Vous êtes sur la page 1sur 304

Co-operative Innovations in China and the West

This page intentionally left blank


Co-operative Innovations in
China and the West
Edited by

Caroline Gijselinckx
Research Manager, Research Institute for Work and Society (HIVA),
KU Leuven, Belgium

Li Zhao
Researcher, KU Leuven, Belgium

Sonja Novkovic
Professor, Saint Marys University, Canada
Editorial matter, selection, introduction and conclusion Caroline Gijselinckx, Li
Zhao and Sonja Novkovic 2014
Individual chapters Respective authors 2014
Foreword Dame Pauline Green 2014
Softcover reprint of the hardcover 1st edition 2014 978-1-137-27727-5
All rights reserved. No reproduction, copy or transmission of this
publication may be made without written permission.
No portion of this publication may be reproduced, copied or transmitted save
with written permission or in accordance with the provisions of the Copyright,
Designs and Patents Act 1988, or under the terms of any licence permitting
limited copying issued by the Copyright Licensing Agency, Saffron House, 610
Kirby Street, London EC1N 8TS.
Any person who does any unauthorized act in relation to this publication
may be liable to criminal prosecution and civil claims for damages.
The authors have asserted their rights to be identified as the authors of this work
in accordance with the Copyright, Designs and Patents Act 1988.
First published 2014 by
PALGRAVE MACMILLAN
Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited,
registered in England, company number 785998, of Houndmills, Basingstoke,
Hampshire RG21 6XS.
Palgrave Macmillan in the US is a division of St Martins Press LLC,
175 Fifth Avenue, New York, NY 10010.
Palgrave Macmillan is the global academic imprint of the above companies and
has companies and representatives throughout the world.
Palgrave and Macmillan are registered trademarks in the United States, the
United Kingdom, Europe and other countries
ISBN 978-1-349-44706-0 ISBN 978-1-137-27728-2 (eBook)
DOI 10.1057/9781137277282
This book is printed on paper suitable for recycling and made from fully
managed and sustained forest sources. Logging, pulping and manufacturing
processes are expected to conform to the environmental regulations of
the country of origin.
A catalogue record for this book is available from the British Library.
Library of Congress Cataloging-in-Publication Data
Co-operative innovations in China and the West / edited by Caroline Gijselinckx,
Research Manager,Research Institute for Work and Society (HIVA), KU Leuven,
Belgium, Li Zhao, Researcher,KU Leuven, Belgium, Sonja Novkovic, Professor,Saint
Mary's University, Canada.
pages cm
Summary: The declaration of 2012 as the International Year of Cooperatives by
the general assembly of the United Nations highlights co-operative contributions
to socio-economic development. Since its inception the co-operative movement
included highly diverse co-operatives, with different aims, governance and financial
structures. This is exemplified by differences between Western and Chinese
cooperative traditions. Important economic and social transformations have led
to radical innovations in the governance and capital structures of cooperatives,
both in the West and in China, have been observed. Differences may remain but
interesting convergences are also apparent. To date, little dialogue has taken place
between Chinese and Western cooperatives. This book aims to contribute to our
understanding of both those worlds and provides scholars, co-operative leaders and
policy makers with relevant and useful information for further development of both
Chinese and Western cooperatives. Provided by publisher.
1. Cooperative societies China. 2. Cooperative societies Developed countries.
3. Agriculture, Cooperative China. 4. International relations. I. Gijselinckx, Caroline,
editor of compilation. II. Zhao, Li, 1982 editor of compilation. III. Novkovic, Sonja,
editor of compilation.
HD2963.C6586 2014
3389.0640951dc23 2014019733
Contents

List of Figures vii


List of Tables viii
Foreword ix
Dame Pauline Green
Acknowledgements xii
Notes on Contributors xiii

Introduction 1
Caroline Gijselinckx, Li Zhao and Sonja Novkovic

Part I General Analysis of Trends and Evolutions


in Co-operatives in the West
1 Features and Determinants of Co-operative Development in
Western Countries 11
Patrizia Battilani
2 Globalization and Co-operative Strategies 29
Roger Spear
3 Co-operative Networks, Adaptability and Organizational
Innovations 47
Sonja Novkovic
4 Multi-stakeholder Co-operative Model as a Flexible
Sustainable Framework for Collective Entrepreneurship:
An International Perspective 64
Martine Vzina and Jean-Pierre Girard

Part II Sector-Specific Analysis of Trends and


Evolutions in the West
5 Stakeholder Participation in Co-operative Capital in Western
Agricultural Co-operatives 81
Constantine Iliopoulos
6 Stakeholder Participation in Co-operative Governance in
U.S. Agricultural Co-operatives 98
Michael Cook

v
vi Contents

7 Co-operative Banks: Their Contribution to the


Stability and Diversity of the Financial System 113
Giovanni Ferri and Panu Kalmi
8 Co-operatives Providing Welfare Services:
The Case of Italian Social Co-operatives 126
Carlo Borzaga and Sara Depedri
9 Understanding FLOSS as a Commons 143
Dongbin Wang

Part III Trends and Evolutions in


Chinese Co-operatives
10 The Development of Chinese Co-operatives in Rural Areas 163
Xuchu Xu and Bin Wu
11 Co-operatives and Poverty Reduction in China 179
Tim Zachernuk and Guozhong Liu
12 Stakeholder Participation in Co-operative Capital in
Chinese Agricultural Co-operatives 198
Li Zhao
13 Stakeholder Participation in Co-operative
Governance in China 215
Peng Yuan
14 Banking Co-operatives in China 233
Guangwen He
15 The Grassroots Co-operative Housing in
Urban China: The Case of LINECITY 248
Yuqi Wang
16 Conclusion: Co-operative Innovations in
China and in the West: Recent Trends and Challenges 264
Caroline Gijselinckx, Sonja Novkovic and Li Zhao

Index 283
List of Figures

5.1 Co-operative capitalization models, member


control and investor mentality 92
7.1 The development of Fitch ratings between 2007 and
2011, across ownership structures 123
9.1 Categories of FLOSS (by FSF) 146
9.2 Drivers of Linux adoption 154
9.3 Market share for top servers across all
domains (August 1995November 2011) 155
9.4 Operating system family market share for
supercomputer (TOP500, 06/2011) 155
9.5 Primary operating systems for software development
(20072010) 156
12.1 A framework of co-operative finance 205
14.1 The changing tendency of deposit and loan for
Fengfu rural mutual fund association 241
15.1 Market price index of residential housing
(previous year = 100) 249
15.2 The operation process of co-operative housing project 253

vii
List of Tables

1.1 Members and average size in terms of members of


co-operatives in Western countries, 1947 and 2009 14
1.2 Types of state interventions in enterprises 17
1.3 Arla Foods: direct group holding 20
1.4 Perceived differences between a co-operative and a
conventional enterprise, by CTA members ideological
self-identification 23
1.5 Perceived differences between a co-operative and a
conventional enterprise, by CTA members age 24
2.1 Sources of competitive advantage 33
3.1 Typology of co-operative networks by their purpose;
a comparison with Menzani and Zamagni (2010)
typology of Italian networks 50
4.1 Social co-operatives, solidarity co-operatives and
socits coopratives dintrt collectif: summary and
comparison 71
5.1 Ownership and capitalization models adopted by
agricultural co-operatives 90
7.1 Market shares of co-operatives in selected countries in 2010 117
9.1 FLOSS definition 145
10.1 A typology of farmers co-operatives in China 166
13.1 Different type of stakeholders in single-stakeholder
co-operatives 221
13.2 Different type of stakeholders in multi-stakeholder
co-operatives 222
13.3 Summary of stakeholders interest claims 225
14.1 The three transformation choices for RCC in
China (2003) 238
14.2 Development model of Chinas rural mutual fund associations 240
14.3 The proportion for loan usage and loan term of Fengfu
rural mutual fund association 242
14.4 Shareholding structure of Shilipu and Shengyuan rural
mutual fund associations 243
15.1 LINECITYs operational structure of individual
co-operative housing 252
15.2 Co-operative benefits claimed by LINECITY (3 examples)
(LINECITY approach versus common commercial
real-estate developer approach) 255

viii
Foreword

The co-operative sector of the global economy is in a confident mood.


While co-operatives, as any other business model, have felt the cold
draught of economic downturn and recession in some parts of the world, it
is clear that the fundamentals of their unique legal and financial structures
have seen the sector emerge from the great financial crisis in good shape.
Co-operative financial institutions have continued to grow, to lend to indi-
viduals and businesses, and are not in debt to taxpayers!
The success of the International Year of Co-operatives in 2012 left the
movement with a stronger sense of its own identity and of the huge con-
tribution it already makes to the global economy. For the first time in their
170-year history, co-operatives have a greater sense of their own global
cohesion and the strength and diversity of their business reach.
The conclusion of the International Year, in Manchester in November
2012, saw a groundbreaking strategy emerge to build the co-operative
family of businesses through this co-operative decade, with the aim of see-
ing it become the fastest-growing model of business by 2020.
What lies behind that confidence, that unity and the strategy? The firm
determination to use the business strengths, longevity and professionalism
of its existing businesses in the post-industrial world, and the innovation,
potential and growing political and economic influence of the emerging
economies, where the co-operative sector often has a significant impact on
the domestic economy.
China is arguably the most important of those emerging economies.
With 600 million Chinese living in rural poverty, the Chinese govern-
ment is determined to see some of the significant benefits of its already-
considerable urban wealth shared with the rural communities. Co-operatives
are seen as a major player in addressing that shift and have seen dou-
ble-digit growth figures for each of the last 11 years. With over 550,000
co-op businesses and growing rapidly, China looks set to overtake Indias
600,000 strong co-operative sector, as having the largest co-operative sector
by number of businesses in the next five to ten years.
With the Chinese economic growth figures down from a staggering
15 per cent to just under 8 per cent by the end of 2012, many Western
commentators were reporting gloomily about a slowdown in the Chinese
economy. But with a shift of investment from export-led to domestic-led
growth, the Chinese leadership is making it clear that it can continue to
grow its economy at levels that significantly outstrip the stagnant levels
with which most of the West (and Japan) are struggling. Co-operatives are
crucial to that policy.

ix
x Foreword

That is why this book is so timely and so relevant. The essays look at
co-operative innovation and change in China and at its convergence with
the co-operative renaissance that has been seen in the West over the last 10
to 15 years.
From the perspective of the global co-operative movement, the Chinese
co-operatives are now playing an important and strategic role alongside
other key players from the co-op world in developing worldwide policy for
the future.
Responsibility for developing the Chinese domestic co-operative
economy lies with the All China Federation of Supply and Marketing
Co-operatives (ACFSMC). For many years now the ACFSMC has been
exploring the way modern co-operative businesses work across the
world how they are governed and financed, the levers for establish-
ing innovative models in new sectors of the economy and defining
the challenges and opportunities. Using the huge network within the
International Co-operative Alliance of which they are members, they
have studied, understood and are customising appropriate co-operative
models for the Chinese environment, the requirements of their economy
and to meet the needs of their people.
For the International Co-operative Alliance, the emergence of the BRICS
countries (Brazil, Russia, India, China and South Africa) as key players in
the global political and economic structures is crucial to its campaign to
give the co-operative model of business the significance and public profile
it deserves.
Co-operatives are the most democratic and participatory form of business
in the world. Whilst of course needing to make profits, they put people
at the heart of economic decision making, given their clear constitutional
duty to meet the needs of their members.
A business model which is owned by one billion of the worlds citizens,
which employs over 100 million people worldwide and which can demon-
strate that its largest 300 businesses alone have a turnover of 2 trillion U.S.
dollars, deserves to have its voice heard in the global institutions that dom-
inate the worlds economy. When you couple this economic strength with
the knowledge that co-operatives have been building civil society across
the world for nearly 200 years by developing local community leadership,
bringing skills and expertise to local people, embedding democratic prac-
tices, encouraging more informed citizens, promoting education and help-
ing women into positions in the real economy and leadership positions in
their villages and communities it is even clearer that its voice also deserves
to be heard in public-policy terms.
In this work, the International Co-operative Alliance need to have the
informed support of all those countries which will have a key decision-
making role on the direction of public policy and the global economy in
Foreword xi

the coming decades. In this respect, the West of course remains crucial, but
China is already becoming a vital component.
I welcome the contribution that this book makes to the greater under-
standing of co-operatives in China and that strategic debate.
Dame Pauline Green
President of the International Co-Operative Alliance
Acknowledgements

Contributors to this project come from various backgrounds, from agricul-


tural economists to social scientists, economists, sociologists, historians,
and experts in social economy research. Eminent scholars from government
think tanks or leading universities and research centers in China joined
Western scholars who have contributed extensively and made their mark on
co-operative research and writing in their respective countries. Our contrib-
utors wrote chapters, served as reviewers of others, or both. In a carefully
designed process, this effort was a true collaboration of peers. We thank all
of them for their co-operation and effort.1
We are also honoured to have Dame Pauline Green, president of the
International Co-Operative Alliance (ICA), write the foreword. She instantly
believed in the project and gave us her full support.
Besides the authors and reviewers of the chapters, we are greatly indebted
to the secretariat of the Research Institute for Work and Society at the
University of Leuven for the assistance with the layout, and the editors at
Palgrave for their support and belief in the project.
Financial support from the University of Leuven and Tsinghua University
is gratefully acknowledged.

Note
1. A list of the members of the scientific committee involved in the review process is
presented in the notes on contributors.

xii
Notes on Contributors

Scientific committee

Carlo Borzaga (Italy) is Professor of Economic Policy at the Faculty of


Economics, University of Trento; President of EURICSE (European Research
Institute on Co-operative and Social Enterprises), University of Trento; Dean
of the Faculty of Economics, University of Trento.
Michael Cook (U.S.A.) is Robert D. Partridge Professor, Department of
Agricultural Economics, University of Missouri.
Caroline Gijselinckx (Belgium) was a research manager, co-operative and social
entrepreneurship and civil society, Research Institute for Work and Society, Catholic
University of Leuven. She is senior researcher at the Department of Education and
Training of the Flemish government (Brussels, Belgium) since 2013.
Constantine Iliopoulos (Greece) is Associate research professor, National
Agricultural Research Foundation, Agricultural Economics and Policy
Research Institute and Agricultural University of Athens.
Zuhui Huang (China) is Professor of Agricultural Economics and Director of the
Center for Agricultural and Rural Development (CARD), Zhejiang University.
Jerker Nilsson (Sweden) is Professor of Co-operative Business and Marketing
at the Swedish University of Agricultural Sciences.
Sonja Novkovic (Canada) is Professor of Economics and Associate Director
of the Co-operative Management Education program at the Sobey School of
Business, Saint Marys University, Halifax.
Roger Spear (UK) is Professor of Social Entrepreneurship, Chair of the
Co-operatives Research Unit, founder-member and vice-president of the
EMES research network on social enterprise; he teaches organizational sys-
tems and research methods at the Open University and is Guest Professor at
the Centre for Social Entrepreneurship, Roskilde University.
Xiaoshan Zhang (China) is Professor and Director of the Institute of Rural
Development, Chinese Academy of Social Sciences.
Li Zhao (Belgium) is Lecturer in Political and Social Sciences, Catholic
University of Leuven.

Contributors

Patrizia Battilani (Italy) is Associate Professor in the Economic Sciences


Department, University of Bologna.

xiii
xiv Notes on Contributors

Carlo Borzaga (Italy) is Professor of Economic Policy at the Faculty of


Economics, University of Trento; President of EURICSE (European Research
Institute on Co-operative and Social Enterprises), University of Trento; Dean
of the Faculty of Economics, University of Trento.
Michael Cook (U.S.A.) is Robert D. Partridge Professor in the University of
Missouri Department of Agricultural Economics.
Sara Depedri (Italy) is a lecturer at EURICSE (European Research Institute
on Co-operative and Social Enterprises), University of Trento.
Giovanni Ferri (Italy) is Professor of Economics, Department of Economics
and Mathematics, University of Bari.
Caroline Gijselinckx (Belgium) was a research manager, co-operative
and social entrepreneurship and civil society, Research Institute for Work
and Society, Catholic University of Leuven. She is senior researcher at the
Department of Education and Training of the Flemish government (Brussels,
Belgium) since 2013.
Jean-Pierre Girard (Canada) is an international expert in collective enter-
prises and lecturer at the Universit du Qubec Montral.
Guangwen He (China) is Professor, Chair of the Department of Finance,
Director of the Center for Rural Finance and Investment Research, College
of Economics and Management, China Agricultural University, Beijing.
Constantine Iliopoulos (Greece) is Associate Research Professor at the
National Agricultural Research Foundation, Agricultural Economics and
Policy Research Institute and Agricultural University of Athens.
Panu Kalmi (Finland) is Professor of Economics, Faculty of Business Studies,
University of Vaasa.
Guozhong Liu (China) is Senior Lecturer at Shandan Bailie School of Gansu
Province, China.
Sonja Novkovic (Canada) is Professor of Economics and Associate Director
of the Co-operative Management Education program, at the Sobey School
of Business, Saint Marys University, Halifax.
Roger Spear (U.K.) is Professor of Social Entrepreneurship, Chair of the
Co-operatives Research Unit, founder member and vice-president of the
EMES research network on social enterprise, and teaches organisational sys-
tems and research methods at the Open University and is Guest Professor at
the Centre for Social Entrepreneurship, Roskilde University.
Martine Vzina (Canada) is Professor of Management at HEC Montral.
Notes on Contributors xv

Dongbin Wang (China) is a PhD candidate at the School of Public Policy


and Management, Tsinghua University.
Yuqi Wang (China) is a researcher, Hong Kong and Macao Affairs Office of
the State Council, Beijing.
Bin Wu is a PhD candidate in the School of Management, Zhejiang
University with a major in Agricultural Economics and Management. His
research focuses on farmer co-operatives. He has participated in seven rele-
vant national projects and published five academic articles.
Xuchu Xu (China) is Professor at the School of Humanities and Law,
Hangzhou Dianzi University.
Peng Yuan (China) is Professor at the Rural Development Institute of the
Chinese Academy of Social Sciences.
Tim Zachernuk (Canada and China) is a development consultant and
vice director of the Shandan Center for the Promotion and Development of
Western Cooperatives.
Li Zhao (Belgium) is a lecturer in political and social sciences, Catholic
University of Leuven.
Introduction
Caroline Gijselinckx, Li Zhao and Sonja Novkovic

Globally, the co- operative movement brings together over one billion peo-
ple. Co- operatives provide over 100 million jobs, 20 per cent more than
multinational enterprises. They are enterprises that put people instead of
capital at the centre of their business. The United Nations estimated in 1994
that the livelihood of nearly three billion people, or half of the worlds pop-
ulation, was made secure by co- operative enterprises. These enterprises con-
tinue to play significant economic and social roles in their communities.1
Policy makers in both industrialized and developing countries see them as
effective tools to fight poverty, to create employment and to foster social
cohesion. The general assembly of the United Nations declared 2012 as the
International Year of Co- operatives in order to highlight their contributions
to socio- economic development of their communities. The year ended with
the Blueprint for the Co- operative Decade, in which the worlds co- operatives
identified common issues, common growth strategy and areas for increased
density of co- operative businesses.2 Co- operatives are experiencing a renais-
sance today all around the world.
This book addresses co- operative responses to the new challenges in
their changing environments in the West and in China the largest
emerging economy, and one which is on a fascinating journey from a
centrally planned economy to a market superpower. Since its inception,
the co- operative movement has been an international network of highly
diverse co- operatives, with different aims and different governance and
financial models, each with their own peculiarities. The Blueprint for
the Co- operative Decade will help bridge some of those divergences, but
peculiarities remain in the understanding and the applications of the
co- operative model between China and Western countries. In the wake
of important economic and social transformations, both in the West and
the East, traditional co- operatives have re- engineered their models or
engaged in new co- operative strategies, including new emergent types of
co- operatives.

