Why cooperatives

The New Zealand context

By Bruce Dyer

Considering how water, wind, and landforms affect rainfall, how rain nurtures plant
life and how trees affect climatic conditions - to just hint at how cooperation is an
integral part of nature - it’s clear that cooperation underpins our very existence.
From this perspective, it’s no surprise that the world’s largest non-governmental
organisation is the International Cooperative Alliance (ICA) representing 237 national
and international organisations and more than 700 million members.

Cooperatives formalise cooperation by enabling cooperative members to jointly own

and profit from a venture. Not surprisingly, worker co-ops first developed as a result
of the exploitation of workers during the industrial revolution. In England they began
with the Rochdale Pioneers in Toad Lane, Rochdale, and on the Continent date back
200 years to the French revolution.

Today the Mondragon group of cooperatives in the Basque area of Spain provides a
benchmark for producer/worker cooperatives by representing what is generally
acknowledged as the world’s most well-developed and successful model. The subject
of a BBC Horizons documentary in 1980, Mondragon’s cooperatives began in the
1940s and by the late 1980s employed two thirds of the region’s workforce.

The international cooperative movement has many other success stories to its credit.
According to the National Cooperative Business Association, there are 47,000
cooperatives in the U.S.A. serving as many as 100 million people or 40 percent of the
population. Co-ops control 99 percent of Sweden’s dairy production, 95 percent of
Japan’s rice harvest, 75 percent of western Canada’s grain and oil seed output and
60 percent of Italy’s wine production. Some of the major commercial banks in Europe
are cooperatively owned or organised, including such giants as Germany’s DG Bank,
Holland’s Rabobank, France’s Credit Agricole. Almost 100 percent of Japan’s
fishermen are organised in cooperatives.

New Zealand today

New Zealand’s ideological climate is largely unsupportive of cooperative

development, in spite of the fact that high unemployment conditions are generally
regarded as being conducive to the establishment of worker-owned cooperatives.

Few for example will know that starting this year, the first Saturday of July is to be
observed as the international day of cooperatives - the result of a U.N. General
Assembly resolution. It will probably come as no surprise to learn that Mr. McKinnon
as Minister of Foreign Affairs defends New Zealand’s lack of action on the grounds
that the resolution and a subsequent resolution in December ‘94 urging more specific
support for cooperatives was adopted without a vote and so was not binding.

Despite the lack of support, cooperatives are a familiar feature of New Zealand’s
agricultural sector, with almost all of the country’s 70,000 farmers belonging to at
least one cooperative. The New Zealand Agricultural Cooperative Association has 49
member cooperatives including the 16 companies of the wholly cooperative dairy
industry. Collectively, turnover of cooperative association members exceeds $10
billion, shareholders exceed 277,000 and member organisations employ many
thousands of New Zealanders.

Non-agricultural members of the Cooperative Association include Foodstuffs -

servicing 54 percent of New Zealand’s grocery trade, the PSIS with 150,000
members and Motor Trade Finances Ltd., which specialises in vehicle finance. Other
major cooperatively-run enterprises include electricity supply trusts and credit
unions.

Cooperatives in New Zealand have developed despite the absence of any

Government agency fostering cooperative enterprise. Other difficulties encountered
by cooperatives in New Zealand include the recent withdrawal of tax advantages and
a struggle for the retention of cooperative company legislation. This contrasts with
the experience of many other countries. French law for example favours cooperatives
and various government taxes and levies are channeled into co-op training, while in
Spain, worker co-ops pay a much lower income tax rate.

Why cooperatives?

Cooperatives are based on the principle of maximising income and welfare for all
members. They also help unify society by facilitating an awareness of
interdependence.

Traditionally, cooperatives have been born out of oppressive economic conditions.

Currently our economy has both positive and negative features.

Positive features include:

• a market and price system
• the opportunity for citizens to engage in free enterprise
• incentives to productive effort
• competition to provide the best product

A key negative feature is its propensity to divide society. By commanding a high

return, scarce capital leads to extreme inequalities of income and wealth which
worsen over time. Sarkar’s Progressive Utilisation Theory (Prout) directly confront
this inequality. It argues that because physical resources are limited, an economic
system allowing unlimited accumulation means that some roll in luxury while others
starve and that a society so divided is ultimately unsustainable. It also recognises
that choosing between a system that divides or one that unites is essentially a moral
issue.

The Prout model proposes that rather than allowing economic control to be
progressively centralised with wealth concentrated in fewer and fewer hands, the
economy needs decentralising. It suggests that decentralisation be introduced by a
system of economic democracy. Thus one of Prout’s basic principles is that society
needs to set limits on the extent to which individuals can accumulate physical
wealth.
Cooperatives or democratic firms offer a means of establishing such a system at the
microeconomic level. Rather than perpetuating a situation where, according to
Semler, "even in the largest companies, it’s rare for more that half a dozen people to
decide corporate strategy and determine the destinies of workers", in democratic
firms, labour hires capital rather than vice versa.

