has worked better and, therefore, the efficiency of private, investor-owned enterprises has worked better in exacting performance than the voice option in achieving similar results in cooperatives. But the failure of the voice option has been the outcome of what Brett has called "bounded rationality" among cooperative members stemming from extreme asymmetries in information. Few of their members had sufficient time to acquire the knowledge necessary for effective control over officials, while the officials, on their part, have a strong incentive to conceal what they were doing.

Moreover, the voice option was only nominally available. In most cases the government officials, political leaders and managers of development agencies impose their will on cooperatives. In such cases, the value of voice was entirely lost. The voice option (members' participation) was seen more as an ideological bother than a potent means to improve the efficiency of cooperatives.

Much more importance to participation in cooperatives, both in the governance processes of cooperatives and cooperative legislation, will have to be given. It was rightly remarked during field studies that the Registrar/officers of Cooperative Department who were otherwise omniscient, were mute witness at the Annual General Meeting of members where members were routinely denied the opportunity to question managements on their role and performance.

Cooperative companies

In some circles in India there was a steadily growing demand to register cooperatives as companies under the Indian Company Law. The underlying motive is to "liberate" cooperatives from the strangulating control exercised by the Registrar of Cooperative Societies. The following appears to be the rationale for making the proposal for the incorporation of cooperative companies.
  1. Draconian powers of the Registrar of Cooperative Societies: The Registrar of Cooperative Societies enjoys enormous powers over cooperatives but, as he is appointed by elected politically active government ministers, he almost inevitably becomes an instrument in the hands of political elements.

  2. Inefficiencies resulting due to exit barriers: It is argued that in an investor-oriented company, the investor has the option of exit. In the case of a cooperative, which is a user-oriented enterprise, there are no similar pressures under the prevailing conditions. That is so for two reasons: a producer member may not be able to exit because, thanks to government policies, he has nowhere else to go and deliver his produce and, as an individual, his voice is seldom heard.

  3. Democracy - a congenital defect in cooperatives: The principal of one-member-one-vote has been described as a congenital defect in cooperatives for it ignores the relative significance of the extent of use made by user-members.

  4. Absence of drive to succeed: The general failure of Indian cooperatives is attributed to lack of collective will or drive amongst managers, members and leaders of cooperatives to succeed as economic enterprises; Indian cooperatives work on the value-first-model than on member-first-model; it is expected that under the company framework member-first-model can be adopted.

  5. Ease in raising capital: A cooperative company would be better placed to raise capital from the market.

  6. Spur to professionalism: It is argued that, since within the company's framework real decision-making powers can be effectively transferred to the paid professional managers, the management process will be professionalized.

As can be seen, the foremost concern here is with improving efficiency and building comparative advantage. However, if cooperative legislation can be suitably altered and the Registrar can be appropriately repositioned, the primary objective of creating level field conditions for cooperatives in relation to their competitors can be realized.

A paper, "The Conversion Syndrome: A Review of the Conversion of Australian Cooperatives into Investor-Owned Firms", presented in the First Meeting of the ICA Regional Assembly for Asia and Pacific, held in New Delhi in 1995, dwelt on the same theme. It was claimed in the paper that:

"The rate of conversion of some of the country's leading cooperatives into company structures has quickened as completion and deregulation of the nation's economy intensify. The cooperative sector has lost millions of dollars of turnover to the world of investor-owned firms. Many thousands of Australians have lost their direct association with the cooperative movement."

It is timely caution which cooperatives and governments in the region might ponder while they prepare to respond to new changes and emerging environments.

Role of the government

The challenge of building comparative advantage of cooperative in the marketplace is formidable. The primary responsibility for meeting this challenge and increasing capabilities rests solely with the cooperatives themselves. External actors, donor agencies and others, of course, can and must lend a hand. This capability of cooperatives to meet the enveloping challenge can be greatly facilitated if the governments were to come forward and undertake the following steps in the period of de-regulation and liberalization:


Bibliography

Birgegaard, Lars and Genberg, Bjorn (1994). "Summary of a Report on Cooperative Adjustment in a Changing Environment in Africa". ICA, Geneva.

Brazda, Johann and Schediwy, Robert (1994). "Lessons from Recent Collapse of Various Federative Systems of Cooperatives". ICA-CIRIEC, Sevilla, May 2-3.

Brett, E.A. (1993). "Voluntary Agencies as Development Organizations: Theorizing the Problem of Efficiency and Accountability. Development and Change". Sage, London.

  • You may also download "Cooperatives in the new environments: role of the Registrar of Cooperative Societies in South Asia (Bangladesh, India, Pakistan and Sri Lanka)" in Word 6.0 for Windows (.ZIP, 101 K).



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