1
2 Caroline Gijselinckx, Li Zhao and Sonja Novkovic

With this book we shed light on convergences and divergences in


co- operative models and highlight co- operative responses to particular
socio- economic challenges in China and in the West. Select scholars and
researchers share their insights with us insights that are based on thor-
ough academic analyses, both theoretical and empirical, in the respective
regions.
With the West, we mainly refer to countries where the liberal demo-
cratic tradition of co- operatives prevailed all the way through the history of
their co- operative sector. Chapters discussing evolutions and innovations in
the West are based upon research in Western European countries,3 United
States and Canada. Co- operatives in these countries are largely character-
ized by individual ownership, unifunctionalism, market embeddedness and
democratic governance: one member one vote (Melnyk 1985). Over the
last two decades, however, economic, technological and political changes
in business environments have led some co- operatives to demutualize or,
alternatively, to develop new co- operative models. Under market pressure,
a number of traditional (or classical) co- operatives changed their identity,
relinquishing their co- operative principles and degenerating into typical
investor- owned firms in order to grow and survive in turbulent markets.
As a consequence, this practice has come under considerable scrutiny. The
central question of whether demutualization of co- operatives was inevi-
table is of crucial importance to the co- operative enterprise development
(for example, Ct 2001; Spear 2000; Birchall 2001; Nilsson 1999; Chaddad
and Cook 2004; Develtere and Raymaekers 2005; Gijselinckx and Develtere
2008; Sousa and Herman 2012).
Following this debate, the last 20 years or so have witnessed the emergence
of various kinds of innovations adopted by the traditional co- operatives
in Europe, the United States and elsewhere (Cook and Iliopoulos 1999;
Iliopoulos 2009). Proportional investment, member-investor, new genera-
tion and investor-share co- operatives are but a few of the innovative forms
of collective entrepreneurship that have emerged (Chaddad and Cook
2004). New co- operatives (mainly of a producer type) incorporate a greater
degree of incentive alignment, are offensive in design, seek to generate eco-
nomic rents at multiple levels and, consequently, create options for exit
and short-term gain. During the same period, scholars highlight the emer-
gence of social, solidarity or multistakeholder co- operatives (MSCs) in the
West (for example Pestoff 1995; Borzaga and Mittone 1997; Mnkner 2004;
Gijselinckx and Develtere 2008; Gijselinckx 2009; Girard 2009) and their
importance for economic participation and social cohesion (Galera 2004;
MacPherson 2004; Thomas 2004). Internationally, these new co- operative
forms have often been labelled as social enterprises (for example Borzaga
and Defourny 2000; Borzaga and Spear 2004; Nyssens 2006; Defourny
and Nyssens 2008; Defourny et al. 2009). Co- operatives in the West have
also been innovative in developing networks to reach scale economies
Introduction 3

(Desrochers and Fischer 2003; Menzani and Zamagni 2010), to access


co- operative capital and to provide new types of shared services (Novkovic
and Holm 2012).
Chinese co- operatives have for a long time developed along the Marxist
tradition of co- operation, emphasizing collective ownership, multifunc-
tionalism and state- embeddedness (Melnyk 1985; Develtere 1994). In recent
years, a new co- operative movement in China, transforming from the
Marxist tradition, has been witnessed (for example Zhang 1999; Xu 2005;
Xu and Huang 2009; Zhang and Yuan 2009). Previous research demon-
strates that co- operatives in China are highly innovative, creating the con-
ditions for a different form of liberalization (Zhao 2009; Zhao and Develtere
2010; Zhao 2011, 2012). This is especially the case in agriculture where,
since the 1980s, shareholding co- operatives have been established at a rapid
pace and, since the late 1990s, agricultural co- operatives in China contin-
ued to grow (Bijman and Hu 2011). With the shift to the household contract
responsibility system in the late 1970s and the dismantling of the com-
mune system at the beginning of the 1980s, rural co- operatives in China
have re- emerged to play an important role in rural local development in
times of crises that exposed the rural population as the largest vulnerable
group in Chinese society. The Chinese central government declared, on
numerous occasions, the co- operative model as a key instrument for rapid
rural economic development. This has been reinforced by much promo-
tion and experimentation by provincial authorities, rural enterprises and
agricultural communities. In such a context, the shareholding co- operative
system was invented as an experiment in the reform of property rights and
management systems and as a response to the problems created by the dis-
mantling of collective properties. This system creates a new organizational
ownership form and governance model, combining one share one vote
with one member one vote, in a Meadean tradition (Meade 1989). It also
provides for co- operation between local governments, collective enterprises
and community residents. This system has later been used in community
co- operatives and land co- operatives, as well as by the new and prosperous
farmers specialized co- operatives (FSCs), particularly after the implementa-
tion of the Law on Farmers Specialized Co-operatives in 2007.
The new co- operative forms in China resemble social (solidarity or multi-
stakeholder) co- operatives emerging in the West, sharing features such as
multiple stakeholder ownership, multi-purpose character and community-
orientation/social responsibility. However, their investor profile and gov-
ernance systems seem to run counter to the liberal democratic principles
of the Western co- operative movement as defined in the Statement on Co-
operative Identity adopted at the International Conference and General
Assembly of the ICA in 1995 and in the ILO Promotion of Co- operatives
Recommendation 193 of 2002. Given these trends, it seems particu-
larly interesting to reveal the divergences, but also convergences, in the
4 Caroline Gijselinckx, Li Zhao and Sonja Novkovic

evolution of co- operatives in China and Western countries. Fortunately, a


number of research projects have been carried out to identify either inno-
vative co- operative experiences in the West, or new co- operative models in
China. Unfortunately, to date, the scope and approach of these studies have
created little dialogue between the two regions on the assessment of the
co- operative realities. This is the gap this book attempts to fill. We bring
together insights about Chinese and Western co- operative innovations to
start a dialogue, based on concrete and systematic knowledge and a true
understanding of the models, their evolutions and their implications.
Both in China and in Western countries, co- operatives, through their
varied activities, are significant social and economic actors in national
and global economies and contribute to the human well- being at
regional, national and global levels. With the new post-2012 blueprint
for co- operative growth it is necessary to scrutinize recent innovations in
traditional and new co- operative sectors, examine their adaptive capac-
ity and highlight their important roles in and contributions to socio-
economic development. Moreover, the recent economic crisis and the
crisis of public finance have already triggered a search for new solu-
tions in the welfare sector. These trends and challenges contribute to a
renewed public interest in the role of co- operatives as innovative solu-
tions in modern market economies of the Western welfare states as well
as the Chinese socialist market economy.
Contacts between Western and Chinese co- operatives, co- operative
researchers and relevant policy makers have not been many so far. Where
they exist, they are largely based upon preconceptions that are not always in
line with realities. Western actors (including international agencies such as
the International Co- operative Alliance, the ILO and the World Bank) have
their preconceptions of Chinese co- operatives, and exhibit strong opin-
ions on how China should operate when it comes to co- operatives. They
do not fully understand some of the intricacies of the Chinese co- operative
approach. The Chinese actors, on the other hand, have their own experi-
ences, but also their own (idealistic) conceptions of the Western model. As
Chinese and Western co- operatives are evolving and experimenting with
new operational mechanisms, a good understanding of the other major
economic player is a strategic factor. This is all the more important since
Chinese and Western co- operatives are increasingly working together. In
addition, international financial agencies, such as the World Bank and
the Asian Development Bank, are providing loan packages for the agricul-
tural sector in which most of these co- operatives operate. New efforts are,
therefore, needed to identify factors that contribute to the understanding
of recent co- operative innovations in China in comparison with trends
and evolutions in co- operatives in the West. This comparative approach
will provide a variety of actors on both sides with relevant and strategic
information on the newest developments in the co- operative sector, but it
Introduction 5

will also shed light on some global developments and dilemmas unique to
all co- operatives in the increasingly globalized economy.
The book is organized in three parts. The first part is a general analy-
sis of trends and evolutions of co- operatives in the West. A historical
analysis by Patrizia Battilani is followed by a chapter by Roger Spear that
elaborates on a core contemporary challenge of globalization and how
co- operatives can cope with it. Inter- co- operation and networks are pre-
sented as a key strategy to cope with globalization, while keeping the
co- operative identity. In the third chapter, Sonja Novkovic develops a
typology and analysis of co- operative networks as organizational inno-
vations, safeguarding the co- operative identity and values. Networks are
also a key feature of so- called multistakeholder co- operatives where vari-
ous actors network and work together to realize common goals of develop-
ment and service delivery. Different legal frameworks and organizational
forms of multistakeholder co- operatives are presented by Martine Vzina
and Jean- Pierre Girard, focusing on Italian social co- operatives, Quebec
solidarity co- operatives and French co- operative societies with a collec-
tive interest.
The second part of the book is dedicated to sector-specific trends and
evolutions in co- operatives in the West. This part starts with two ensuing
chapters by Costas Iliopoulos and Michael Cook, focusing respectively on
stakeholder participation in agricultural co- operatives in the West and
recent innovations to tackle issues of globalization, capitalization and
democratic governance. These two chapters are followed by an analysis
by Giovanni Ferri and Panu Kalmi of the development and challenges
faced by co- operative banks in the West, pointing out that they also ben-
efit greatly from network strategies. Carlo Borzaga and Sara Depedri next
write on social co- operatives and the provision of welfare services in Italy,
which in fact builds upon the previous chapters by Vzina and Girard and
Novkovic in the first part of the book. In the last chapter of this second
part, Dongbin Wang introduces us into the world of FLOSS (Free/Libre
Open Source Software) with its commons ideology and legal framework,
at once challenging traditional ownership views and building on fea-
tures such as communities, co- operation and networking. The third part
of the book gives a thorough insight into the institutional and organiza-
tional evolution of Chinese co- operatives. Two chapters by Li Zhao and
Peng Yuan focus on stakeholder participation in Chinese agricultural
co- operatives, complementing the first two chapters in the second part of
the book. A general introduction to rural co- operatives by Xuchu Xu and
Bin Wu provides a typology and a pathway for the development of rural
co- operatives in China, with a multi-layered approach and strong govern-
ment support. Tim Zachernuc and Guozhong Liu focus on the potential
role for co- operatives in poverty alleviation in a contrasting bottom-up
approach. The third part of the book ends with chapters by Guangwen
6 Caroline Gijselinckx, Li Zhao and Sonja Novkovic

He on the history of Chinese banking co- operatives and Yuqi Wang on


grass-roots housing experiments in China.
The books conclusion brings together the most important insights with
respect to co- operative innovations in China and in the West and identifies
some future challenges and opportunities. While we do not claim to cover
all trends and evolutions in the East and West in this book, we believe the
volume presents some important regional co- operative developments. The
book presents a comparative analysis of recent trends and evolutions and
contributes to a discourse about the divergences and convergences in the
trends and evolutions of co- operatives in China and the West. Given the
importance of the Chinese co- operative sector to the global picture and the
impact of co- operatives, as well as their role in shifting the economic focus
to home-grown solutions, we believe this volume is a timely and relevant
contribution to the co- operative decade.

Notes
1. www.ica.coop/statistics.html.
2. www.ica.coop.
3. Western European countries includes Northern and Southern European coun-
tries, while excluding former socialist states in Central and Eastern Europe.

References
Bijman, J. and Hu, D. (2011) The Rise of New Farmer Cooperatives in China; Evidence
from Hubei Province, Journal of Rural Cooperation, 39(2): 99113.
Birchall, J. (2001) The New Mutualism in Public Policy. London: Routledge.
Borzaga, C. and Defourny, J. (2000) The Emergence of Social Enterprise. London:
Routledge.
Borzaga, C. and Mittone, L. (1997) The Multi-stakeholder Versus the Nonprofit
Organisations. Universit degli Studi di Trento Dipartimento di Economia,
Discussion Paper no. 7.
Borzaga, C. and Spear, R. (2004) Trends and Challenges for Co- operatives and Social
Enterprises in Developed and Transition Countries. Trento: Edizioni31.
Chaddad, F.R. and Cook, M.L. (2004) Understanding New Cooperative Models:
An Ownership- Control Rights Typology, Review of Agricultural Economics, 26(3):
348360.
Cook, M.L. and Iliopoulos, C. (1999) Beginning to Inform the Theory of the
Cooperative Firm: Emergence of the New generation Cooperative, Finnish Journal
of Business Economics, LTA 4/99: 525535.
Ct, D. (2001) Les holdings coopratifs: volution ou transformation dfinitive? Brussels:
De Boeck Universit.
Defourny, J. and Nyssens, M. (2008) Social Enterprise in Europe: Recent Trends and
Developments. EMES Working Paper 08.01.
Defourny, J., Develtere, P., Fonteneau, B. and Nyssens, M. (2009) The Worldwide
Making of the Social Economy. Leuven: Acco.
Desrochers, M. and Fischer, K. (2003) Theory and Test on the Corporate Governance of
Financial Cooperative Systems: Merger vs. Networks. CIRPEE Working paper 0334.
Introduction 7

Develtere, P. (1994) Co- operation and Development: With Special Reference to the
Experience of the Commonwealth Caribbean. Leuven: ACCO.
Develtere, P. and Raymaekers, P. (2005) Mature Cooperatives Seeking New Identities:
The Case of Belgium, Journal of Rural Cooperation, 33(2): 97109.
Galera, J. (2004) The Evolution of the Co- operative Form: An International
Perspective, in C. Borzaga and R. Spear (eds), Trends and Challenges for Co- operatives
and Social Enterprises in Developed and Transition Countries. Trento: Edizioni31,
pp. 1738.
Gijselinckx, C. (2009) Co- operative Stakeholders: Who Counts in Co- operatives and
How? Working Paper on Social and Co- operative Entrepreneurship 09.05.
Gijselinckx, C. and Develtere, P. (2008) The Co- operative Trilemma. Co- operatives
between Market, State and Civil Society. Working Paper on Social and Co- operative
Entrepreneurship 08.01.
Girard, J. (2009) Solidarity Co- operatives (Quebec, Canada), in A. Noya (ed.), The
Changing Boundaries of Social Enterprises. Paris, France: OECD, pp. 229272.
Iliopoulos, C. (2009) Organisational Remodeling of Agricultural Co- operatives: A Research
Agenda. Athens: Department of Agricultural Economics and Rural Development,
Agricultural University of Athens. Available at: http://www.agreri.gr/en/sites/
default/files/uploaded/publications/ILIOPOULOS- Cologneper cent20(2009).pdf.
International Labour Organization (ILO) (2002) Promotion of Co- operatives.
Genve, Recommendation no. 192.
McPherson, I. (2004) Remembering the Big Picture: The Co- operative Movement
and Contemporary Communities, in C. Borzaga and R. Spear (eds), Trends and
Challenges for Co- operatives and Social Enterprises in Developed and Transition Countries.
Trento: Edizioni31, pp. 3948.
Meade, J. (1989) Agathotopia: The Economics of Partnership. Aberdeen: Aberdeen
University Press.
Melnyk, G. (1985) The Search for Community: From Utopia to a Co- Operative Society.
Montreal and Buffalo: Black Rose.
Menzani, T. and Zamagni, V. (2010) Cooperative Networks in the Italian Economy,
Enterprise and Society, 11(1): 98127.
Mnker, H. (2004) Multi-stakeholder Co- operatives and Legal Frameworks, in
C. Borzaga and R. Spear (eds), Trends and Challenges for Co- operatives and Social
Enterprises in Developed and Transition Countries. Trento: Edizioni31, pp. 4982.
Nilsson, J. (1999) Co- operative Organisational Models as Reflections of the Business
Environments, The Finnish Journal of Business Economics, 4: 449470.
Novkovic, S. and Holm, W. (2012) Co- operative Networks as a Source of Organizational
Innovation, International Journal of Cooperative Management, 6(1.1): 5160.
Nyssens, M. (2006) Social Enterprises: At the Crossroads of Market, Public Policies and
Civil Society. London: Routledge.
Pestoff, V.A. (1995) Local Economic Democracy and Multi- Stakeholder Cooperatives,
Journal of Rural Cooperation, 23: 151167.
Sousa, G. and Herman, R. (2012) A Co- operative Dilemma: Converting Organizational
Form. Saskatchewan: Centre for the Study of Co- operatives.
Spear, R. (2000) The Co- operative Advantage, Annals of Public and Co- operative
Economics. 71(4): 507523.
Thomas, A. (2004) The Rise of Social Cooperatives in Italy, Voluntas. International
Journal of Voluntary and Non-Profit Organizations, 15(3): 243263.
Xu, X. (2005) Institutional Analysis on Farmer Co- operatives in China. Beijing: Economic
Science Press (in Chinese).
8 Caroline Gijselinckx, Li Zhao and Sonja Novkovic

Xu, X. and Huang, S. (2009) Moving Towards New Co- operation: Research on the
Development of Farmers Specialized Co- operatives in Zhejiang Province. Beijing: Science
Press (in Chinese).
Zhang, X. (1999) Co-operatives, Communities and the State: The Recent Development
of Chinese Rural Cooperatives in Transition. Land Reform (FAO Bulletin) 12.
Available at: http://www.fao.org/DOCREP/X3720t/x3720t08.htm.
Zhang, X. and Yuan P. (2009) The Theory of Co- operative Economics and the Practice of
Chinas Farmers Cooperatives. Beijing: Capital Economic and Trade University Press
(in Chinese).
Zhao, L. (2009) A Start for Mild Liberalization? Building Civil Society through Co-
operative Dynamics in China, in J. Defourny, P. Develtere, B. Fonteneau and M.
Nyssens (eds), The Worldwide Making of the Social Economy: Innovations and Changes.
Leuven and Den Haag: Acco, pp. 231252.
Zhao, L. (2011) Understanding New Rural Co- operative Movement: Towards
Rebuilding Civil Society in China, Journal of Contemporary China, 20(71): 679
698.
Zhao, L. (2012) New Co- operative Development in China: An Institutional
Approach. Doctoral dissertation, Institute for International and European Policy,
Catholic University of Leuven, Leuven.
Zhao, L. and Develtere, P. (2010) New Co- operatives in China: Why They Break
Away from Orthodox Co- operatives?, Social Enterprise Journal, 6(1): 3548.
Part I
General Analysis of Trends and
Evolutions in Co-operatives in the
West
1
Features and Determinants of
Co-operative Development in
Western Countries
Patrizia Battilani

Introduction

The Barcelona football club is a co- operative, as are many prestigious


European winemakers. Surfing the Web, you can find the site of the Nursery
School of Old Saybrook, Connecticut, a small community co- operative
owned and managed by parents whose children attend the school. Arla
Foods is a big agri-food co- operative which owns some 150 companies
around the world. The above picture is not surprising to scholars who have
some familiarity with this form of enterprise: the co- operative world has
been one of diversity since its beginnings. In 1937 the International Co-
operative Alliance (ICA) adopted the 1844 Rochdale principles as a set of
guidelines to provide a universal framework which would strengthen the
identity of this form of enterprise. That was also the first attempt to define a
universal model whose origins must be traced in the European experience.
When, in 1966 and 1995, that set of principles was revised, the Western
countries co- operative movement remained the reference point.
Starting from the above considerations, we will analyse the evolution of
Western co- operatives, looking for diverse and shared features. Sections
one and two are devoted to identifying the basic elements of the Western
co- operative story. The remaining sections focus on the main factors which
can explain the evolution of this form of enterprise in Western countries:
state promotion, networking and cultural views.
At the end of the day a composite picture emerges in which two aspects
deserve particular attention. In the West, co- operative development has
for the most part been a bottom-up process in which government poli-
cies played a marginal role. The most effective long-term policies, where
they existed, were those aimed at supporting the institutional viability of
co- operatives. In addition, networking and members cohesion, related to
the sharing of cultural views, have certainly helped co- operatives growth
and competitiveness.

11
12 Patrizia Battilani

Co-operative beginnings in Western countries

The two key aspects of the long history of co- operative enterprises in
Western countries are their origins, which date back to before the industrial
revolution, and the bottom up process that generated them.
The first feature is in contrast to the prevailing literature, which links
the birth of co- operative firms to the Industrial Revolution. In 1908, Fay,
in the very first geography of co- operatives across Europe, provided an his-
torical overview based on interviews and documented records. The author
dated back the origins of co- operatives to the 18th century. Already in 1760
corn mills were founded on a co- operative basis as a countermeasure against
the high prices set by the corn millers who held the local monopoly (p.14).
However, as Cole stated 40 years later (Cole 1944), the first co- operatives
were not followed up, and never constituted a movement. They were iso-
lated experiments; and no one knows now who inspired most of them
(p.15). Eventually, during the first half of the 20th century, when books and
pamphlets on co- operative enterprises were published, a literature of their
development appeared as well and connected their diffusion to the social
disruption and economic thought generated by the Industrial Revolution. In
addition, co- operative enterprises were considered as being a part of a wider
movement deeply rooted in 19th-century social and political attitudes. This
version has been often re- circulated (Birchall 1997).
However more recent studies on the Middle Ages leave room for ques-
tioning the above conviction. The 1997 paper by van Driel and Davos pre-
dated the origins of co- operatives to as early as the 14th and 15th centuries
in Belgium and Holland. Indeed, the Antwerp naties and the Dutch vemen
were organized in the late 15th and early 16th centuries, respectively. Both
were set up as co- operatives of porters or other auxiliary merchants work-
ers. These structures exhibited many features of modern co- operatives. We
shall take, for example, the one member, one vote principle, or the habit of
collecting revenues from each member in order to periodically share within
the co- operative (van Driel and Davos 1997).
It is also important to recall the regulated companies set up by merchants
in the England in the 15th century, which followed the one member, one
vote rule. Adam Smith, in his The Wealth of Nations, compares the regu-
lated companies to the emerging joint stock companies, so to focus on what
he considered to be the main weaknesses of this form of enterprise: the
corporation spirit (p.580) and the open- door principle. The latter actually
obliged the firms to admit any person, properly qualified, upon paying a
certain fine (Smith 1812:579).
Therefore, we could conclude that co-operatives appeared in the 15th century,
at the dawn of the market economy. However only in the age of the Industrial
Revolution, and particularly during the 19th century, did co-operatives catch
experts and politicians attention together with the support of the various
Features and Determinants of Co- operative Development 13

social and political movements of the time. In the century when commercial
codes made their appearance (Ripert 1951), co-operative enterprises gained
legal status. In many countries the deregulation of limited liability companies
was the occasion to enter the definition and regulation of co-operative enter-
prises into the commercial code (Guinnane and Martnez-Rodrguez 2010;
Battilani and Bertagnoni 2010). The 19th-century institutional innovations
did not have the purpose of strengthening only investor-owned enterprises;
they also included the concept of undertaking, through which ownership
was assigned to stakeholders who were not investors in other words the
co-operative.1 The first countries to provide a legal framework for this form
of enterprise were the Austrian Empire and Belgium. In many countries the
new laws were the expression of liberal ideals which considered co-operatives
a possible solution for social issues.
In conclusion, since their beginning, Western co- operatives showed
aspects of voluntary organizations and emerged as a result of a bottom-up
process driven by values and social inspirations which sometimes changed
over time. Very often worker, religious and economic movements had an
impact in shaping and fostering this form of enterprise (Schneiberg, King
and Smith 2008).