Vanek observes that the concentration of economic power supports the concentration
of political power, the logical result of which is totalitarianism. Conversely, practicing
democracy at the economic level strengthens political democracy.

He further suggests that the sine qua non of our economic system is profit
maximisation, and suggests that the system’s defining equation can be written as

Profit = income - labour and other expenses

where human beings (labour) enter the equation as a minus sign. He describes such
economies as suffering from MSS or minus sign syndrome. Cooperatives would
effectively turn this around with workers controlling capital and enabling people to
come before profit.

In democratic firms, technological advances and productivity gains are retained

within an enterprise and passed on to worker-owners. In capitalist firms, on the
other hand, they are paid out by way of dividend and profit to shareholders who
invariably live in some other region or country.

Without such a change in the exercise of power, workers will remain subordinated to
the interests of capital and exploited by the owners of capital to increase their power
and control.

Capitalism compared to worker cooperatives

Cooperatives can be broadly distinguished between those organised around the

collective use of capital on the one hand or labour on the other. Most of New
Zealand’s cooperatives involve the former, with shareholders investing funds to
create a service to produce a shared financial return. The following focuses on the
latter, generally known as worker cooperatives.

Studies have demonstrated that worker cooperatives enable greater participation and
profit-sharing by workers, leading to better human working environments and
enhanced productivity. It should be noted that productivity can be measured not only
in dollars and output but also job security and happiness. In fact, worker-controlled
firms out-perform conventional private firms if they have access to the necessary
inputs of production.

The higher productivity of worker-controlled firms could attract outside investment

(banks, government, the community at large and outside investors). While investors
would benefit from higher productivity rates, voting rights would still be based on
labour with one person-one vote and not contribution of capital as the criterion.

How can cooperatives be financed?

Perkins of Cornell University suggests that cooperatives be financed by one of three
methods:
1) self-financing
2) lease from the State or private holding company, or
3) financing by outside investors.

Self-financing

Self-financing is the way the Mondragon Cooperative Corporation (MCC) co-ops have
financed most of their capital needs, and involves members investing their savings to
meet the co-op’s need for capital equipment.

However, as shown by the collapse of the Weddell meat works, where workers

lost their savings, wages and jobs, there can be problems. Some of the

issues that self-financing raises are

a) Risk diversification. The MCC has overcome the risks associated with non-
diversification by:

*substantial buffer reserves which come from members being required to

compulsorily save a minimum of 40 percent of profits

*organising participating firms into sector groupings that choose to pool

their profits before distributing them to workers. In any given year, if

one of the firms in the group made a loss and the others a profit, the

loss-making firm would still get some of the net pool profit

*operating their own social security system

*retraining programmes

*job placement services to other cooperatives in need of workers.

b) Under-investment. Equity in the self-financing model can be individual or

communal. That coming from individual members needs to remain in their hands for
them to be capable of autonomous decisions. It implies high individual equity levels,
and raises the question of how to maintain those levels high enough to facilitate
technical change and to sustain growth.

Communally-owned equity on the other hand, reduces the incentive to invest.

Investment by an individual involves repaying both principal and interest.

Communally-owned principal however is not repaid to any individual. Thus there’s an
incentive to take higher wages rather than using the profits for the optimal amount
of plough-back.

c) Inter-generational conflict. Older co-op members may wish to depreciate the co-
op’s stock of equipment in favour of higher wages, while younger members may
prefer long-term investment. At Mondragon, with its special conditions of low inter-
generational mobility and high community solidarity, older workers have not been
preoccupied with short-term personal gain. By way of contrast, at the Vakhrusheva
coal mine in the Khabarovsk region of what was the USSR, workers have wanted
dividends, high wages and access to imported goods rather than plough-back profits
into the maintenance and development of jobs.

d) Inefficient capital utilisation - due to worker inertia and failure to disinvest when
returns to capital become significantly low.

e) Over-capitalisation - arises with the adoption of capital-intensive production and is

a consequence of workers in a profitable cooperative preferring to use more physical
capital than labour so as to maximize income per worker. Apart from having
implications for the creation of jobs it can also lead to wide divergences between
successful and unsuccessful co-ops in terms of income for workers doing comparable
jobs.

Leasing a) from the State, with co-ops retaining full rights of self-determination and
access to profits, while paying for capital supplied by the Government. It avoids the
issue of inefficiency of capital utilisation, although the problems of over-capitalisation
and job restriction remain.

b) from private capital-holding companies, with investment funds coming from

private savings and Government savings being used to finance key industries and
social expenditures. Private savings would be invested in cooperative banks and
loaned to a variety of local businesses that would lease capital. Cooperative banks
can fulfil the crucial role of support organisation along the lines of Mondragon’s Caja
Laboral Popular (Working People’s Bank), and would facilitate the creation of new co-
ops and the exit of co-ops from industries in decline.