Western co-operatives after World War II

Due to a lack of comparative data on co- operative enterprises, only a very


rough sketch can be made of the evolution of co- operatives in Western coun-
tries after World War II.2 To this end, I will use two benchmark years (1947
and 2009) with data on membership from various sources.3 The results are
compiled in Table 1.1. Three aspects stand out over the long run. First of all,
the number of members has been increasing in almost all Western coun-
tries. Secondly, co- operatives have become larger. Thirdly, the size mainly
increased in what we can consider the traditional co- operative sectors:
consumer, credit and agriculture. Indeed, if we take into consideration the
300 largest global co- operatives and mutual organizations in the world
including their associated companies (ICA 2011) we will notice that nearly
80 per cent of the overall turnover (revenue) is represented by the following
sectors: food and agriculture (33 per cent), insurance (22 per cent), retailing/
wholesaling (25 per cent).
Therefore, we could describe the evolution of Western co-operatives in tra-
ditional sectors as acquiring a larger size to exploit economies of scale and
to invest in innovation or marketing. Take, for instance, the agricultural sec-
tor. Since the 1950s many European co-operative leaders claimed the need to
change the basic structure of the sector by limiting the number of nationwide
co-operatives. In some cases the rationalization became an issue before World
War II. In Denmark, in July 1937, the government established the first com-
mission promoting amalgamation in the dairy sector, but the publication of
Table 1.1 Members and average size in terms of members of co- operatives in Western countries 1947 and 2009

All sectors All sectors All sectors All sectors Consumer Agricultural Banking
members members coops coops size Coops size size Coops size size Coops size

Country 19451947 20092011 19451947 20092011 19451947 20102012 19451947 20102012 19451947 20102012

Austria 287,000 4,866,148 362 2339 4333 2 1313 473 3631


Belgium 430,304 2,670,000 95 166 6470 466 28
Greece 420,160 942,991 4257 6392 99 117 570 12,261
Denmark 1,287,454 1,840,803 7835 1223 225 4372 144 9000 534 3350
France 4,079,332 23,000,000 19,170 21,000 1958 66,667 107 26 143 8044
Germany 500,000 20,509,973 284 7415 1761 3072 107 601 162 13,554
Ireland 100,473** 152,000 528 183 783 233 1000 122
Italy 3,824,802 13,063,419 17,624 41,552 355 9484 148 122 101 3596
Norway 239,854 2,040,000 1001 5,348 240 9091 101 3125
Finland 841,476 3,164,626 380 380 1714 50,119 101 1442 131 5504
Portugal 19,000* 2,135,000 2946 2,946 760 2564 1094 3338
Netherlands 278,000 3,249,000 677 677 965 700,000 718 1544 156 11,318
Spain 1,884,688* 6,960,870 24,276 24,276 654 6788 131 284 25,883
Switzerland 516,311 3,476,151 1416 1416 578 205,504 84 7 368 3516
UK 9,745,436 12,800,000 977 977 9691 119,987 3,500,00
Sweden 851,576 4,069,852 9170 9170 1208 65,208 145 5633 102 5761
Canada 387,575 11,000,000 5679 5679 817 10,363 27,973 709 5766
USA 646,000 12,000,000 29,285 29,285 248 1679 921 12,463

* Numbers in 19451947 column are for 1937.


** Numbers in 19451947 column are for 1941.
Source: Own compilation of data from Hoyt & Menzani (2012), Rhodes (1995), Parker & Cowen (1944), Medina Albaladejo (2012), ICA (2010), ICA (2011).
Features and Determinants of Co- operative Development 15

the commissions report was interrupted by the war (Svendsen and Svendsen
2004). When it became public in 1949 the report stated that: large dairies are
better capable of implementing the needed technological innovations that
can ensure the best quality products (Svendsen and Svendsen 2004:114). In
general the amalgamation process became a common feature in the European
co-operative movement during the 1960s and the 1970s.4 Rationalization
and amalgamation not only increased the market power of farmers but, more
importantly, enabled them to take part in the development of agro-industry
and to consequently obtain an increasing share of the value of their produc-
tion. Since then mergers and acquisitions never stopped.
However the creation of big enterprises is only one part of the story. Small
undertakings are still an important share of the European co- operative
movement, above all outside the traditional co- operative sectors. Take, for
instance, the setting up of many small social co- operatives in Italy in the
last few decades (Borzaga and Ianes 2006).
We could ask what factors stimulated the multifaceted evolution of
Western co- operatives during the second half of the 20th century. Among
the many determinants that explain success and failure of co- operative
enterprises analysed in the literature, we focus on three features: state inter-
vention, networking, and cultural views.

The determinants of co-operative development: state


intervention

There is a long tradition of claims that co- operatives should be supported by


the state, especially in the initial stage of their development. The origin of
this approach can be traced back to the French thinker, Louis Blanc, accord-
ing to whom co- operatives are a form of organization promoting the public
interest (Blanc 1839) because they could provide a solution to unemployment.
Therefore, according to Blanc, a government should support co- operatives
in their early stages by purchasing production equipment or giving public
procurement, and should withdraw its support once co- operatives become
viable. The first attempt to implement this project was made during the
Revolution of 1848, when the provisional government and Blanc himself
created the National Workshops: laboratories in which unemployed urban
workers were given a job to carry out useful public works. However, this first
experiment was unsuccessful.
Nevertheless, after World War I in some European countries (for example,
Italy and France) the government fostered the development of co- operatives
because they were considered a good tool to fight not only unemployment
but also inflation by granting free land to cultivate, giving public works
without tender, or providing low-interest loans (Caroleo 1986). In the sec-
ond half of the 20th century this kind of public intervention in favour of
co- operatives became less and less practiced.
16 Patrizia Battilani

The second type of state intervention, much more intrusive for co- operative
life, dates back to the Russian Revolution. It consisted in the promotion of
a different kind of enterprise: the state- centric co- operative, in which the
state or the party in power takes over traditional co- operatives. In Western
Europe this solution was adopted by Fascist and Nazi regimes during the
interwar years (Menzani 2009, Kramper 2009) in order to politically control
the co- operative movement.
However, after World War II the state- centric co- operatives disappeared in
Italy, Germany and Western countries in general, even though the state was
occasionally taking over co- operatives in those decades, too, as for example
the mutuals in Germany, which were included in the public security system
of the country during the 1960s.
In the same decades, however, state- centric co- operatives kept spreading
in all command economies as well as in many former European colonies
in Africa and Asia. This divide would be overcome only after the collapse
of the Soviet Union with the transition to the market economy in Eastern
and Central Europe. Generally, the promotion of state- centric co- operatives
did not prove to be very successful, above all when the strategy included
general state support and dependence. In those countries it did not help the
diffusion of viable autonomous co- operative enterprises and, in addition,
it contributed to the lack of understanding and a negative public image,
even for member-based co- operatives. The third kind of state intervention
we consider, namely the approval of legislative measures to ensure proper
functioning of co- operative enterprises, demonstrate markedly different
results compared to the other two types of intervention. During the 1960s
and the 1970s, the adoption of mainstream economic models in analysing
co- operative firms focused on the many alleged weaknesses of this kind of
enterprise (Furubotn and Pejovich 1970; Ward 1958; Vanek 1977).5
A clear example is the undercapitalization (and underinvestment) of
co- operatives, an issue on which a complex and protracted debate took
place (Pencavel 2001; Dow 2003; Perotin 2012). A variety of suggestions
came from those empirical and theoretical studies, from the adoption of tax
incentives to the creation of membership markets.
In the end, the result of all of this was not the disposal of co- operatives
but rather the development of legislative measures aiming at ensuring their
proper functioning, so to overcome their potential weaknesses. As for the
under capitalization, UK legislation enabled the creation of a market for
membership rights. However, very often these co- operatives were converted
into traditional companies after a few years. Take, for instance, the worker-
owned bus companies that resulted from privatization in the 1990s; after
some years they were sold to conventional owners (Perotin 2012).
This means that these legislative measures were actually more favourable
for investor- owned companies than for co- operatives, thereby leading to
demutualization, even though they may have seemed to offer a solution for
Features and Determinants of Co- operative Development 17

undercapitalization and the long-run growth strategies of co- operatives. An


alternative solution to the underinvestment issue was the mandatory collec-
tive capital accumulation adopted at least since the end of World War II in
France and Italy, and in the Mondragon system in Spain (Alzola et al. 2010).
In these countries, the underinvestment problem was particularly strong
because in each co- operative a part of the capital was individually owned,
while a part was collectively owned and could not be divided among the
members. In those three countries, the law or co- operatives statute encour-
aged capital accumulation and investment by stating that a percentage of
profit was to be ploughed back into the firm each year and added to the indi-
visible capital reserves. Often, the mandatory collective capital accumula-
tion was coupled with other kinds of incentives, for instance, tax exemption
of retained earnings set aside in indivisible reserves (Battilani and Zamagni
2011). The empirical evidence observed so far proves that mandatory accu-
mulation had a positive impact on co- operative longevity (Perotin 2012).
To sum up: usually, state intervention has been following three different
kinds of strategies: co- operative promotion, state- centric co- operatives, and
institutional viability. As Table 1.2 illustrates, the same three types of strate-
gies of state intervention can also be identified for conventional enterprises.
Therefore, it is possible to identify a dominant strategy for each time period,
both for conventional firms and for co- operatives, implying that the time-
dependent dominant economic culture is an important factor in state sup-
port policies.
As a matter of fact, over the last decades an interest for the institu-
tional architecture of firms also stimulated a substantial wave of inno-
vation for co- operatives. The results of the process are prismatic, but it

Table 1.2 Types of state interventions in enterprises

Years Conventional enterprises Co-operative enterprises

From the 19th century The state fosters the The state fosters the
to the end of World development of new development of co-
War I enterprises in some operatives in all sectors
industrial sectors
From 1917 to 1989 in State-owned enterprises State-centric co-operatives
command economies
From 1917 to 1970 in Private enterprises play a Member-centric co-
market economies pivotal role however a operatives spread,
strong development of however, occasionally the
state-owned enterprises took state took over some co-
place operatives
From 1970 to the The state sets the rules for The state sets the rules for
present the proper functioning of the proper functioning of
conventional firms co-operatives
18 Patrizia Battilani

indisputably paved the way for new forms of co- operatives. In the United
States and Canada, they were commonly referred to as new-generation
co- operatives (NGCs), in Italy and Spain they were called groups or net-
works of co- operatives. Since one of the main features for some of these
new organizational structures was to emulate some of the advantages of the
investor- oriented firm (above all, in capital-raising activities) while keeping
the mutual/co- operative status, their introduction was called hybridization
(Nilsson 2001; Chaddad and Cook 2004; van Bekkum and Bijman 2006).
These new organizations seemed particularly well suited to accompany the
process of amalgamation started in the previous decades. At the same time,
in some countries (the United States, United Kingdom and Australia) and
sectors (substantially agriculture and finance), institutional innovations
paved the way for a more radical outcome: demutualization. Although the
process of conversion of co- operatives into conventional enterprises dates
back to the origins of the co- operative movement (Mayers and Smith 1986;
Carson, Forster and McNamara 1998), it entered a new phase in the last two
decades, both in the United States and in Europe, a moment characterized
by a substantial intensification (Battilani and Schroeter 2012).
To conclude, we can say that in Western countries there is a tradition of
state intervention, both for co- operative and conventional enterprises. It has
taken a variety of forms but, apart from the interwar years, it never took the
shape of state- owned co- operatives. After World War II, state intervention
has usually taken the shape of legislative measures in support of capitaliza-
tion and viability of co- operative enterprises. So far, the institutional inno-
vations appear to be more effective than the promotion strategies chosen
in the past. For instance, previous strategies assisted in the amalgamation
process in Western co- operative movements, contributing to the emergence
of large co- operative enterprises.

The determinants of co-operative development:


networking

The above-mentioned changes take us to the second determinant we would


like to analyse in this chapter: networking. Since the very beginning of
their emergence, co- operative networks have been a crucial feature of the
co- operative movement in many Western countries. We should observe, for
example, consumer co- operatives and their attempts to centralize warehouse
or purchasing activities by setting up federal or national wholesale societies
in Sweden, the UK and Italy over the 19th and 20th centuries. Co-operation
among co- operatives usually has assumed two distinct modes. The first type
of networks was based on economic rationales, as in the example of the
wholesale societies that were set up to exploit economies of scale and/or to
exercise some sort of monopsony. Often, some type of formal links foster-
ing the collaborative nature of co- operatives also was set up. For instance,
Features and Determinants of Co- operative Development 19

wholesale societies were often built up as second-level co- operatives and


could therefore admit only co- operatives as members (Friburg et al. 2012;
Battilani 2005). The second type of network is represented by apex organi-
zations. They were set up almost everywhere to represent the co- operative
instances in the social or political arenas and, even if in this case the link
was weaker, it did exist. After World War II, both type of networks con-
tinued to operate. Furthermore, it was the existence of such networks that
made mergers and acquisitions possible, as it was proven by the history of
many co- operative sectors in Italy, Ireland, Scandinavian countries and oth-
ers (Battilani 2005; Jenkins 1996). A systematic analysis and typology of
co- operative networks are presented in Menzani and Zamagni (2010) as well
as in the chapter by Novkovic in this volume.
We should not forget that the amalgamation process changed co-operative
networks in many respects. On the one hand some of the previous networks
were substituted by the internal organization, while on the other hand new
connections were created to comply with the market strategies and needs of
the new enterprises resulting from mergers, especially the financial needs
connected with the expansion in both the internal and foreign markets. This
issue has been studied for the Italian co-operatives: take, for instance, the
transformation of Granarolo (a dairy co-operative) and Coop Consumatori
into co-operative groups (Bertagnoni 2004; Battilani 2005). Therefore, the end
result of amalgamations was not a handful of giant integrated co-operatives
but rather a handful of much more complex entities. Furthermore, in the
last two decades this tendency was strengthened by the internationaliza-
tion of large co-operatives, like Arla Foods (the Danish-Swedish co-operative
resulting from a cross-frontier merger), Friesland Coberco Dairy Foods and
Campina (the Netherlands), Glambia (Ireland) and the Valio Group (Finland)
in the agricultural sector and Mondragon (Spain) and Sacmi (Italy) in manu-
facturing. As a matter of fact, to address cross-border activities, co-operatives
have often preferred building up a conventional firm than enlisting new
members in the foreign countries. The most striking example is Mondragon,
a Spanish (Basque) co-operative group which owns conventional enterprises
on nearly every continent (however, in some of these companies employ-
ees are included in profit sharing). A similar strategy was chosen by some
co-operatives in Italy, such as Conserve Italia (a food-processing co-op with
plants in France and Spain and trading companies in Germany and the UK)
and Sacmi (a group producing machines with plants in 23 countries), which
have also become international, usually by setting up or buying conventional
enterprises.
To provide an example of these new co- operative groups we can take
a look at Table 1.3 about the Arla Foods subsidiaries. Arla Foods can be
taken as an example of the best practice to become a market leader. The
group controls 95 per cent and 65 per cent of dairy production in Denmark
and Sweden respectively, and shares between 11 per cent and 18 per cent
20 Patrizia Battilani

Table 1.3 Arla Foods: direct group holding

Countries N Arla groups co. Countries N Arla groups co.

Denmark 46 United States 6


Sweden 23 Canada 1
Norway 1 Argentina 1
United Kingdom 13 Mexico 1
The Netherlands 2 Brazil 2
Switzerland 1 UAE 1
Germany 28 Saudi Arabia 1
Finland 6 Lebanon 1
France 3 Kuwait 1
Italy 1 Qatar 1
Spain 1 Bahrain 1
Greece 1 Iraq 1
Russia 1 China 1
Poland 3 South Korea 1

Source: Arla Foods (2011).

in other European and in Asian countries. The origin of this group dates
back to 18691870, when the Swedish and the Danish predecessors were set
up. What followed was a history quite similar to that of the hundreds of
other dairy co- operatives founded in Europe in the last decades of the 19th
century. In Denmark the incentive to band together came first in the mid-
1950s, when the largest export co- operatives joined to create a marketing
group for the UK in order to cope with the growing market competition.
The real consolidation process started some years later with the formation
of a handful of leading co- operatives. Among them the MD Foods had the
strongest international position, which was strengthened during the 1990s
by the creation of subsidiaries and the acquisition of existing dairy firms
in its main markets, namely in the UK and United States. By the 1970s
a similar amalgamation process was accomplished in Sweden, leading to
the birth of a market leader, Arla, with 65 per cent of market share at the
beginning of the 1990s. When Sweden entered the European Union, Arla
conceived international strategies to increase sales in the Scandinavian
countries, Germany and the UK. It was time for Arla and MD Foods to meet.
They could not grow anymore in their domestic markets and, at the same
time, needed to find new funds to foster the internationalization strategy.
The talks started in 1999 and, two years later, Arla Foods was created. The
two networks of dairy co- operatives became a new entity: a cross-border
co- operative group.
To conclude, we can say that amalgamation and networking dramatically
changed the co- operative organization and structure, especially in agri-
culture, retailing and finance. Certainly, this process made co- operatives
Features and Determinants of Co- operative Development 21

more competitive and able to increase their market share, although it raised
new questions. The most important concern is the difficulty of maintain-
ing member ownership and control. This is the challenge that the Western
co- operative movement is now facing.

The determinants of co-operatives development:


the ideal inspiration and the connection with social and
political movements

As stated in the introduction, the Industrial Revolution did not represent


the origin of co- operative enterprises, but it surely marked the origin of
their connections with new social, political and religious inspirations. Since
then co- operatives have shared their ideals with a number of other social
movements. Throughout Western Europe, working- class organizations
played a crucial role in fostering co- operatives, which for many decades of
the 20th century, were one of the four pillars of the labour movement, along
with political parties, trade unions, and recreational organizations. The var-
ious forms of Christianity played an equally important role: usually the
Catholic faith in Italy, Spain and Belgium, and the Protestant in Denmark
(Zamagni and Zamagni 2010). In addition, in the 19th century the pro-
moters of agricultural and mutual co- operatives in the United States were
the Grangers (The National Grange of the Order of Patrons of Husbandry),
namely the followers of anti-corporate movements. This is an example of
what Furlough and Strikwarda (1999) have called the ideological flexibility
of co- operatives. We can say that in Western Europe many social move-
ments found their way to co- operate and the essentially cultural views were
an important factor in the evolution of co- operatives.
Despite the ideological flexibility, some shared values can be identified
over the long history of Western co- operatives. The first one is the ideal of
collaboration among citizens for the improvement of the standard of liv-
ing of the whole community. Using the terminology of the International
Cooperative Alliance we can define it as concern for community. For
this reason the local roots have been always so important for the whole
co- operative movement. The second value crossing all the co- operative cul-
tural traditions is social justice which has been connected with a variety of
purposes and actions, from the construction of a more egalitarian society to
the improvement of members moral and economic standing.
The link with social movements produced contrasting results. First of
all it spread knowledge of such undertakings, contributing to their diffu-
sion internationally. Secondly it increased the level of inter-personal trust
through a series of membership mechanisms, and in the meantime made the
interests of members less heterogeneous than they had previously been: as
a result, the costs normally associated with collective decision-making were
reduced. In these respects the ideologicalcultural component proved to be
22 Patrizia Battilani

a vital factor in the development of co- operatives (Battilani 2011). However,


focusing on the last three decades of the 20th century, some negative con-
sequences also emerged. According to some scholars (Zangheri, Galassi and
Castronovo 1986), the ideological claims of the worker movement restricted
the economic choices available to individual co- operatives in the long run
and limited the spread of an entrepreneurial culture as well as the recruit-
ment of professional management, especially in the latest stages of indus-
trialization (Rothschild-Whitt 1979; Fanning and McCarthy 1986; Cook
in this volume). The decline in the number of co- operative enterprises, as
well as the collapse of consumer co- operatives in Germany and Austria, has
been ascribed to this factor (Bradza and Schediwy 1989). However it was not
only a problem of entrepreneurial or managerial culture. According to these
scholars, once a higher level of income and living was reached there was less
of a reason for co- operatives to exist, and their life cycle ended. However,
the history of consumer co- operatives in Mediterranean and Scandinavian
countries offers a different answer to the problem. As a matter of fact in
Italy, Sweden and in recent years also in the UK, the success or the resur-
gence of consumer co- operatives also involved the redefinition of their
values and aspirations. The emergence of the affluent society changed the
needs of customers. The Scandinavian and Italian co- operatives provided
an answer to the new members needs by promoting healthy and environ-
mentally friendly foods, as a reflection of the inclusion of the environmen-
tal movements values in their business strategy and consequently changing
their inspirational ideals. In the meantime, as they have usually done in the
past, they kept catering to their members needs, which are now the needs
emerging in an affluent society.
To better illustrate the point we will look at another example of a trucker
co-operative operating in Italy, the CTA (Cooperativa trasporti alimentari[Food
transport co-operative]), which currently has 116 members, 38 of them in their
50s, 33 in their 40s and only 14 in their 30s.
The co- operative was set up in 1972 by 28 truckers; most of whom were
unemployed and had no working equipment. Some of them knew each
other because they lived in the same neighbourhood or had shared some
work experience that is they belonged to the same community. Their
motivation to start a co- operative resulted from the desire to find a perma-
nent job. At that time Italian consumer co- operatives had already started
the amalgamation process and the rationalization of warehouse activities by
outsourcing of some activities such as transport of goods (Battilani 2005).
The CTA intercepted this transformation, providing transport services to
consumer co- operatives as well as to other customers.
In 2008, a survey regarding the attitude towards the co- operative was
administered to all members.
The crucial question in the survey was about the difference members per-
ceived between a conventional firm and a co- operative, which is a way to
Features and Determinants of Co- operative Development 23

ask what a co- operative is. In addition, as the Italian co- operative culture
emerged from three different traditions: liberalism, Catholicism, and social-
ism, another question was asking about the cultural and religious move-
ments they belonged to.
By comparing the two answers a substantial divide emerged between mem-
bers who declared to be left oriented on the one hand, and either Catholic or
without ideological tradition on the other hand, as illustrated in Table 1.4.
According to left- oriented members the main differences between their
co- operative and a conventional firm consisted in the protection schemes
provided by the co- operative. They considered the co- operative a sort of
mutual aid society which can contribute to the construction of a more egali-
tarian society. Conversely, other members focused above all on the quality
of work and the opportunities for entrepreneurial development. It appeared
that ideology mattered. However it is not easy to find a connection between
the set of values traditionally shared by each ideology and the role assigned
to co- operatives by CTA members.
It is well known that the left wing, Catholic, and the liberal traditions
considered co- operative enterprises the solution to different sets of needs. In
a nutshell, liberal- oriented co- operative promoters believed in the potential
of the co- operative enterprise to create the conditions for social peace and
the moral improvement of the individual. Catholic founding fathers defined
the co- operatives principal tasks as the improvement of the living standards

Table 1.4 Perceived differences between a co- operative and a conventional enter-
prise, by CTA members ideological self-identification

Members
Left who do not
oriented Catholic subscribe to
In a co-operative: All members members one ideology
Taxes are lower 0% 0% 0% 0%
Revenue is higher 1% 3% 0% 0%
There is a greater attention to the 29% 24% 38% 36%
quality of work
The exchange of information is 14% 11% 15% 18%
more frequent
There are better opportunities for 24% 18% 31% 32%
entrepreneurial development
There is a protection scheme 30% 45% 15% 9%
in case of needs (illness,
accident, ... )
Other 1% 0% 0% 5%
Total 100% 100% 100% 100%
Completed questionnaires 76 38 13 22

Source: Battilani, Bertagnoni and Vignini (2008).


24 Patrizia Battilani

of the poorer classes. Left- oriented founding fathers saw the co- operative as
a form of enterprise that re-established the dignity of labour and helped to
create a more egalitarian society. In other words, none of them originally
focused on entrepreneurial development.
Taking into consideration the age of the members, a more significant pic-
ture emerged, since the left- oriented members were also the oldest. Members
in the same age group provided similar answers regardless of their cultural
traditions. More than that, as illustrated in Table 1.5, for older generations
the essential role of a co- operative was providing social benefits and protec-
tion, which is not surprising considering that those members grew up in
a context characterized by low income and limited welfare coverage. The
youngest generation of truckers, who had relied on a publicly provided social
security system all their lives, gave a markedly different answer. For them,
co- operatives can help members to improve their entrepreneurial attitude
or their human capital. Again, we can see the inclusion of a new set of values
within co- operative enterprises, such as providing a career, social mobility
and so on. The CTA case study is an interesting example of the impact an
affluent society can have on co- operative identity.
In conclusion, over the last half of the 20th century as a consequence of
the new social and economic context, the average members needs changed,

Table 1.5 Perceived differences between a co- operative and a conventional enter-
prise by CTA members age

Retired Born before Born between Born between


In a co-operative: members 1955 1956 and 1966 1967 and 1976

Taxes are lower 0% 0% 0% 0%


Revenue is higher 0% 3% 0% 0%
There is a greater 29% 24% 34% 28%
attention to the quality
of work
The exchange of 18% 14% 14% 17%
information is more
frequent
There are better 18% 21% 21% 33%
opportunities for
the entrepreneurial
development
There is a protection 36% 34% 31% 22%
scheme in case of needs
(illness, accident, ... )
Other 0% 3% 0% 0%
Total 100% 100% 100% 100%
Completed questionnaires 28 29 29 18

Source: A survey of CTA co-operative members; Battilani, Bertagnoni and Vignini (2008).
Features and Determinants of Co- operative Development 25

and co- operatives partly transformed their original goals in order to corre-
spond to such emerging needs. The ability of the co- operative movement to
define its relevance based on its values and goals continues to be crucial for
its survival and ability to flourish.

Concluding remarks

In conclusion, co-operatives changed in many ways in the second half of the


20th century in order to go with the economic and social transformations of
the time: they grew in size, they became well capitalized, and they organized
complex networks. The co-operative form in Western countries became more
flexible than may have been expected. Innovation in structure and organi-
zational models certainly improved the competitiveness of co-operatives, but
at the same time it exposed them to the risk of losing their identities. The
ability to adapt almost every feature without losing the original capability to
address members needs can be considered the real hallmark of co-operative
development in the West.

Notes
1. In France, the governmental authorization for the foundation of corporations was
finally abolished by the 1867 Code, which also introduced the socits capital
variable, a legal form including the co-operatives. In England the Joint-stock
Companies Act (1844) made incorporation possible simply by registration, and
between 1844 and 1862 the full joint-stock company with limited liability for all
shareholders became widespread. In the same decade, more precisely in 1852, the
Industrial and Provident Societies Acts (I&P Acts) were adopted, and for the first
time gave co-operatives a corporate status, providing them a proper legal frame-
work. In Italy, co-operatives were legally recognized with the publication in 1882
of the new Commercial Code, which also abolished the need for governmental
authorization when creating a corporation. Co-operative organization in Austria
was shaped by the co-operative societies act of 1873 (Gesetz vom 9. April 1873, ??ber
Erwerbs- und Wirthschaftsgenossenschaften, RGBl Nr. 70/1873). Following the impe-
rial law the same act became applicable in the territories of Bohemia, Moravia,
and Silesia. In that same year a legal framework for co-operatives was created in
Belgium.
2. The International Co-operative Alliance has not published a consistent collection
of data during the past 40 years, even though occasionally it collects data provided
by its members. In addition, not all nations are members of the ICA and not all
co-operatives of member states are included in the ICA data base, let alone the
great variety in the methods used to collect that data.
3. Data come from two basic sources: Hoyt and Menzani (2012) and Rhodes (1995).
However, for some countries additional data was collected from: Parker and Cowen
(1944), Medina Albaladejo (2012), ICA (2010), ICA (2011).
4. See, for instance, the dairy sector mergers in Ireland (Jenkins 1996), Sweden (Arla
Foods company history) and again in Italy (Bertagnoni 2004).
5. For a criticism of these models see Borzaga and Tortia (2010).
26 Patrizia Battilani

References
Alzola, I., Arando, S., Fakhfakh, F., Freundlich, F., Gago, M., Protin, V. and Zevi,
A. (2010) Are Labour-Managed Firms All the Same? A Comparison of Incentives
for Growth, Democracy and Institutional Sustainability in the Constitutions of
Worker Cooperatives in Mondragon, Italy and France. Paper presented at: The 15th
World Congress of the International Association for the Economics of Participation,
Paris.
Arla Foods (2011) Annual Report. Available at: http://www.arla.com/service-links/
Investors/Annual-Reports.
Battilani, P. (2005) How To Beat The Competition Without Losing Co- operative
Identity: The Case of The Italian Consumer Co- operatives, in Acta of: The
International Congress (2005)Consumerism versus Capitalism? Co- operatives Seen
from an International Comparative Perspective. Ghent: A msab-Instituut voor Sociale
Geschiedenis.
Battilani, P. (2011) The Creation of New Entities: Stakeholders and Shareholders in
19th Century Italian Co- operatives, in: A. Webster, L. Shaw, J. Walton, A. Brown
and D. Stewart (eds) The Hidden Alternative. Co- operative values, Past, Present and
Future. Manchester: Manchester University Press, pp. 157176.
Battilani, P. and Bertagnoni, G. (2010) Co- operation, Networks, Service: Innovation in
Outsourcing. Preston: Crucible.
Battilani, P. and Schroeter, H. (2012) The Co- operative Business Movement: 1950 to the
Present. Cambridge: Cambridge University Press.
Battilani, P., Bertagnoni, G. and Vignini, S. (2008) Unimpresa di co- operatori, artigiani,
camionisti: la CTA e il trasporto merci in Italia. Bologna: il Mulino.
Battilani, P. and Zamagni, V. (2010) Italys Co- operatives from Marginality to
Success: Finance and Networks, in: A. Colli and M. Vasta (eds) Forms of Enterprise
in the 20th Century Italy: Boundaries, Structures and Strategies. London: Edward Elgar
Publishing.
Bekkum, O.F. van and Bijman, J. (2006) Innovations in Co- operative Ownership:
Converted and Hybrid Listed co- operatives. Paper presented at: The 7th
International Conference on Management in Agri Food Chains and Networks, 31
May2 June, Ede, The Netherlands.
Bertagnoni, G. (ed.) (2004) Una storia di qualit. Bologna: il Mulino.
Birchall, J. (1997) The International Co- operative Movement. Manchester: Manchester
University Press.
Borzaga, C. and Ianes, A. (2006) Leconomia della Solidariet: Storia e Prospettive della
co- operazione Sociale. Roma: Donzelli.
Borzaga, C. and Tortia, E.C. (2010) The Economics of Social Enterprises: An Interpretive
Framework, in: L. Becchetti and C. Borzaga (eds) The Economics of Social Responsibility:
the World of Social Enterprises. London: Routledge, pp. 1533.
Caroleo, A. (1986) Il movimento co- operativo in Italia nel primo dopoguerra: 19181925.
Milano: Franco Angeli.
Carson, J.M., Forster, M.D. and McNamara, M.J. (1998) Changes in Ownership
Structure: Theory and Evidence from Life Insurer Demutualizations, Journal of
Insurance Issues, XXI: 122.
Chaddad, F. and Cook, M. (2004) The Economics of Organization Structure Changes:
A US Perspective on Demutualization, Annales de lconomie publique, sociale et
co- oprative, LV: 575594.
Cole, G.D.H. (1944) A Century of Co- operation. London: Allen & Unwin.
Features and Determinants of Co- operative Development 27

Dow, G.K. (2003) Governing the Firm: Workers Control in Theory and Practice. Cambridge,
UK: Cambridge University Press.
Driel, H. van and Devos, G. (2007) Path Dependence in Ports: The Persistence of Co-
operative Forms, Business History Review, LXXXI: 681708.
Fay, C.R. (1908) Co- operation at Home and Abroad: A Description and Analysis. London:
King and Sons.
Fanning, C.M. and McCarthy, T. (1986) A Survey of Economic Hypotheses
Concerning the Non-Viability of Labour-Directed Firms in Capitalist Economics,
in: S. Jansson and A.B. Hellmark (eds.) Labor- Owned Firms and Workers Cooperatives.
Gower: Aldershot, pp: 750.
Furubotn, E. and Pejovich, S. (1970) Property Rights and the Behaviour of the Firm
in a Socialist State, Journal of Economic Literature, X: 430454.
Furlough, E. and Strickwarda, C. (eds.) (1999) Consumers Against Capitalism? Consumer
co- operation in Europe, North America and Japan, 18401990. Maryland: Rowman &
Littlefield.
Guinnane, T.W. and Martnez-Rodrguez, S. (2010) Did the Co- operative Start Life as
a Joint- Stock Company? Business Law and Co- operatives in Spain, 18691931. Yale
University, Department of Economics, working paper 987.
Hoyt, A. and Menzani, T. (2012) The International Co- operative Movement: A Quiet
Giant, in: P. Battilani and H. Schroeter (2012) The Co- operative Business Movement:
1950 to the Present. Cambridge: Cambridge University Press.
ICA (2010) European Co- operatives Key Statistics. Brussels: ICA.
ICA (2011) Global 300. Report 2010: The World Major Co- operatives and Mutual Businesses.
Avaialable at: (http://2012.coop/sites/default/files/attachments/Global300%20
Report%202011.pdf).
Jenkins, W. (1996) Restructuring of Irish Dairy Co- operatives since 1950: An Example
from County Tipperary, Irish Geography, XXIX: 3848.
Kramper, P. (2009) Il movimento co- operativo tedesco nel periodo fra le due guerre,
Rivista della co- operazione, XXXVII: 89104.
Mayers, D. and Smith, C.W. (1986) Ownership Structure and Control: The
Mutualization of Stock Life Insurance Companies, Journal of Financial Economics,
XVI: 7398.
Medina Albaladejo, F.J. (2012) Consumer Co- operatives in Spain (18602010): An
Overview. Paper presented at: The International Conference Towards a Global
History of Consumer Co- operation, 24 May, Stockholm, Sweden.
Menzani, T. (2009) Il movimento co- operativo fra le due guerre. Il caso italiano nel contesto
europeo. Rome: Carocci.
Nilsson, J., Kihln, A. and Norell, L. (2009) Are Traditional Co- operatives an
Endangered Species? About Shrinking Satisfaction, Involvement and Trust,
International Food and Agribusiness Management Review, XII: 101122.
Parker, B.N. and Cowen, H. (1944) Co- operative Associations in Europe and Their
Possibility for Post-War Reconstruction, U.S. Department of Labor Bureau of Labor
Statistics, Bulletin No. 770.
Smith, A. (1812) The Wealth of Nations. London: Ward Lock and Co. Limited.
Ripert, G. (1951) Aspects juridiques du capitalisme moderne. Paris: LGDJ.
Pencavel, J. (2001) Worker Participation: Lessons from the Worker Co- ops of the Pacific
Northwest. New York: Russell Sage.
Perotin, V. (2012) The Performance of Workers Co- operatives, in: P. Battilani and H.
Schroeter (eds) The Co- operative Business Movement: 1950 to the Present. Cambridge:
Cambridge University Press, pp. 195220.
28 Patrizia Battilani

Rhodes, R. (1995) The International Co- operative Alliance in War and Peace: 19101950.
Geneva: International Co- operative Alliance.
Rothschild-Whitt, J. (1979) The Collectivist Organisation: An Alternative to Rational-
bureaucratic Models, American Sociological Review, IV: 509527.
Shaffer, J. (1999) Historical Dictionary of the Co- operative Movement. Lanham, MD:
Scarecrow Press.
Svendsen, L.G. and Svendsen, H. (2004) The Creation and Destruction of Social Capital:
Entrepreneurship, Co- operative Movements and Institutions. Cheltenham: Edward
Elgar.
Vanek, J. (1977) The Labor-Managed Economy. Ithaca: Cornell University Press.
Ward, B. (1958) The Firm in Illyria: Market Syndicalism, American Economic Review,
XLVII: 566589.
Webster, A., Shaw, L., Walton, J., Brown, A., Stewart, D. (eds) (2011) The Hidden
Alternative. Co- operative Values, Past, Present and Future. Manchester: Manchester
University Press.
Zangheri, R., Galasso, G. and Castronovo, V. (1987) Storia del movimento cooperativo in
Italia. La Lega Nazionale delle Cooperative e Mutue, 18861986. Turin: Einaudi.
Zamagni, S. and Zamagni, V. (2010) Co- operative Enterprise: Facing the Challenge of
Globalization. UK: Edward Elgar.
2
Globalization and Co-operative
Strategies
Roger Spear

Introduction

Globalization has many features, but three in particular have important


implications for co- operatives in the way in which they respond to the
challenge of globalization. Firstly, the globalization of financial markets,
which gives a competitive advantage to large multi-national corporations
compared to co-operatives, due to the latters more restricted access to such
markets. Secondly, the internationalization of corporations through merger
and acquisition activity, and the comparative disadvantage of co- operatives
in this market for corporate control, partly due to their financial and gov-
ernance structures and partly to their national orientation. Thirdly, the lib-
eralization of national regulatory and institutional frameworks which have
often supported or protected co- operatives activities.
In this chapter, conventional business globalization strategies are exam-
ined, drawing on business theorists such as Porter (1998; 2008), who argued
that five factors shape the strategy game: the threats of: substitute products,
established rivals and new market entrants; as well as the bargaining power
of suppliers and of customers. As a result, he argued that it is advanced fac-
tors of production that now give competitive advantage, such as:
human resources especially managerial and technological skills;
physical resources environmental quality, its natural resources or
location;
knowledge resources educational and research infrastructure;
capital resources financial infrastructure, for example, for start-up and
other risk capital;
infrastructure transport system, communications, quality of life, and
its health care facilities; technology can also radically improve infrastruc-
ture, for example, satellite telecommunications or mobile phones.

These factors are extremely varied but they can all give companies compar-
ative advantages in some countries rather than in others. But the structural

29
30 Roger Spear

ways in which these advantages are exploited typically involve organic growth,
mergers and acquisitions, or strategic alliances. However, the extent to which
co-operatives can engage in global strategies may be limited due to factors
inherent in their form, such as access to capital, their governance structures
and their role in national/regional economies. These factors limit the strategic
possibilities of co-operatives, leading to adaptations of the co-operative form
and separation of economic and social aspects, as ways around the difficulties.
However, it is also possible to explore the development of alternatives which are
compatible with the co-operative form and values. These alternative options
include: federal structures, developing congruent business and membership
activities, and exploiting the co-operative advantage. These strategic options are
examined with reference to some historical cases in the co-operative sector.

Globalization

The push towards globalization is based on the view that there are com-
parative advantages of operating in different countries, and so international
trade will benefit globalized companies because of a more efficient system
of production and exchange (better vertical and horizontal integration
capabilities to address customer diversity in demand; greater technological
capabilities, and so on); the implication is also that barriers to trade and
regulatory protectionism will reduce efficiency and overall welfare. The glo-
balization process operates at many different levels:

the business unit, where ownership and trading relations are becoming
more international;
the nation state, where the regulatory powers are diminishing, and
domestic policies are under pressure and do not overtly favour domestic
companies, either in terms of contracted out state services or in terms of
subsidies and developmental support;
media, where global spread facilitates international branding and influ-
ences national cultures, with greater (global) impact on individuals and
their consumption choices;
culture and ideology, where the demise of the Soviet Bloc has led to similar
economic and business ideas having increasing hegemony (privatization
of state assets and public services, business strategy for example restruc-
turing, delayering, and contracting out and so on);
international trade, where free trade policies and trading agreements force
national deregulation and market liberalization, weakening national
institutions that support domestic business; this is likely to lead to new
forms of institutional and regulatory organization which may be more
international in nature (Bager 1997);
technology, where telecommunications and information systems facili-
tate the global integration of business and economic systems; and access
Globalization and Co- operative Strategies 31

to technological know-how gives economic power in trading relations: for


example large agribusiness companies with genetically manipulated seed
stuffs together with fertilizer/pesticide technologies providing biotechni-
cal packages for farmers.