Community member investment in several co-ops reduces the tendency for

cooperatives to act in isolation from the wider community. Moreover, having local
authority officials sit on the boards of cooperatives facilitates the process of economic
planning based on the interaction of public and private sector. Using a system of
economic penalties and rewards, cooperative banks could help ensure that job
opportunities were not being ignored in favour of higher incomes for existing co-op
members.

Non-voting share issues

In this model, outside investors buy equity shares and take a proportion of the
profits. In contrast to share capitalism however, while being able to offer advice,
outside investors cannot vote on policy issues. A variable debenture system could
operate to diversify investment risk whereby shares yield two distinct returns, one
fixed and the other linked to the profits or losses of the firm.
Obvious problems are that as an investment option, it is less attractive, at least to
the unethical investor, when compared with the dominant current model in which
workers are unentitled to significant if any profit or control. Also, profit drain to
outside investors may lead to dilution of incentives.

Education

Experience has shown the need for education to establish a cooperative ethic among
workers so that they develop their ability to participate in and control their firms.
This was apparent in the example of the Vakhrusheva coal mine above, where
workers wanted dividends, high wages and access to imported goods rather than
plough profits back into the maintenance and development of jobs. One way
Mondragon cooperatives have overcome this problem has been to pre-screen
workers to establish their interest in cooperatives as a form of organisation.

In addition to educating co-op members, one of the major contributions of the

cooperative movement is to heighten public awareness about cooperatives. In this
regard, study of the cooperative model is featured in a number of universities around
the world. The opportunity exists for New Zealand’s cooperative movement to
support the study of cooperatives in New Zealand within polytechnic and/or
university courses.

Local support

While Mondragon’s example has established their clear potential, the creation and
maintenance of cooperatives calls for a nurturing environment. Perkins sees the
cooperative sector of the future needing a branch of local government that supports
the development of new cooperatives and discourages the inefficient. This support
structure would have roles including help with start-up costs, training, market
research, and monitoring cooperatives for unfavourable trends such as the
divergence of capital intensity for different co-ops in the same industry.

If for example a cooperatively-run industry was making too high a margin of profit,
the support organization’s role would be to keep the industry competitive by
encouraging the entry of new firms, thereby increasing supply and bringing down
prices.

For the Mondragon group of cooperatives such a supportive function is provided by

their banking institution - the Caja Laboral. Its effectiveness can be seen from it
being ranked among the one hundred most efficient financial institutions in the world
in terms of its profit over total assets ratio.

P.R.Sarkar suggests three basic factors in establishing successful community co-ops:

1) an integrated economic environment, 2) common economic needs, and 3) a ready
market for the produced goods. He states that "for their success, cooperative
enterprises depend on morality, strong administration and wholehearted acceptance
of the cooperative system by the people. To encourage people to form cooperatives,
successful cooperative models should be established and people educated about the
benefit of the cooperative system." Ethical issues arise when choosing between
support for a system that divides or one that unites.
To conclude

Some of the benefits of workers organising on a cooperative basis include job

security, productivity gains being passed on to workers and the strengthening of
communities in the face of economic globalisation.

Cooperatives represent a shift of power from the owners of capital to workers as the
owners of labour. Education of workers is important for the successful establishment
of cooperatives and could be helped with the support of existing cooperatives.

Of all New Zealand’s political parties, the Alliance’s policy on cooperatives is probably
the most pro-active. Its economic policy, for example, states that it will actively
support the development of worker and community owned cooperatives in new and
existing enterprises, with training, loans, encouragement and recognition.

For further information please contact:

*Proutist Universal, P. O. Box 984, Nelson, New Zealand

*General Manager, Community Employment Group, P. O. Box 10671, Wellington, New

Zealand *International Cooperative Alliance, 15, route des Morillons, 1218 Grand-
Saconnex, Geneva, Switzerland *Commact (Commonwealth Association for Local
Action and Economic Development), Commact House, KSD-21 Jalan Malawali, Taman
Setapak, 53000 Kuala Lumpur, Malaysia (Email: baginda@pop.jaring.my)

Bibliography
Cameron B.K. and Giles P.J., "Public Policy and Cooperatives in New Zealand", in
1992 Yearbook of Cooperative Enterprise, Plunkett Foundation, U.K.
Perkins, A., "On the transition from state planning to a cooperative system of
production in the former Soviet Union". Unpublished paper.
Sarkar, P.R., Proutist Economics - Discourses on Economic Liberation, Ananda Marga
Publications, Singapore, 1992
Semler, Ricardo, Maverick, Century, 1993
Ac. Tadbhavananda Avt., A look at Decentralised Economy and the Cooperative
System, Prout Research Institute, Copenhagen, 1993
"Cooperative Economics: An Interview With Jaroslav Vanek", by Albert Perkins, New
Renaissance, London, Vol 5 No 1
Vanek, Jaroslav, "Towards a Strategy of Democracy, Political and Economic in
Russia", a study presented to the March ‘93 Annual Congress of the Society for the
Advancement of Socio-Economics
Mondragon Cooperative Corporation’s corporate profile and the Caja Laboral’s 1995
Annual Report

Copyright The author 1999