Two characteristics of the globalization process which are sometimes empha-


sized are, firstly, that market barriers within trading blocs (such as Europe, or
the Americas) may be reduced so that, for example, in Europe we have seen
primarily a Europeanization of trade and corporate activity (which may in
fact facilitate globalization between trading blocs); and, secondly, a region-
alization of economic activity across national boundaries within trading
blocks, for example strong links between Barcelona/Catalonia and Southern
France; this may lead to a view on regional engines of growth, such as the
European banana (Barcelona/Lyon/Milan/Stuttgart), which cuts across
national boundaries (though there is some debate on the myth status of
this view).
Global corporations can locate to avoid regulatory barriers and social taxes
and, as regulated trading blocks are getting larger, the possibilities increase
for advantageous relocations within such trading blocks for example
within the European Union, either because of differing regulations, taxes,
or costs or other advantages. The resulting considerable social costs cannot
easily be compensated through welfare policy, as this requires taxes which,
in turn, may lead to capital withdrawal. However, the problems of unem-
ployment and structural change cannot all be attributed to globalization: as
Nunnenkamp (1996) argues, they may have more to do with technological
change, structural mismatch, and inflexible institutions. However, a retreat
by the state is likely to exacerbate the situation; it is no accident that the
strongest countries in the global competition game are those which have
actively supported innovation and local competitive advantage in areas
of market failure and collective goods, such as research and development,
education, health, public infrastructure, community services, and so on.
While this requires the state to engage in active and partnering industrial
and economic policies (Ebert and Noll 1999), it may also mean that, from
a public-policy perspective, there is an advantageous role for co- operatives
if they can demonstrate their advantage in producing positive externalities
and collective goods such as: trust, reducing disadvantage and exclusion,
social capital via community linkages, and so on.
The globalization process, together with co-operatives specific character-
istics, produce a number of problematic features with regard to strategy, and
this may be particularly felt in those sectors and regions where co-operatives
are well established and have enjoyed some state support or protection. Note
that Western levels of state expenditure are still quite high (on, for example,
industrial development), but the character of support may be changing, mov-
ing away from traditional areas towards newer agendas.
32 Roger Spear

Globalization and strategy

The nature of comparative advantage has changed with globalization; it


used to be that there were advantages inherent in a particular countrys
availability of traditional factors of production: land, capital and labour.
However, labour (including skilled and managerial labour) now has become
more mobile, and capital markets have become very international; technol-
ogy is more accessible in some ways (via imitation and transfer), but is vig-
orously contested in others (through patents and R&D investment, which
give advantage); and strategy is as much concerned with exploiting natural
advantage as strengthening barriers to mobility, and market entry: for exam-
ple by protecting know-how, strategic assets, economies of scale and scope,
and exploiting national (or regional bloc) regulatory frameworks. Since it is
the advanced factors of production that now give competitive advantage
(Porter 1998), globalization allows companies the flexibility to choose the
most appropriate configuration of its activities to exploit such advantages in
different countries. It might be considered that local companies have advan-
tages due to their local knowledge of consumers, suppliers, and regulatory
frameworks, and so on; but, as Dunning (2000) argues, international com-
panies secure advantage through eclectically exploiting OLI attributes:

ownership (O) depends on owning certain key resources or capabilities


in specific markets (for example brand names, specific technologies or
know-how);
localization (L) means locating an activity to benefit from some com-
parative advantage, such as low- cost or highly experienced labour, or to
avoid national or regional tariff barriers (for example by locating produc-
tion within a trading bloc);
internalization (I) means internally retaining certain critical activities
with competitive advantages within the international company (such as
R&D or marketing), as outsourcing these would risk losing major corpo-
rate advantages.

This implies a wide range of configurations of an international business:


although a global business may be essentially engaged in exporting, possibly
with some ownership of local suppliers, most global companies have a sub-
stantial degree of foreign direct investment (FDI), that is ownership of produc-
tion and distribution facilities in different parts of the world; alternatively,
an international business may engage in licensing to local businesses; or may
rely on joint ventures or strategic alliances, particularly if its OLI advantages are
rather limited or there may be combinations of all of these possibilities.
In general international business produces standard products/services
with minor variations for local markets; it will do this by retaining inter-
nally its core competences and resources, owning other key capabilities
Globalization and Co- operative Strategies 33

whilst locating them to the best advantage; then it will source its supplies to
best economic advantage and develop and exploit global brands and, where
required, customize them to local taste.
Within this overall perspective there may be considerable variations
between parent and local companies in the degree of centralization/decen-
tralization, both in terms of how core assets and capabilities are config-
ured, and in terms of how essential knowledge is developed and distributed
or retained. Some corporations may give their national operations a high
degree of local autonomy, whilst others require them to implement central
strategies.
Bartlett and Ghoshal (2002) develop the strategic analysis further by
showing how sources of competitive advantage can be organized to meet
strategic objectives. They identify the main sources of competitive advan-
tage as national differences, scale and scope economies, then examine how
these might be developed to meet the strategic objectives of efficiency, man-
aging risk, and improving innovation and learning (see Table 2.1 based on
these authors).
There is currently increasing emphasis on corporate innovation and
learning, as can be seen in developments in knowledge management within
global corporations; while we are seeing a decline in emphasis on scope
economies, with a move away from conglomerate structures towards more
focused operations and managed supply chains; nonetheless most global

Table 2.1 Sources of competitive advantage

Strategic
objectives National differences Scale economies Scope economies

Achieving Benefiting from Expanding and Sharing of investments


efficiency differences in factor exploiting and costs across
in current costs (for example potential scale products, markets
operations wages and cost of economies in and businesses
capital) each activity
Managing risks Managing different Balancing scale Portfolio
kinds of risk arising with strategic diversification of
from market or policy- and operational risks and creation of
induced changes flexibility options and side bets
in comparative
advantages of
different countries
Innovation, Learning from societal Benefiting from Shared learning across
learning and differences in experience (cost organizational
adaptation organizational and reduction and components in
managerial processes innovation) different products,
and systems markets or
businesses
34 Roger Spear

businesses can build on some of these competitive advantages. Global cor-


porations also regularly draw on another significant source of competitive
advantage which is missing from the above scheme: economic power that
goes with size and global span.
This approach is quite powerful in informing strategy and the config-
uration of global business structures, but the ways in which companies
become global must also be addressed. As noted above, besides licensing
and exporting, the main routes to a global operation are foreign direct
investment (that is acquisition of overseas companies), and strategic alli-
ances. To these should be added mergers, which have become widespread
and have increased considerably in size. Acquisitions may be wholly or par-
tially owned, usually through some holding structure. Mergers are a much
faster route to global scale, but they require substantial restructuring finan-
cially as well as organizationally and strategically. Strategic alliances are an
important way of acquiring additional assets and capabilities without such
costs, but also are without the same degree of control, since they depend
on partnerships.
Strategic alliances may be short- or long-term; there are several different
types: joint ventures in which a new company is jointly set up to achieve
an agreed purpose; collaborations looser alliances, where a new corporate
body may not be set up, and consortia, where alliances are between more
than two partners. Faulkner (2003) notes that four factors that influence
success include: commitment and trust by partners, clear organizational
arrangements, a mutual learning philosophy, and congruent long-term
goals although as Kanter (1995) argues, alliances are more about consensus
building than decision-making, since partners generally wish to retain their
autonomy whilst exploiting the joint activity.
Examined in the next section is the extent to which co- operatives can
engage in global strategies, looking initially at factors which limit their
capabilities.

Limitations on co-operatives strategies

Capital
The distinctive capital structure of co-operatives while giving them strong ties
with members and the possibility of the lower cost of raising capital through
member investment in shares or member loans does limit access to wider
sources of capital compared to conventional businesses (Thomas and Defourny
1990). Although (OECD 2006) this comparison may be misleading, since they
argue there is enough evidence of a market failure in financing of small and
medium-size enterprises to merit government intervention, rather than leaving
them to rely on access to capital through family or friends; however, once a con-
ventional enterprise is large enough to be publicly listed on the stock exchange,
Globalization and Co- operative Strategies 35

this gives the possibility of raising capital through share issues, which greatly
facilitates the potential for growth, particularly through merger and acquisition.
Thus, the financial structure of co-operatives imposes some limitations on the
strategies available to co-operatives chiefly for growth via merger and acquisi-
tion, but also for restructuring and refocusing via disposal and acquisition.

Governance
As argued in another paper (Spear 2004) democratic member-based organi-
zations tend to suffer from a governance situation of weak stakeholder
(member) control due to agency problems, such as asymmetric informa-
tion in favour of managers; this is exacerbated by the absence of external
control through the market in corporate control (that is, merger and acqui-
sition activities are more difficult), and by the general weakness of legisla-
tion in protecting member rights, although this varies country by country
(Monzon Campos et al. 1996). On the other hand, in those countries like
the UK, with little legal protection for co- operatives and mutuals, the mar-
ket for corporate control may be distorted by demutualization payoffs,
where managers with share options and new members who join for capital
gains vote to change the structure. This legislative weakness, in turn, weak-
ens the original market advantage of such enterprises, in trust and collec-
tive goods, by reducing trust and reducing the incentives and controls for
good performance. The consequence of this member- control weakness is
that other central stakeholders, most notably managers (but also banks and
federative organizations), will be well placed to fill the void and will not be
pressured to perform according to member interests. In addition, they may
enjoy a certain degree of slack due to considerable asset bases built up over
generations, and no requirement to pay dividends; in other words as well as
having a stronger power base, they may be more insulated from the rigours
of the market. Gradual declines in the co- operative business may go on for
years with the market for corporate control only becoming effective at the
terminal crisis when a merger of last resort may take place.
One of the important implications of this is that during the cycles of con-
centration that every economic sector undergoes periodically, conventional
capitalist firms will merge and acquire others, in order to grow into large eco-
nomic players, often with oligopolistic power; and very often co- operatives
will be excluded from such a process (or adapt more slowly), thereby reduc-
ing their economic weight in the market (for example in 2009, the UK top
four supermarket chains accounted for almost 68 per cent of grocery sales).
This is a tendency which may be overcome, and there are many examples at
regional and national levels, but far fewer at international levels.
The current extended phase of globalization is seeing a sustained phase
of concentration in many sectors; during this phase, co- operatives generally
find it difficult to keep their position in the market, due to the above-noted
capital and governance reasons.
36 Roger Spear

National/regional/community orientation
Co- operatives tend to have national or regional or community orientations
which limit their consideration of international trade and inter-regional
partnerships. While concentration processes may take place nationally,
co- operatives have lagged behind in the internationalization processes seen
in the private sector for example the farmer- controlled businesses in Irish
agriculture experienced a very dramatic period of growth by acquisition
and merger on conversion to Public limited company (PLC) status, in con-
trast to the farmer co- operatives that remained (see Kerry Group below).
While it is relatively straightforward to sustain a sense of identification
between the member and the co-operative within a region or even a nation, it
becomes more difficult when the co-operative becomes international. Similarly,
governance issues are not trivial in co-operatives whose members cover more
than one country, unless the notion of membership and participation becomes
more restricted: for example, to economic benefits and annual voting.
Self regulation of competition one factor that strengthens the above
tendency is that co- operatives often tend to regulate competition between
themselves on a regional/national basis; that is. in general co- operatives
avoid competing with each other in the same communities. This is partly
due to a member orientation that is often geographically based (NB, recent
ethical marketing and branding by co- operatives is more oriented to a sector
of society and is less geographically based). The effectiveness of federations
in regulating competition may be limited by the dominance of large pri-
mary members. All these tendencies limit the payoff for the internationali-
zation of co- op business activity.
Federal structures are fairly common amongst co- operatives and, in
some ways, parallel the corporate holding structure of conventional busi-
nesses. Federations are, in general, a key element of co- operative globali-
zation strategies, since they may overcome some of the growth and size
weaknesses that co- operatives face. They do this by joint marketing, joint
buying and providing central services.
However, there are weaknesses since control is much weaker. Federal
structures work best when (like co- operatives) there is a high degree of
homogeneity amongst their members; if one or a few members become large
and strong, a conflict of interests may arise between them and the greater
number of smaller members. This can lead to the breakdown of effective
operation of federal structures; or, as Brazda and Schediwy (2001) have
argued, there is a life cycle in federations, since over time it is unlikely that
member co- operatives will remain a similar size.

Strategic options

In relation to the OLI factors mentioned earlier, co- operatives have no diffi-
culty about the internalization or ownership of key resources, but localizing
Globalization and Co- operative Strategies 37

existing capabilities elsewhere may be constrained by considerations of


regional identity (particularly if there are job losses); localizing new capa-
bilities for comparative advantage would not be an issue, provided there
are no direct membership ties to that capability (for example a new retail
outlet would raise issues of membership for a consumer co- op, but not a
processing facility). Holding structures release the co- operative from some
of these members ties (and from regional/national orientations) that can
limit decisions about how to distribute capabilities to maximize competitive
advantage.
From the globalization options available, exporting is more relevant to
producers than to consumer co- operatives; FDI (acquisition) would not be
appropriate for replicating the same business in another geographical loca-
tion (because of the difficulties of converting to a consumer or producer
co- operative though it may be seen as expedient not to avoid such conver-
sions), but it would be relevant to vertical integration (purchase of suppliers
or processors), and a holding structure would be the easiest arrangement;
licensing would not be a problem (SODIAAL, a French dairy co- op, is a
good example); while strategic alliances between co- operatives offer many
advantages, particularly since the bases for commitment and trust may be
enhanced through similar values.
When considering how co- operatives might grow to become more glo-
bal, besides the above options there are mergers and internal development.
Organic growth through internal development is less suited to globalization
strategies where rapid entry and growth are required in geographically new
markets. Due to governance characteristics discussed above, mergers of
co- operatives tend not to be undertaken for positive reasons but, rather,
under duress due to poor economic performance or near bankruptcy, a
merger takes place as a last resort; although there are interesting counter
examples, such as between Arla (Sweden) which merged in 2000 with MD-
Foods (Denmark). This typically has the tendency to weaken the taking-
over partner, or the whole co- operative system.
Thus, consideration of a framework of strategic options for globalization
reveals several that are closed off or restricted for co- operatives. Given this
situation and the limitations on the co- operative form outlined earlier,
the main strategic question of how to compete in a global context may be
reformulated in terms of either overcoming the co- operative limitations, or
exploiting its advantages.
One of the structural outcomes of both these strategic developments has
been the growth of hybrid forms of co- operatives (Spear 2011) where, on
the one hand, co- operatives have developed forms more isomorphic with
capitalist business in terms of capital and governance structure; whilst on
the other hand new multi-stakeholder forms have developed which seem
closer to the non-profit sector.
38 Roger Spear

Overcoming the co-operative limitations

Adaptations of the co- operative form: hybridity. The post-war period has
seen a process of hybridization through significant legislative changes to
the co- operative form in order to facilitate its operation in more competi-
tive capital and product markets (see Spear 2011). Three in particular are
noteworthy:

issuing of non-voting shares to third-party financial partners;


changing the membership base to include financial partners as members
(as well as employees);
adaptation of voting rights (away from the principle of equality of mem-
bers) towards voting rights being weighted according to the extent of
patronage.

There have been new financial innovations which have improved


co- operatives access to capital markets, such as the Saskatchewan Wheat
Pool, which had class A shares with voting rights (non-tradable) only for
members, and class B shares (tradable preference shares) listed on the
Toronto stock exchange in 1996; but this hybrid structure eventually suc-
cumbed to mergers, and the logic of conventional capital markets. Another
example is Kerry Group, a successful, publicly traded, multinational cor-
poration in the global food industry, with most of its Euro 5.3 billion sales
outside Ireland. But it was established in 1972 as a subsidiary of Kerry Co- op,
a milk-processing organization. Since then it has grown rapidly through
acquisition, regularly issuing shares, so that now the co- op is a minority
shareholder, but with good representation on the board.
It is noteworthy that similar differential voting share structures exist in
the shareholdings of some of the largest quoted companies: for example,
the phone company, Ericsson, was controlled by Investor (vehicle for the
Wallenberg family) and Industrivarden which together held 50.2 per cent
of the votes, with only 5.9 per cent of the capital in terms of votes, one
class A share was equivalent to 1,000 class B shares. And in the new world
of information technology share offerings, both Google and Facebook have
dual share structures which give substantial control to the original entre-
preneurs. Neither of these companies appears to have significant difficulties
competing globally!
Similar co- operative initiatives could facilitate acquisition and disposal
activities, by allowing co- operatives to raise money through issuing new
shares rather than through loans.
And the New Generation Co- ops, a hybrid form developed in the United
States (see van Dijk 1997), have exploited members capacity to provide
cheap finance to develop processing capacity for adding value to agricul-
tural produce.
Globalization and Co- operative Strategies 39

Separation of economic and social objectives/aspects. While this may


not be so relevant to agricultural co- operatives, it has been a strategy pur-
sued by many other types of co- operatives in order to allow an unhindered
focusing on each aspect: for example, in consumer co- operatives where
member relations are kept rather separate from customer relations, and are
linked mainly to governance requirements.
If one examines approaches to the issue internationally, it is clear that
there are quite distinct approaches of separation or inclusion. Many con-
sumer co- operative societies have moved to separate membership issues
from customer issues; typically, membership benefits might be quite sep-
arate from customer benefits, or they may be narrowly defined. In some
consumer societies member relations is entirely separate from customer
relations.
An alternative approach is to consider that the two are inextricably linked.
Thus, members are a sub-set of customers; member benefits are similar to
those for customers, and so on. The above relates both to a consideration of
economic benefits and social benefits and how these are distributed. This
alternative involves adopting a principle of congruence of social and eco-
nomic dimensions (see below).
Holdings. Holding structures (Ct 2000), where the co- operative takes
whole or partial ownership of capitalist structures (subsidiaries or joint
ventures), allows it to replicate capitalist globalization strategies. The hold-
ing structure of subsidiaries offers some advantages by helping to find
a way round the strategic limitations of the co- operative form. It allows
co- operatives more easily to acquire and dispose of businesses; but the
form of financing (which would often be non-share based) is less advanta-
geous for co- operatives, and the lack of co- operative values and practices
in such structures eliminates some of the competitive advantage of co-
operation. A further disadvantage from the point of view of co-operation
is that holding structures are often less accountable to members (or their
board representatives), who have less influence over activities of subsidiary
companies. However, this issue may be addressed through changes, both
to governance (and related codes of practice) and reporting/accounting
standards.
Several of these strategies for overcoming co-operative limitations have
led to hybrid structures (Spear 2011), which include: manager-controlled
co-operatives (mutual, but member participation with weak governance), and
business co-operatives (strong business orientation, with manager control,
and with membership restrictions and financial adaptations; and so on).

Exploiting the co-operative advantage

Another set of strategies is revealed by examining the nature of the


co- operative advantage (Spear 2000a) and then exploiting them.
40 Roger Spear

There is a considerable amount of literature and evidence to suggest that


co- operatives respond to market failures and state crises. If one looks back to
the times of the Rochdale pioneers and origins of co- op financial services,
it is apparent that these origins lie in excessive market power by private
operators, and the co- operatives developed in response to this. Thus, it is
important to consider the co- op advantage in terms of the characteristics
that make it effective in responding to market failures and state crises, and
in contributing to a plural economy with a better form of business.
Trust advantage. In theoretical terms transactions often take place when
there is asymmetric information that is, the consumer possesses far less
information than the producer and opportunistic behaviour on the part of
the producer can exploit this information advantage. In the case of products
which can be readily inspected, such as washing machines, you can see the
quality of the product you buy, but in the case of services like residential
care for the elderly a lot of the quality of the service is taken on trust.
Co- operatives have an important role to play in overcoming such prob-
lems because in general their membership structure and principles mean
that they are regarded as more trustworthy, less likely to engage in oppor-
tunistic behaviour and exploit the consumer. This means that there are
lower costs of monitoring to check that there is no exploitation and that
there is good quality. And this transaction cost efficiency and trustworthi-
ness should be attractive for consumers.
In practice, there is a trust dimension in many goods and services (Spear
2000a). So, for example, in foodstuffs there is considerable current concern
about food security what exactly we are eating and one would expect
that co- operatives would have a unique advantage in informing the pub-
lic, campaigning for better standards and being more trustworthy from the
point of view of the consumer, for example the UKs consumer Co-operative
Group campaigns over food standards, and farmers (co- operative) markets
sell local produce. Thus, co- operatives are well placed to develop ethical
operations and a positive image. Thus, trust has a potentially major role to
play in overcoming agency problems and, as Borgen (2001) reports in his
study of Norwegian meat producers: the stronger the members identifica-
tion to the collective organization, the more they trust the benevolence of
the co- operative management.
Social capital. This extends the trust advantage: the central idea is that
networks of reciprocal and high-trust relations allow more efficient eco-
nomic exchanges and activities to take place. They also allow resources out-
side an organization to be pulled into economic activities via such networks.
Putnam (1993) argued that the associative voluntary and co- operative sec-
tors have created much stronger trust relations and community solidarity
in society. This has had considerable economic benefit as well as important
social and citizenship benefits for civil society. The potential effect can be
so great that Putnam (1993) argues it is the major difference between the
Globalization and Co- operative Strategies 41

very strong economic and civil society performance of Northern Italy com-
pared to Southern Italy.
There are four important conclusions which give the social capital
advantage: firstly, co- operatives strengthen civil society and democracy;
secondly, this has considerable economic and social impact, strengthen-
ing community/enterprise relations; thirdly, co- operatives facilitate high-
trust relations with consumers/users and workers, which improve economic
efficiency of the organization. In addition, fourth, the existence of social
capital facilitates the formation of co- operatives (entrepreneurial process)
combating contract failures, but also combating excessive market power by
weak actors.
Empowerment. Co- operatives are participative by definition, and they
empower people and thereby make more effective use of the resources that
those people bring to their organizations.
Mutual self-help advantage. Co- operatives are uniquely suited to build
on the spirit of self-help of individuals. The history of co- operatives is
replete with examples of small producers/consumers getting together, com-
bining their resources to develop countervailing market power, mobilized to
gain entry to a market which had been exploiting them (for example, agri-
cultural co- operatives, consumer co- operatives, financial mutuals). In addi-
tion, co- operatives build on solidarity within the community; they extend
stronger relations within a community or territory and build social capital
to develop a better civil society.
Principle of congruence developing a membership/business
dynamic. Spear (2000b) argues that there can be a congruence between
social and economic strategy, where members provide resources (includ-
ing finance), members get involved in decisions, business becomes more
responsive to consumer and member needs, and member benefits are
improved (dividend, quality goods); and there can be a further congruence
with strategies for community development where business and member
interests are positively related. This dynamic does not need to be ideologi-
cally based; it is often based purely on the economic self-interest of the
members in getting good quality goods at fair prices. And Saxena and Craig
(1990) argued, using the example of the Dortmund consumer society, that a
complementary dynamic of planning, financial/educational/training poli-
cies, and programmes for member loyalty lead to a good distributed surplus
and a positive image for the society.
Improving member benefits either through quality goods or prices or
refunds, and so on generates a positive dynamic of member/consumer
trust, quality goods, and good business. See Borgen (2001), for example, in
the agricultural sector where the development of member loyalty is seen as
the key business/co- operative dynamic.
Another interesting example of developing a membership/business
dynamic is the extension of membership to other classes of stakeholder: in
42 Roger Spear

the case of consumer co- operatives, to workers and/or financial investors; in


the case of Italian social co- operatives where workers are the dominant stake-
holder, membership is also made available to volunteers and others such as
community members, and so on. These multi-stakeholder co- operatives have
the potential to develop a greater unity of interests, and thereby benefit
from a synergy between more involved and committed stakeholders. When
Mondragons Eroski consumer co- operative merged with other retailers,
it extended the democratic franchise to its staff, thereby creating a multi-
stakeholder co- operative (Gomez Urquijo and de los Rios Anon 1998).
So these are the co- operative advantages. There are also advantages that
arise intrinsically from co- operative values and principles.

Systemic options arising from co-operative values and


principles

Co- operatives have a sound reputation for their ethical values: self-help,
democracy, equality, equity, and solidarity, and so on; and the same applies
to their principles of openness, autonomy and independence, education,
co-operation among co- operatives, and concern for community. The
emphasis on voice gives co- operative members much greater influence
than stakeholders (consumers or staff) in comparable enterprises. In worker
co- operatives this can lead to efficiency gains through an empowered and
more self- organizing workforce.
With ethical and environmental concerns increasing in many markets,
such values (other things being equal) lead to a number of advantages:
greater attractiveness to consumers concerned about ethical/environmen-
tal issues; greater attractiveness for staff. This is particularly so in the area
of food security where, for example, mad cow disease has had implications
for traceability of beef sources; similarly for GMOs in agriculture in Europe;
likewise with fair-trade, and the increasing differentiation of the ethical
food market, for example, with animal-friendly produce. This has informed
branding, certification systems (Raynolds 2004), and product descriptions,
but in some countries co- operatives have taken the lead in responding to
these consumer desires, for example the Co- operative Group in the UK, and
food clubs in the United States.
And the UKs highly successful Co-operative Bank has shown that a
holding structure (the Bank is a wholly owned subsidiary of the consumer
co- operative, the Co-operative Group) can develop a co- operative/business
dynamic by demonstrating co- operative values in its corporate identity and
image. Wilkinson and Balmer (1996) argue that the Co-operative Bank has
re-invented traditional co- operative values through its ethical and envi-
ronmental image, and thereby has created a modern, distinctive corporate
identity which has allowed it to differentiate itself in the financial services
market, and to considerable business advantage!
Globalization and Co- operative Strategies 43

Inter- co-operation and federations. One of the potential advantages of


the co- operative form is that it espouses co-operation between co- operatives;
and membership by primary societies of secondary co- operatives and fed-
erations is common. This allows the possibility of strategic development at
different levels (secondary and apex levels, as well as directly between net-
works of primary societies); thus, in principle, this kind of structure might
facilitate thinking globally, acting locally, but in practice it is not always
clear there is sufficient power centrally to enact global strategies.
Inter- co-operation and federations are also ways of achieving economies
of scale or responding to competitive pressures when mergers may be a last
resort. The best examples are the Italian consorzi and the Mondragon gru-
pos both operate at the local level and allow the advantages of size to be
achieved with localism, where expertise is centralized in the local federa-
tion (consorzi/grupos), whilst at the same time facilitating smaller-scale and
local connectivity via the individual co- operatives.
Federations vary in the extent to which they are loosely or tightly inte-
grated, and centralized or decentralized; centralization being more likely
in tightly integrated structures, where the centre has core capabilities
which substantially aid competitiveness. Fischer (2000), in an interna-
tional comparative analysis of different types of credit unions federal bod-
ies, found that the more tightly integrated federal structures were more
successful than the more atomistic credit union sectors. Developing this
capability will increase the power of the centre (by establishing depend-
ency relations), and in a global context it is also important to be able to
locate facilities for competitive advantage (either via subsidiaries or via
local co- operatives). Developing trust between the centre and the periph-
ery is important for federations to work, since, as Brazda and Schediwy
(2001) note, federations may be unstable if there is not a high degree of
homogeneity; however, it could be argued that these factors must be bal-
anced against the extent to which the centre leads strategically and main-
tains a strong position through supplying key capabilities. Rabobank is an
example of a highly integrated centralized structure; it is a leading finan-
cial institution specializing globally in the food and agriculture industry,
with assets of Euro 264 billion in 2011, and 1.8 million members. Rather
than adopting a volume approach to finance, Rabobank operates through
its cluster of specialist subsidiaries and, by emphasizing local relation-
ships, it provides a range of services (for example for insurance, and asset
management) to offer more services for the customers, and build mutu-
ally profitable and long-term member relationships. But federations may
adopt looser structures, such as ICMIF (the International Co- operative and
Mutual Insurance Federation), which has built its capability to deliver key
knowledge-based resources.
This principle of inter- co-operation might also facilitate co-operation
and strategic development between co- operative sectors. Clearly, this
44 Roger Spear

would be more likely to take place where it involved vertical integration to


access more value in the supply chain (for example farming, food process-
ing, food retailing), but some form of horizontal integration of adjacent
sectors might also be appropriate (as in the case of bancassurance: com-
bining banking and insurance, where the prospect of integrating proc-
esses and cross- selling financial products is particularly attractive). This
is not to neglect strategic alliances within the same sector that may pres-
age mergers or greater inter- co-operation (Perrot, Ruffio, and Guillouzo
2001).
Relationship management is an area where co- operatives ought to have
a competitive advantage, since it is based on investing in knowledge about
the client and developing the client relationship. Two types of network
are important for developing this approach. Knowledge networks are
the most crucial resource for firms servicing global clients. They help
develop professional specialist knowledge and experience for a clients
organization, and they build deep knowledge of clients both of their
business and of their ways of doing business; and this may be extended
by joint projects working and learning together. And social networks
help develop social capital, thereby enhancing the quality of relation-
ships between people and releasing resources through such relationships.
Developing such networks requires commitment to achieving mutual
benefits, a high level of trust, and personal bonds to sustain loyalty. A
strategy which builds on this is to aim for a greater share of the customer
rather than a greater share of the market; for example the Rabobank
model, with its strong centre and through its subsidiaries, develops a wide
range of services for its local banks to deliver to customers. In this it relies
on good relationship management, thereby building on the co- operative
advantage; this seems a well adapted model for global growth, but with
local roots.

Conclusions

The challenge of globalization is a considerable one for co- operatives, as


they are inherently restricted in their choice of the most efficient business
configurations to compete with corporations. Co- operatives are reputed to
suffer from a number of disadvantages when growing, such as raising capital,
governance, and a local community orientation, and much debate on strat-
egy has focused on overcoming such weaknesses. However, such approaches
risk isomorphic degeneration of the form so that its distinctiveness is lost.
The alternative explored in this chapter has indicated some of the ways
the co- operatives advantages can be enhanced strategically by building
on trust and social capital and developing a greater congruence between
membership and business activities so that a new dynamic of co- operative
business can be established.
Globalization and Co- operative Strategies 45

References
Bager, T. (1997) Institutional and Organizational Change in the European Food
Sector: A Meso-Level Perspective, in: J. Nilsson and G. van Dijk (eds) Strategies and
Structures in the Agro-food Industries. Assen: Van Gorcum, pp. 319.
Bartlett, C.A. and Ghoshal, S. (2002) Managing Across Borders: The Transnational
Solution. Boston, MA: Harvard Business Press.
Borgen, S. (2001) Identification as a Trust-generating Mechanism in Cooperatives,
Annals of Public and Cooperative Economics, 72(1): 209228, June.
Brazda, J. and Schediwy, R. (2001) Preconditions for Successful Co- operatives in
the Light of Historical Evidence, Review of International Co- operation, 94(1), ICA,
Geneva. Available at: http://2012.coop/sites/default/files/media_items/2001-issue1.
pdf.
Ct, D. (ed.) (2000) Les holdings coopratifs. Evolution ou transformation dfinitive?
Brussels: De Boeck Universit Editions.
Dunning, J.H. (2000) The Eclectic Paradigm as an Envelope for Economic and
Business Theories of MNE Activity, International Business Review, 9(2): 163190,
April.
Dijk, Gert van (1997) Implementing the Sixth Reason for Co- operation: New
Generation Co- operatives in Agribusiness, in: J. Nilsson and G. van Dijk (eds)
Strategies and Structures in the Agro-food Industries. Assen: Van Gorcum.
Ebert, W. and Noll, W. (1999) Globalization New Demands on Public Enterprises,
Annals of Public and Cooperative Economics, 70(3): 477499.
Faulkner, D.O. (2003) Cooperative Strategy: Strategic Alliances and Networks, in:
D.O. Faulkner and A. Campbell (eds) The Oxford Handbook of Strategy: A Strategy
Overview and Competitive Strategy. Oxford: Oxford University Press, pp. 610649.
Fischer, K.P. (2000) Rgie, Rglementation et performance des coopratives finan-
cires, Annals of Public and Cooperative Economics, 71(4): pp. 607636.
Gomez Urquijo, L. and de los Rios Anon, M. (1998) The Survival of the Co- operative
Model in a Competition Context. Paper presented at: ICA Research Committee
Annual Conference, 1317 May, Cork, Ireland.
Kanter, R.M. (1995) World Class: Thriving Locally in the Global Economy. New York:
Simon and Schuster.
Monzon Campos, J.L., Spear, R., Thomas, A. and Zevi, A. (1996) Cooperatives, Markets
and Cooperative Principles. Brussels: De Boeck.
Nunnenkamp, P. (1996) Winners and Losers in the Global Economy. Kiel: Kiel Institute
for the World Economy. Discussion paper no. 281.
OECD (2006) Financing SMEs and Entrepreneurs. Policy Brief. Available at: http://www.
oecd.org/dataoecd/53/27/37704120.pdf.
Perrot, P., Ruffio, P. and Guillouzo, R. (2001) Les alliances stratgiques au service du
dveloppement des coopratives agro-alimentaires. Le cas de lOuest de la France,
Annals of Public and Cooperative Economics, 72(3): 351377.
Porter, M.E. (1998) The Competitive Advantage of Nations. New York: Free Press.
Porter, M.E. (2008) The Five Competitive Forces That Shape Strategy, Harvard
Business Review, 7993, January.
Putnam, R. (1993) Making Democracy Work: Civic Traditions in Modern Italy. New Jersey:
Princeton University Press.
Raynolds, L.T. (2004) The Globalization of Organic Agro Food Networks, World
Development, 32(5): 725743.
46 Roger Spear

Saxena, S.K. and Craig, J.G. (1990) Consumer Cooperatives in a Changing World,
Annals of Public and Cooperative Economics, 61(4): 489518.
Spear, R. (2000a) The Co- operative Advantage, Annals of Public and Cooperative
Economics, 71(4): 507523.
Spear, R. (2000b) Membership Strategy for Co- operative Advantage, Journal of Co-
operative Studies, 33(2): 102123.
Spear, R. (2004) Governance in Democratic Member Based Organizations, Annals of
Public and Cooperative Economics, 75(1): 3359. Oxford: Blackwell.
Spear, R. (2011) Formes Coopratives Hybrides, Revue internationale de lconomie
sociale, 320: 2642.
Thomas, A. and Defourny, J. (1990) Financing Workers Co- operatives and Self-
Managed Enterprises, Annals of Public and Cooperative Economics, 61(23): 167174.
Wilkinson, A. and Balmer, J. (1996) Corporate and Generic Identities: Lessons from
the Co- operative Bank, International Journal of Bank Marketing, 14(4): 2235.
3
Co-operative Networks, Adaptability
and Organizational Innovations
Sonja Novkovic

Introduction

This chapter considers social networking of co- operatives as a driving force


of innovative organizational forms in Canada and elsewhere in the West.
A review of the literature and observations lead to the proposed typology
of co- operative networks based on the types of alliances and purpose of
network formation. Co- operatives themselves are examples of network gov-
ernance, contrasting the market and/or hierarchical governance of firms.
Network formation is a strategic advantage for co- operatives, given their
collective problem-solving nature, and co- operative identity (ICA 1995).
Regulatory and market pressures, as well as the dominance of, and institu-
tional support for, investor- owned firms (IOF) may cause isomorphism of
co- operatives and IOFs and put pressure toward hierarchical arrangements.
Principles and values of co-operation, we argue, serve as an adaptation
mechanism that may generate innovative responses to market and regula-
tory demands and foil demutualization through social networking.
Competitive pressures in increasingly more liberalized markets in
the West1 created new economic environments, prompting traditional
co- operatives to find new, creative ways to protect their members interests.
High capitalization requirements and pursuit of scale economies as a strat-
egy in cost reduction and survival opened up co- operatives to new organiza-
tional models and, while some pushed for new ownership structures, others
resorted to social networking as a source of innovative solutions. Agricultural
co- operatives, particularly in the United States and Canada, experimented
with new ownership structures as pressures were mounting due to regula-
tory changes and internationalization of agro-food markets (Nilsson 1999),
increasing the need for large capital investments. New quasi- co- operative
firms (termed new generation co- operatives) emerged as a solution to the
undercapitalization problem, allowing co- ops access to external venture
capital (see Chapter 5 by Iliopoulos). Co- operatives demonstrated adapt-
ability but, possibly, of the kind potentially detrimental to the survival of

47
48 Sonja Novkovic

the traditional co- operative model (Ketilson 1997; Baarda 2004; Bijman
2005; Fulton and Larson 2009; Fulton and Huet 2009). These changes
lead in some cases to co- operative conversions into investor- owned firms
(Fulton and Huet 2009). Also under the pressure of growth, co- operatives
resorted to purchases of subsidiary (non- co- operative) firms through which
they were able to access capital markets. An international regulatory push
was an important factor in financial markets in the aftermath of a series of
financial crises in the 1990s and the latest one in 2008, the ripple effects of
which are still felt around the globe. The financial sector looked to merg-
ers and acquisitions as a way to cope with the new environment and uti-
lize scale economies. However, financial co- operatives, as well as agro-food
businesses and other co- operative sectors, also resorted to networking as a
growth strategy, and with considerable success: this networking is the focus
of this chapter.
Co- operatives strive on participatory decision-making and on democ-
racy as member- organizations, but also on upholding the subordinate
role of capital as a people- centred business. In response to increased
capitalization requirements and to adapting legal frameworks that allow
co- ops access to external capital, new forms of supply of capital fit for
co- operatives have been developing in some countries and regions,
either as co- operative networks (for Spain and Italy see Zevi et al. 2011;
Menzani and Zamagni 2010), or as a wider social economy 2 effort. Co-
operative networks are, at least in part, a reflection of the social structure
of co- operative organizations; as such they are often vehicles for adap-
tation to a changing environment and a foundation of organizational
innovation. This chapter maintains that co-operative advantage lies
in social networking, and illustrates various types of co- operative net-
works 3 as sources of innovative adaptations to new socio- economic chal-
lenges. Further, there is compelling evidence that increased co- operative
density increases the probability of their survival, as co- operatives apply
the principle of co-operation among co- operatives, collaborate across
specific functions to increase scale and reduce transaction costs, and
engage in solidarity- based institutional support to the network. Worker
co- operatives in Europe have been particularly reliant on networks as an
insurance instrument and a method of survival in economic downturns,
implementing their unique adaptation mechanisms, such as pay reduc-
tion and inter-network member transfers (Roelants, Pellirossi and Biron
2011; Arando et al. 2010).
Following in the footsteps of Menard (2007), co- operative systems are
understood as networks in their own right, but the types of complex arrange-
ments driven by their co- operative identity (ICA 1995) are also explored,
particularly their autonomy and independence and democratic governance,
in forging co-operation among co- operatives. Co-operatives form complex
networks with other types of organizations in the interest of their members
Co- operative Networks, Adaptability and Organizational Innovations 49

and the wider community (Novkovic and Holm 2012), especially in the
provision of public goods. As collective problem solvers (Borzaga 2011),
co- operatives are at their best when adapting to new environments through
the mechanism of collective resolutions.
Organizational forms of co- operative networks differ and are influenced
by their purpose, but also by the external factors, such as policy and social
environments (Smith 2004). Drawing on similarities across varied legal
environments, the following types of networks can be differentiated by
their purpose:4

1. co- operatives themselves are networks of independent producers/users of


inputs or services offered by the co- operative,
2. independent co- operative firms forming inter- organizational networks for
a particular purpose (for example second-tier co- operatives; co- operative
federations; consortia),
3. co- operatives forming supply- chain networks with other co- operatives
(for example fair trade co- operative chains; food supply chains),
4. co- operatives taking membership in professional networks/federations/
leagues to provide themselves with particular member services, or to pro-
vide services to the co- operative movement at large (for example sector
federations or regional councils), and
5. co- operatives forming networks with other co- ops, with individuals,
businesses or government agencies for a particular purpose, often outside
of their core business (complex networks; mixed5 consortia). Table 3.1
illustrates this typology, and compares it with the Menzani and Zamagni
(2010) exposition of Italian co- operative networks.

Division of reticular arrangements into the above five types leads to a dis-
cussion about both the motivations of co- ops to form alliances, as well as
their approaches in adapting to changes or in finding solutions to partic-
ular issues they are facing. First, the chapter establishes the dual character
of co- operative firms as hybrid forms of governance in the transactions
costs tradition on the one hand, and as member- organizations on the
other. In the second part of the chapter the five network types are dis-
cussed from this dual perspective, with stress on the social coordination
mechanisms rooted in co- operative principles as the basis for co- operative
adaptation.

Co-operatives as hybrids

Economic transactions are governed through the competitive markets or


the hierarchy of a vertically integrated firm or the hybrid form of organiza-
tion (Williamson 1991). While market transactions reflect the neoclassical
invisible hand with many small firms responding to price signals, at the
50 Sonja Novkovic

Table 3.1 Typology of co- operative networks by their purpose; a comparison with
Menzani and Zamagni (2010) typology of Italian networks

Co-operative
networks in Italy
Typology of co-operative Purpose for network (Menzani and
networks formation Zamagni 2010)

1. Co-operatives are Forming a co-operative industrial n/a


networks of independent democracy; social and
actors economic justice; network
governance; economic and
social benefits
2. Inter-organizational Scale economies; cost reduction Horizontal networks;
networks through joint services (second financial networks
tier co-operatives; federations,
consortia); financial support
3. Supply chain networks Food security; fair trade; financial Vertical networks;
support within the supply complementary
chain; complementary goods networks
and services
4. Sectoral networks; co- op Representation; to support the Horizontal networks;
development networks; co-operative movement; lobby network of networks
co- operative federations government; advocacy; co-op
/leagues (regional, development
national, international)
5. Complex networks with Public goods provision; regional n/a
other (co operative and development; community
non- co-operative) types development
of actors in the economy
and society

other end of the spectrum is the large enterprise with internalized transac-
tions, governed by a hierarchical chain of command (Menzani and Zamagni
2010). Networks belong to the hybrid form of governance between these
two extremes, and they signify inter- organizational linkages of otherwise
autonomous organizations. The degree of sharing of resources and decision-
making varies among the diverse hybrids, placing these organizations on
a continuum between markets and hierarchies (Menard 2007). An impor-
tant aspect of the hybrid form of organization is the intentional creation
of mechanisms that govern their transactions, restricting their activities to
prevent opportunism and to secure positive network externalities, while
maintaining their autonomy with respect to other decisions. Co- operatives,
Menard argues, are hybrid forms with decision-making arrangements that
span from very little control in a quasi-market setting, to quite centralized
systems.
Co- operative Networks, Adaptability and Organizational Innovations 51

The social dimension

The contractual relationship is one key characteristic of the coordination


of activities in hybrid organizations. However, contracts are incomplete,
costly to enforce, and cannot always provide needed adaptability to a
changing environment (Menard 2007). Hybrid organizations resort to
their own mechanisms for coordination and internal governance. The
predominant mechanism for incentives and control in networks are social
norms that rely on trust and reciprocity, but the other two mechanisms,6
price and authority, are also used to varying degrees (Bijman 2005). For
co- operatives, we argue, the co- operative identity (ICA 1995), with a well-
defined set of principles and values (that is, norms), forms the framework
for such coordination mechanisms. Co- operatives use this toolkit to vary-
ing degrees, but they all clearly exhibit the dual character social, reflected
in their associative nature and in democratic governance, and economic,
concerned with business viability and pecuniary gains for their members.
A case can be made that a sole focus on efficiency, understood as a reduc-
tion of transaction and production costs, may impede on learning and
innovation abilities in organizations (Lundvall 1993). Moreover, networks
are based on norms, trust and reciprocity: or, social constructs and rela-
tionships that often reduce transactions costs (Bijman 2005; Hobbs 2001;
Desrocher and Fischer 2003). Contracts in co- operative networks are also
often intentionally open ended to allow for the flexibility and adaptabil-
ity of the system, given an understanding of the underlying principles of
the relationship between its member organizations.
We, therefore, approach the co- operative capacity to innovate, adapt and
evolve, from the social network that is the preservation of co- operative
identity, perspective. We highlight co- op successes when resorting to
co- operative (network) strategy, as well as co- op failures where strategy was
reliant on tools based predominantly on pecuniary interest. With this focus
in mind, we turn to the discussion of different types of co-operative net-
works and their adaptive capacity.

Co- operatives as networks of independent producers or patrons


Co- operative firms must be established by a group of founding members.
By their very essence, they are a social network an association of indi-
viduals and/or organizations with a shared interest. The International
Co- operative alliance (ICA) defines a co- operative as an autonomous
association of persons united voluntarily to meet their common eco-
nomic, social, and cultural needs and aspirations through a jointly- owned
and democratically controlled enterprise (www.ica.coop). Members of a
co- operative agree to a particular governance structure based on mutu-
ality, equity, and ethical principles, assuming responsibilities and ben-
efits of the co- operative structure. Some key differences in the types of
52 Sonja Novkovic

co- operatives, membership, and their goals highlight the predominance


of one coordination mechanism over the other. A co- operative may be
formed to coordinate activities to achieve favourable prices for its members
products (or purchases), as is often the case in agricultural and consumer
co- operatives. Worker co- operatives, on the other hand, are about crea-
tion of meaningful employment at a living wage and, often, about social
justice. In this case, and contrary to the dominant views in neoclassical
economics (Ward 1958), the incentives are primarily non-pecuniary, even
though members care about their incomes too. A worker co- op is a social
network in which solidarity, equity, equality and democratic governance
are some of the guiding principles that place them clearly in the hybrid
organizational form. Non-pecuniary benefits for a workermember often
offset the importance of monetary gain (Pencavel, Pistaferri and Schivardi
2006; Protin 2012); this is not always clear for agricultural producers or,
for that matter, consumer co- ops, especially if co- op entry is a purely result
of market failure.7 However, when co- operatives subscribe to a mission,8
their primary objective is to achieve a social goal. In their decision-making
they rely on social norms and, in particular, on co- operative principles
and values. Organic Meadow agricultural co- operative, for example, dis-
plays the following mission statement on their website:

Organic Meadow Co- operative Inc. was formed to provide an opportunity


for organic farmers in Ontario to collectively store, process and market
organically grown products. We are committed to ensure fair, consist-
ent financial returns to farmers while maintaining quality at every stage
from soil to table. We are dedicated to encouraging ecologically sound,
diverse, self-reliant farm units where production efficiency is achieved in
harmony with the surrounding environment.
We will work to build unity among farmers based on the principles
of co- operation, and will affirm their right to self- determination and
the maintenance of a strong rural heritage. Organic Meadow Co- op
will strive to decrease the distance both physically and psychologically
between farmers and customers. Our dealings with members, employees
and customers will be carried on in an atmosphere of openness, honesty
and trust. (www.organicmeadow.com)

Organic Meadow co- operatives clear focus on their social mission allowed
them to devise innovative solutions while maintaining their co- operative
identity. In 2004 the co- operative needed an injection of capital to finance
its expansion and marketing. They sold shares to Investeco, a blended-value
fund (Causeway 2009) to provide them with needed investment, and then
bought back their stock four years later. Organic Meadow and Investeco
also resorted to interlocking directorates (Karantininis 2007), that is cross-
membership on their board of directors during the time of the investment.
Co- operative Networks, Adaptability and Organizational Innovations 53

Inter- organizational networks second-tier co- ops, sector federations,


and consortia
Rooted in co- operative values, co- operative networks are multi- dimensional
and potentially more interconnected and decentralized than the investor-
owned networks (Halary 2006). Co- operatives form inter- organizational
networks for a number of purposes. Typically, they need financial, techni-
cal and other support in the start-up stage and in the growth and expansion
stages. Their access to financial capital has been restricted since they are
jointly owned, democratically governed, and distribute profits according
to use rather than ownership (Government of Quebec 2003), so they have
resorted to innovative financing solutions by pooling resources through
sector or financial networks.
Generally speaking, on the business side of the equation co- operatives
form networks to: share risks, reach economies of scale and reduce costs,
share marketing and/or purchasing services, secure financing, or provide
other products and services to member- co- operatives. Various co- op adap-
tations and developments have been triggered by increasing competition
(or regulation) and the ensuing growth imperative. The network option,
compared to a large hierarchical firm, is a more flexible organizational form
well suited to co- operatives and supporting their co- operative identity.
Individual co- operatives maintain autonomy within a network in spheres
of business that are not directly related to the networks purpose, but they
submit to the decisions at the network level on agreed-upon issues they hold
in common with other member cooperatives.
Besides cost reduction and provision of common services to a group of
co- operatives, networking is at the same time an application of co- operative
principles9 and a source of competitive advantage. In a study of the
co- operative financial sector, Desrochers and Fischer (2003) compared
mergers to networks, that is hierarchy to hybrid governance structure, as
a growth strategy for financial co- operatives, and found evidence that net-
works are a more efficient growth option. While hierarchies may initially
appear to be a more effective method to reach economies of scale, co- op
networks are more efficient overall than mergers due to the reduction of
transaction costs and decentralized decision-making that allows for more
effective adjustments and innovations within the network. This finding
is confirmed by analyses of the Danish pork industry whose co- operative
and densely networked structure results in considerable transactions costs
reductions, giving the industry a competitive edge in global markets (Hobbs
2001; Karantininis 2007). One overlooked source of co- operative advantage
for network formation is the subsidiarity10 principle, a system that ensures
decentralized decision-making, reduces management opportunism, and
serves as a growth- control mechanism (Desrochers and Fischer 2003). Co-
operatives have resorted to other coordination mechanisms within their
54 Sonja Novkovic

networks, such as the interlocking directorates in the Danish pork industry


(Karantininis 2007).
Some of the largest business networks have demonstrated particular adapt-
ability and flexibility of coping mechanisms in economic crises. Affected by
the global market pressures in 1990s, the Desjardins movement resorted to
innovative methods of capitalization, but the individual member, Caisse
Populaire, also pooled resources to support the changes (Sanchez Bajo and
Roelants 2011). Desjardins raised their capital ratio above the regulatory
requirement by increasing indivisible reserves, and resorted to a series of
actions and financing mechanisms that did not jeopardize their co- operative
identity.11 They also embarked on an ambitious restructuring process, the
success of which is credited to the democratic debate and to consultations
within the Desjardins group; devising local solutions in a decentralized
decision-making system, such as mergers of smaller proximate units12 and
a common co- operative identity of the group. The latter is implied in the
cost cutting- decisions made as a group which excluded reductions in the
governance costs of general assemblies, meetings, congresses and so on as
well as refusing to downsize their presence at the grass roots, particularly
in rural areas, seeing this as a part of the Desjardins mission (Sanchez Bajo
and Roelants 2011: 167). A similar consultation and restructuring process
was undertaken by Agropur, the largest dairy producers co- operative in
Canada, when Agropur was planning its expansion strategy (Ct 2003).
Mondragon worker co- operatives in the Basque country are other well
documented examples of network- coordinated adjustments with a clear
co- operative focus. A set of intricate institutional arrangements work
together to secure jobs, to ensure democratic decision-making and a healthy
associative life of Mondragons members, as well as serving as a vehicle for
local development. Mondragons response to economic crises rests firmly
on the principle of solidarity among member co- operatives, as witnessed
by the networks interventions to save some co- operatives when needed,
transfer of workers to other co- operatives if their job positions are tempo-
rarily made redundant, voluntary pay cuts across the board, and retraining
of employees within the system (Sanchez Bajo and Roelants 2011; Arando
et al. 2010). Mondragon also provides social security to its members and
builds non- divisible reserves to capitalize expansions in times of growth
as well as to finance adjustments to external shocks. The most impressive
aspect of Mondragons 60-year history is the ability to keep its focus on
jobs and its co- operative identity, and to adapt to dramatically changing
circumstances.
Other types of co- op business networks integrate co- operatives from vari-
ous industries under a federated structure. These federations usually have
a regional character and expand into diverse types of business providing
technical, financial and other support structures to co- operatives in the
network.13
Co- operative Networks, Adaptability and Organizational Innovations 55

Co- operatives in a supply chain


Co- operatives integrate their operations in supply chains to reduce and
manage risk, access value-added, and maintain control over the value chain.
Vertically integrated systems in agricultural production often benefit from
economies of scope and can be quite complex entities that include a number
of different organizations, such as primary co- ops or co- op groups, but also
non- co- operative subsidiaries or partners (Menzani and Zamagni 2010;
Karantininis 2007). Besides these well- established and elaborate vertical
networks, more recently there have been new areas in which an underlying
solidarity or social justice principle attracted the formation of co- operative
supply- chain networks. Consumer awareness and concerns about food
security, the environment (the ecological footprint), and global inequal-
ity are inspiring co- operative networks, from the buy-local movement to
fair trade. Coupled with increased consumer demand for high-quality prod-
ucts that include transparency and traceability of the food sources, vertical
integration as an application of co- operative principles is a space with the
potential co- operative advantage.
Fair-trade chains typically connect small producers in less-developed
countries to the consumers in developed countries through the intermedia-
tion of fair-trade organizations (FTOs) which are committed to a set of fair-
trade principles. Besides a fair price premium targeted for investment in the
local economic development, these principles ensure a network of support
to farmers in the global South, from financial to technical and organiza-
tional support (Crowell and Reed 2009). Co- operatives have been the pre-
dominant business form in some fair-trade markets given close compatibility
between the principles of co-operation and fair trade. This set of shared val-
ues forms a solid basis for coordination of the co- operative network. The
co- op fair trade network includes global North financial co- operatives that
secure credit to farmers in the South, South producer co- operatives and
export co- operatives, marketing and distribution co- ops in the North, as
well as processing and retail co- operatives mostly in the North (Crowell and
Reed 2009: 169). While fair-trade price is one aspect of the relationship, this
intricate co- operative network is based on the long-term relationships of
social networks.
The role played by fair-trade certification bodies and a wider net of organ-
izations involved and their internal divisions, opened up fair trade to corpo-
rations which saw it as a lucrative niche market. Corporate participation in
fair-trade markets has been questioned by many proponents of fair trade. On
the one hand, the high volume of trade ensures a wider reach of premium
price, improving the living conditions in a larger population of participat-
ing communities. On the other hand, however, the fair trade standards have
been compromised,14 pushing co- operatives to find innovative mechanisms
to further diversify principled trade. Talks of a common co- op brand have
56 Sonja Novkovic

been ongoing, while some retail co- op chains have been branding their
lines of fair-trade products as well (Coop Italia; The Co-operative Group
UK).

Co- operative leagues and co- op development networks


As a social movement, co-operatives have been organized in most Western
economies into regional and national networks whose purpose is to provide
support for co-op development, to lobby governments, represent co-operatives
as a unified front, and raise awareness about this socio- economic business
model. Sectoral co-operative federations and associations implement joint
strategies to support and develop co-operatives in their respective sectors.
Providing specialized services, they play an important role in ensuring the
growth and survival of co-operative enterprises (Government of Quebec
2003). The role of national co-operative federations is well documented.
Their functions span a range of services, such as to support entry, reduce
exit, sustain democratic ownership and control, solve organizational prob-
lems, explore joint ventures and strategic alliances, innovation and technol-
ogy transfer, finance, mitigate risk, and employment policies (Smith 2004).
Among the leaders in playing this important role for the co-operative sec-
tor are Italian networks, with La Lega Cooperativa the largest among the
three Italian national federations (Menzani and Zamagni 2010). The role of
La Lega and other similar networks has been paramount in increasing the
size, density, and success and adaptability of co-operatives. Among other
networks of networks is the Conseil de la coopration du Qubec a third
tier co-operative whose members include co-operative associations and vari-
ous organizations. The role of industry/sector and regional federations has
been a very important one, particularly with respect to education, training,
co-op development, finance, legal and technical expertise, but also lobby-
ing and influence on government policy. Effective federations can consider-
ably reduce transactions costs for individual co-operatives, as well as produce
positive externalities by increasing co-operative density and strengthening
the co-operative sector. An example of a federation providing diverse and
innovative services to its members is the Scottish Agricultural Organization
Society (SAOS), whose mission is to ensure to Scottish farmers collective
gains that cannot be achieved individually:

The purpose of SAOS is to strengthen the profitability, competitiveness


and sustainability of Scotlands farming, food and related rural indus-
tries, through the development of co- operation and joint activity. (SAOS,
Annual Report 2011)

The array of services SAOS provides to its members includes technical and
governance support and tools, supply- chain management, co- operative
innovation, and member support.
Co- operative Networks, Adaptability and Organizational Innovations 57

SAOS assists rural industries to adapt, innovate and implement change in


response to the dynamic market and political environment. SAOS facili-
tates co- operation and joint venture between primary producers, often
resulting in horizontal or vertical integration, to add value to their pro-
duce, to develop a competitive market position with negotiating strength,
and to reduce costs through improved processes.

A very important role taken on by many regional and sector federations has
been to assist their co-operative members in securing financial capital, both
within the sector and in collaborative efforts with friendly investors. In par-
ticular, Italian co-op development and assistance funds are handled by the
three national federations La Lega, Confcooperative and AGCI (Zevi et al.
2011: 87). Each fund is capitalized by the mandatory investment of 3 per
cent of co-operatives profits (Menzani and Zamagni 2010; Zevi et al. 2011).
Elsewhere, the funds are capitalized with combined investments from the sec-
tor, the government and social investors (private or social economy funding).
While most regional and sector federations engage in co- op development
and services, and many large co- operatives and networks have their own
co- op development units, special co- operative networks are sometimes cre-
ated with the specific purpose to assist in co- op development and thereby
strengthen the co- operative movement. Co- operatives are understood as,
and promoted as, vehicles for local economic development. It is therefore
not unusual that they join regional co- op development networks where par-
ticipating co- operatives provide financial and technical support to start-up
co- operatives.
CooperationWorks! in the United States is a second-tier co- operative whose
members are Cooperative Development Centres across the country, and
whose mandate is co- op development. In Quebec, the Rseau des coopra-
tives de dveloppement rgional (CDR) is made up of regional development
co- operatives. It is responsible for co- operative creation, development and
representation, and it complements the efforts of sector-based federations in
the province. SOCODEVI is an interesting example of a Quebec co- operative
whose reach is international. Its members are co- operatives and co- operative
federations that invest in the international co- op development and provide
technical support and expertise.
The web of associations for co- op development and assistance is unique
to co- operative business form, including the ICA as a global umbrella and
advocacy organization for the global co- operative movement.

Complex networks
Co- operatives also form networks with other co- operatives, individuals,
businesses or government agencies for a particular purpose, often outside of
their core business. We call these types of networks complex networks, but
they can also be consortia with mixed types of members. What sets these
58 Sonja Novkovic

networks apart from other types is the unpredictability of their reach and
form, as parts of the network take independent action in furthering the joint
goal, or purpose. We make a case elsewhere that co- operatives are driven
by their problem-solving nature, and a common purpose of the members,
leading in the process of complex (multi- organizational) network formation
(Novkovic and Holm 2012). This co- operative leadership role is particularly
evident when partnerships are motivated by the provision of public goods
such as, but not limited to, education, health care, or R&D.
Co- operative networks share common characteristics with complex
organizations (Cilliers 2005). They are both based on relationships and inter-
actions among the members, and they are open systems that interact with
other organizations and with their environments, and therefore shape and
are shaped by them. Co- operative networks abide by the principle of open
membership, leaving the boundaries of the organization open to external
influence and re- examination of its purpose and functioning. Unpredictable
(emergent) behaviours and outcomes are possible in co- operative networks,
since co- operatives are run democratically, and networks are decentral-
ized. Nonlinearity of interactions manifested by the whole being greater
than the sum of its parts is present in co- operative networks, and there is
also context and path dependency: local and/or internal solutions and social
innovations dominate in successful co- operatives. Finally, both systems are
decentralized; they self- organize and respond to a perceived need (Novkovic
and Holm 2012). Examples of complex co- operative systems abound: from
Mondragons Garaia research centre, where Mondragon co- operatives
are partnering with local government, academia and local businesses, to
quasi-private health care provisions guided by the common principles; or
co- operative educational and research centres. Soots, Perry and Cowan
(2007) consider the activities of one Canadian regional co- operative coun-
cil as the hub of a complex network which is building and facilitating link-
ages among various support groups in the network. A similar role is played
by other national co- operative networks (for example SAOS).
Complexity theorists point out that people in organizations are the most
effective problem-solvers in dynamic environments. They require knowl-
edge and freedom to act,15 rather than hierarchical structures that are slow
to respond to frequent changes. The basis of co-operation (with government,
private business, other co-operatives) becomes a shared values-based platform,
rather than one guided by profit. Co-operatives are leaders in the formation
of complex networks that is social coordination, particularly in case of public
goods, due to their comparative advantage as values-based businesses.

Closing remarks

Co-ops in the West have been adapting to new challenges in the past few
decades. From financial crises and regulation to the growth imperative and
Co- operative Networks, Adaptability and Organizational Innovations 59

value-added activities, a marriage between people-centred co-operatives and


investment capital has presented unique challenges for the co-operative sec-
tor. This chapter describes co-operatives in the transactions costs framework
(Williamson 1991; Menard 2007) as examples of network governance that
relies predominantly on social norms as a coordination mechanism. In par-
ticular, the norms are rooted in the co-operative identity and rationale state-
ment (ICA 1995). Given this distinctive feature, co-operatives thrive when
they resort to building networks with like-minded organizations for a par-
ticular purpose, while maintaining their autonomy in business decisions not
related to the network.
The chapter paints a picture of co-operatives as networks in their own right,
but also considers the types of connections and intricate webs co-operatives
engage in to gain a market advantage. Networking is how co-operatives do
business; it is also how they remain hybrids, rather than transform into
hierarchies. Networks are categorized by their purpose and by the type of
collaborative partners. Co-operatives form second-tier networks (consortia)
with other co-operatives, or pool resources to form sector/territorial federa-
tions.16 While the former ensures shared business transactions resulting in
scale economies and reduction in costs, federations provide education, train-
ing, technical support, research and development, governance, management
expertise, and cross-sector connections that assist co-operatives to fully capi-
talize on mutuality of the co-operative sector. Besides these horizontal types
of networks, co-operatives integrate in the supply chain. We highlight the
distinctiveness of co-operative fair-trade chains, built on the premise of social
norms and shared values, as opposed to of a price mechanism. A fair-trade
premium is paid to producers, but the long-term relationships and develop-
ment assistance to the producers is what drives and sustains co-operative
chains. Another type of co-operative network we consider is one built for
the technical assistance of co-op development. Co- operatives formed for the
purpose of co-op development face unique challenges and opportunities,
but they thrive when formed by a group of co-operatives. Lastly, we dis-
cuss co-operative networks as complex systems. There are many similarities
between a complex system and the co-operative firm, in particular in regards
to its attribute to being larger than the sum of its parts. But we consider a
specific set of relationships championed by co-operatives where they seek
partners with a common interest to jointly provide public goods, such as
education or social care. In all these networked arrangements, co-operatives
secure their survival, but they also provide unparalleled social value through
economic democracy and self-help. Co-operative networks play a particularly
important role in pooling and supplying financial capital. This role remains
a critical one for both the viability of the co-operative business model and
the growth of the co-operative movement.
The evidence also points to reduced transactions costs and therefore over-
all increased efficiency in a co- operative network (compared to a hierarchy),
60 Sonja Novkovic

placing co- operatives in a position to increase social benefits as well as


establish their market competitiveness. Low co- operative density in many
regions makes survival more challenging but isomorphism and conversion
more likely, due to a lack of co- operative-specific expertise and institutional
support. A tightly knit web of social networks, where it exists, has been a
very successful instrument in upholding the co- operative advantage.

Notes
1. In the last few decades of the 20th century, besides increasing liberalization
policies initiated under the likes of the Reagan and Thatcher regimes, European
national markets have been under pressure of unification and of the EU enlarge-
ment, and North America established the free trade agreement (NAFTA) between
Canada, United States and Mexico.
2. Quebec devised a web of patient capital funds as collaboration between the
government, the co- operative and social economy sectors (Mendell 2009). In
the UK and elsewhere similar efforts have been underway that include private
ethical or blended value investments (Causeway 2009).
3. In our interpretation, networks include loose collaborative arrangements as
well as federative (Johnstad 1997) structures.
4. The proposed typology is complementary to the usual treatment of horizontal
versus. vertical networks, or typology by the role an organization plays in a net-
work. We are interested in the reasons and purpose for network formation, and
the types of agents drawn into networks, as an illustration of the application of
co- operative principles, democratic governance, and networked growth.
5. We differentiate consortia with co- operative members from mixed consortia in
which members are co- operatives and/or other types of organizations.
6. Prices, authority, and social norms are three mechanisms for coordination and
control used in all types of governance structures. The dominant mechanism in
markets is price; in the hierarchy, it is the authority; and, in network governance, it
is the norms (Bijman 2005). A mix of mechanisms is used in all governance types,
and their relative importance shifts with organizational change.
7. Market failure is the demand side explanation of co- operative entry (Zamagni
and Zamagni 2010). The supply-side explanation holds deliberate action of mem-
bers to organize as an alternative business model.
8. A mission in this context is a social mission containing elements of social jus-
tice.
9. ICA 1995 statement of co- operative identity; the 6th principle is co- operation
among co- operatives.
10. Decentralized decision-making by which decisions are made as close to the lowest
decision-making level as possible. This implies that the second-tier co-operative does
not compete with the primary co-operatives in their domains; rather, it provides
complementary services that benefit the whole group.
11. Desjardins issued non-voting bonds in 1995 and a savings deposit with equity
return on capital in 1997; the Caisses pooled resources to form Enterprise Financial
Centers and Development Centers (Sanchez Bajo and Roelants 2011: 162163).
12. Desrochers and Fischer (2003) find that mergers of small units at a local level do
not impede the overall efficiency of the network.
Co- operative Networks, Adaptability and Organizational Innovations 61

13. Some Canadian examples are Coop Atlantic, Arctic Cooperatives, Federated
Cooperatives Limited and La Coop Fdre.
14. In particular, there is a rift between fair-trade certification bodies over extending
certification to corporations whose suppliers are large plantations in the South that
often violate labour standards. Fair Trade USA (formerly TransFair USA) has been certi-
fying large corporations, while Fair Trade International (FLO) remains committed to
providing support to small farmers through the promotion of co-operatives.
15. Stocki, Prokopowicz and Zmuda (2010) talk about total participation, and identify
need for total participation management (TPM). Also, see Hough and Novkovic
(2012).
16. Membership in federations is mandatory in some countries (for example France).

References
Arando, S., Freundlich, F., Gago, M., Jones, D. and Kato T. (2010) Assessing Mondragon:
Stability and Managed Change in the Face of Globalization. Working paper No.
1003, William Davidson Institute.
Baarda, J. (2004) Outside Cooperative Equity: Obligations, Tradeoffs, and
Fundamental Cooperative Character. Paper read at the NCR-194 Conference, 2
November, Kansas City, MO.
Bijman, J. (2005) Network and Hierarchy in Dutch Co- operatives: A Critical Analysis,
International Journal of Co- operative Management, 2: 1624.
Borzaga, C. (2011) Social Innovation and New Enterprise Models and Opportunities.
Paper read at: the Keynote address CASC conference, 13 June 2011, Fredericton NB.
Causeway Social Finance Primer (2009) Available at: http://socialfinance.ca/uploads/
documents/Social_Finance_Primer_Final_Version.pdf. (Accessed: April 2012).
Cilliers, P. (2005) Knowing Complex Systems, in: Kurt A. Richardson (ed.) Managing
Organizational Complexity. Philosophy, Theory and Application. Charlotte, NC:
Information Age Publishing, pp. 719.
Ct, D. (2003) Agropur: The Issues and Challenges Facing a Co- operative In Search
of New Cohesion. A case study, Canadian Co- operative Association and Le Conseil
Canadien de la Coopration.
Crowell, E. and Reed D. (2009) Fair Trade: A Model for International Co- operation
among Co- operatives?, in: D. Reed and J.J. McMurtry (eds) Co- operatives in a
Global Economy: The Challenges of Co- operation across Borders. Newcastle upon Tyne:
Cambridge Scholars Publishing.
Desrochers, M. and Fischer, K. (2003) Theory and Test on the Corporate Governance
of Financial Cooperative Systems: Merger vs. Networks. CIRPEE. Working paper
No. 0334.
Fulton, M. and Larson, K. (2009) The Restructuring of the Saskatchewan Wheat
Pool: Overconfidence and Agency, in: M. Fulton and B. Huet (eds) Cooperative
Conversions, Failures and Restructurings: Case Studies and Lessons from U.S. and
Canadian Agriculture. Canada: Knowledge Impact in Society, Centre for the Study
of Co- operatives, University of Saskatchewan, pp. 118.
Fulton, M. and Huet, B. (2009) Cooperative Conversions, Failures and Restructurings: Case
Studies and Lessons from U.S. and Canadian Agriculture. Canada: Knowledge Impact
in Society, Centre for the Study of Co- operatives, University of Saskatchewan.
Government of Quebec (2003) Horizon 2005. Cooperative Development Policy.
Available at: http://www.budget.finances.gouv.qc.ca/budget/20032004/en/pdf/
CooperativeDevPolicy.pdf (Accessed April 2012).
62 Sonja Novkovic

Halary, I. (2006) Co- operatives in Globalization: The Advantages of Networking, in:


P. Kalmi and M. Klinedinst (eds) Advances in the Economic Analysis of Participatory and
Labour-Managed Firms. Bingley, UK: Emerald Group Publishing Ltd., 9: 237264.
Hobbs, J. (2001) Against All Odds. Explaining the Exporting Success of the
Danish Pork Co- operatives. Centre for the Study of Co- operatives, University of
Saskatchewan.
Hough, P. and Novkovic, S. (2012) Measuring Participation in Worker Co-
operatives, in: S. Novkovic and L. Brown (eds) Social Economy: Communities,
Economies, and Solidarity in Atlantic Canada. Sidney, NS: Cape Breton University
Press, pp. 159175.
Iliopoulos, C. (2013) Stakeholder Participation in Cooperative Capital in Western
Agricultural Cooperatives, in: C. Gijselinckx, L. Zhao and S. Novkovic (eds)
Cooperative Innovations in China and the West. London: Palgrave McMillan.
ICA (1995) Statement of Co- operative Identity. Available at: http://www.ica.coop.
Johnstad, T. (1997) Co- operatives and Federations, Journal of Co- Operative Studies,
89: 4860., May
Ketilson, L. (1997) The Saskatchewan Wheat Pool in the Globalized Food Sector: Can
They Remain True to Their Roots?, in: J. Nilsson and G. van Dijk (eds) Strategies
and Structures in the Agro-food Industries. Assen, The Netherlands: Van Gorkum &
Company. B.V.
Karantininis, K. (2007) The Network Form of the Cooperative Organization, in: K.
Karantininis and J. Nilsson (eds) Vertical Markets and Cooperative Hierarchies. The
Role of Co- operatives in the Agri-Food Industry. Springer, pp. 1934.
Lundvall, B. (1993) Explaining Inter-firm Co- operation and Innovation: Limits of
the Transactions Cost Approach, in: G. Grabher (ed.) The Embedded Firm. On the
Socioeconomics of Industrial Networks. New York: Routledge, pp. 5264.
Menard, C. (2007) Co- operatives: Hierarchies or Hybrids?, in: K. Karantininis and J.
Nilsson (eds) Vertical Markets and Cooperative Hierarchies. The Role of Co- operatives in
the Agri-Food Industry. Netherlands: Springer, pp. 117.
Mendell, M. (2009) The Three Pillars of the Social Economy: The Quebec Experience,
in: A. Amin (ed.) The Social Economy: International perspectives on economic solidarity.
London: Zed books, pp. 176207.
Menzani, T. and Zamagni, V. (2010) Co- operative Networks in the Italian Economy,
Enterprise & Society, 11(1): 98127, March.
Nilsson, J. (1999) Co-operative Organisational Models as Reflections of the Business
Environments, The Finnish Journal of Business Economics, 4(99): 449470.
Novkovic, S. and Holm, W. (2012) Co- operative Networks as a Source of Organizational
Innovation, International Journal of Co- operative Management, forthcoming.
Organic Meadow (2012) Available at: http://www.organicmeadow.com.
Sanchez-Bajo, C and Roelants, B. (2011) Capital and the Debt Trap: Learning from
Cooperatives in the Global Crisis. Basingstoke, UK: Palgrave MacMillan.
SAOS (2011) Annual Report. Mimeo.
Smith, S.C. (2004) Network Externalities and Co- operative Networks: Stylized
Facts and Theory, in: L. Sun (ed.) Ownership and Governance of Enterprises. Recent
Innovative Developments. Helsinki, Finland: Palgrave MacMillan UK and UNU/
WIDER, pp. 181201.
Soots, L., Perry, S. and Cowan, J. (2007) Supporting Innovative Co- operative
Development: The Case of the Nova Scotia Co- operative Development System.
Available at http://auspace.athabascau.ca:8080/dspace/bitstream/2149/1112/1/
Congress_07_Paper_Submission_L.Soots.pdf (Accessed: April 2012).
Co- operative Networks, Adaptability and Organizational Innovations 63

Stocki, R., Prokopowicz, P. and muda, G. (2010) Total Participation in Management.


Critical Management Practice. Krakow: Wysza Szkoa Biznesu National Louis
University. Published in Polish in 2008 under the title, Pena Partycypacja w
Zarzdzaniu. Wolters Kluwer.
Pencavel, J., Pistaferri, L. and Schivardi, F. (2006) Wages, Employment and Capital
in Capitalist and Worker- Owned Firms, Industrial and Labor Relations Review, 60(1):
2344.
Protin, V. (2012) Workers Co- operatives: Good, Sustainable Jobs in the Community.
Promoting the Understanding of Co- operatives for a Better World. Paper read at:
Euricse-ICA International Conference, 1517 March, Venice.
Roelants, B., Pellirossi, V. and Biron, O. (eds) (2011) Co- operatives, Territories and Jobs.
Brussels: CECOP Publications.
Zamagni, S. and Zamagni, V. (2010) Cooperative Enterprise. Facing the Challenge of
Globalization. Cheltenham, UK, and Northampton, MA: Edward Elgar.
Zevi, A., Zanotti, A., Soulage, F. and Zelaia, A. (2011) Beyond the Crisis: Co- operatives,
Work, Finance. Brussels: CECOP Publications.
Ward, B. (1958) The Firm in Illyria: Market syndicalism, The American Economic
Review, 48(4): 566589.
Williamson, O. (1991) Comparative Economic Organization: The Analysis of Discrete
Structural Alternatives, Administrative Science Quarterly, 36(2): 269296, June.
4
Multi-stakeholder Co-operative
Model as a Flexible Sustainable
Framework for Collective
Entrepreneurship: An International
Perspective
Martine Vzina and Jean-Pierre Girard

The blueprint for a co- operative decade following the 2012 International
Year of Co- operatives provides an excellent opportunity to look at how the
co- operative movement has evolved in recent years and to draw from it some
trends for the future. The variety of sectors, the diversity and numerical
weight of co- operators and, in some cases, the leading position co- operatives
have assumed in their respective domains should not overshadow a new
trend in the co- operative landscape that is growing in popularity, namely
the multi-stakeholder co- operative (MSC), which is a co- operative with at
least two categories of members (for example users and workers).
Since the mid-1990s, Italys social co- operatives have served as a flag-
ship example and inspiration for several other countries to adopt legislative
frameworks supporting MSC development. Portugal, France and Canada
(provinces of Quebec, Alberta, Ontario, Manitoba) are among the countries
that have moved in this direction. In certain U.S. states and in Denmark,
organizations have espoused the multi-stakeholder co- op model in their
laws and regulations while dealing with umbrella legislation that applies to
enterprises not specifically identified as co- operatives.
Adopting an international comparative and historical perspective on
MSC, we wish to deepen our understanding of the specific nature of this
contemporary model for socioeconomic development and its potential for
the future. By pointing out that, despite its relative novelty, this model has
already gained in popularity and experimentations in addition to evolving
toward a quite flexible model to take charge of contemporary challenges we
want to show that its alleged limitations might not be as sustainable as some
works tend to suggest. Moreover, underlying this comparative analysis is the
question of the capacity of the traditional single-stakeholder co- operative
model to address contemporary challenges facing civil society.

64
Multi-stakeholder Co- operative Model as a Flexible Sustainable Framework 65

We first present three national contexts in which MSCs have developed


in recent years. Considering their respective emergence and legal context,
we present the cases of Italy and its social co- operatives, Quebec and its sol-
idarity coops, and France and its co- operative community- oriented enter-
prises: Socits coopratives dintrt collectif (SCICs). The Italian model of
social co- operatives is presented in detail by Depedri and Borzaga elsewhere
in this volume. We compare the provisions related to these organizations
notably in terms of their purpose, eligible member categories, governance
and financing rules. For each national context, we also present an overview
of how MSCs have evolved in recent years.
In the final section, we discuss some findings from this international com-
parative study of MSC, underlining some common traits of MSC in the three
national contexts. More importantly, we stress their distinctive features and
analyse them in light of the evolution of their respective institutional con-
texts in order to identify some future trends. We conclude that the diversity
and flexibility of the MSC model can be an inspiration for single-member
type cooperatives which are more and more challenged in their capacity to
address, in a distinctive manner, emerging and complex societal claims.

Italian inspiration1

The Italian case is remarkable not only for the inspiration and impulse it
gave to other countries to recognize the MSC model, but also because, over
a 30-year period (19601991), organizations based on this model had been
developing without relying on any specific legal framework. According to
Pezzini (2008), two major factors led to the creation of social co-operatives in
Italy: the inability of the welfare state to meet the expressed needs, and a grow-
ing demand for civil societys participation in organizing services addressing
social and economic needs. In this context, and with leadership of volunteers,
multiple initiatives were undertaken to provide services for rehabilitating and
assisting disadvantaged people, helping individuals with handicaps, addicts,
homeless and minors meeting difficulties reintegrating in the job market.
As the task grew too heavy for volunteers, professionals and salaried work-
ers took charge in the service delivery. The co- operative model then proved
to be the best way to ensure the long-term survival of these projects. Its
entrepreneurial dimension also reflected the specific nature of the commu-
nity in which it developed: the province of Brescia in northern Italy.
For more than 20 years, social co- operatives evolved without any specific
legal framework, building on the legal form of the co- operative, and wel-
coming volunteer members (Pezzini 2008).

Law 381: recognition of social co- operatives


The nearly unanimous adoption of Law 381 by the Italian government,
in November 1991, provided a legal framework to the existing social
66 Martine Vzina and Jean-Pierre Girard

co- operatives, with few modifications. This law was the first in Europe to
institutionalize and regulate the use of the co- operative form in the man-
agement of social services (Pezzini 2008 [Translation]) Italys official rec-
ognition of the MSC is therefore unique in several ways. The law attested
on-going practices and was not, therefore, an ex cathedra creation. In addi-
tion, its key principle was to acknowledge the relevance of the co- operative
model in a given sector, that is social, health and educational services
(A-type social co- operatives) and work reintegration of disadvantaged per-
sons (B-type social co- operatives).2 It is worth pointing out that multi-
stakeholder membership derives from, and is still related to, these origins. It
is interesting to note that the Italian bottom-up approach is very different
from the one in Quebec, where the legal form for MSC was created from
scratch, without prescribing areas of intervention, thus opening a way for
their application in a great variety of activities.3
Italian social co- operatives may have (albeit not obliged by law) a multi-
stakeholder governance structure. Furthermore, the by-laws of a social
co- operative may provide multiple categories of members while board mem-
bership may be limited to a single category. Italian social co-operatives can
thus diverge greatly in their governance structures.
The Italian law on social co- operatives sets out rules relative to member-
ship, contractual relations with government and fiscal benefits. At least 30
per cent of the jobs in the B-type co- operative have to be assigned for those
being integrated the so- called disadvantaged. Also, in this latter type, dis-
advantaged workers have to be members of the co- operative unless member-
ship is not compatible with their condition.
The Italian law also recognizes preferential relationships between social
co- operatives and governments. In this respect, in a departure from rules
governing public contracts, public authorities may enter into agreements
directly with co- operatives (B-type), with some limitations. Italian social
co- operatives also benefit from some tax exemptions.4

Quebec solidarity co-operatives (1997)

In 1997, the Quebec legislature recognized a new type of co- operative,


termed the solidarity co- operative. This new model, which explicitly
accommodates several categories of members, was an elaboration of a long
co- operative tradition in this Canadian province.5
For over a century, Quebec co- operatives had been established with only
one category of members. Generations of co- operatives have emerged in
consumption (food, housing, funeral services, cable television services, as
well as education and teaching, and so on), in agriculture, in financial serv-
ices, and in production, among others.6
Over time, however, the co- operative model with a single category of
members had shown its limits in the ability to come to terms with complex
Multi-stakeholder Co- operative Model as a Flexible Sustainable Framework 67

socio- economic issues involving coordination of multiple social and eco-


nomic actors.

The institutional context pertaining to the solidarity co- operatives act


The legal recognition (1997) of solidarity co- operatives with multiple cat-
egories of members was not the outcome of an improvised process. A closer
look reveals that, in the preceding decades, several factors smoothed the
way.
As elsewhere, globalization has impacted Quebec communities. This real-
ity is not new, as community development has been a social and economic
issue since industrialization in the 19th century. The last few decades have
seen a growing mobilization of civil society around revitalization experi-
ments, which had been historically under state responsibility. Similar to
developments in other welfare states, the Quebec government gradually
abandoned the provision of some local services. An exodus of populations
ensued at such a pace that the survival of some local communities was being
threatened. Beyond allowing a dialogue between local actors, the model
being sought was to enable those actors concerned about communities sur-
vival to mobilize around the provision of local services, such as food, fuel,
and leisure activities, which were crucial in order to prevent local popula-
tion migration.
The development of early childhood day care services also helped to
renew the co- operative model, as the Quebec government voted in a policy
based on quasi-free access to child day- care services. This policy increased
parents involvement in the governance of day- care organizations. It also
mobilized various groups (such as educators, local community organi-
zations, businesses and institutions offering workplace day care services)
around a project combining social and educational objectives. The door was
therefore opened for the emergence of a collective model more sensitive to
the needs of community.
Reintegration of people excluded from the job market was also a concern
and a complex issue. Governmental programs were established to support
populations whose needs transcend merely acquiring occupational skills.
As work-force integration is also achieved through social integration and
the development of occupational attitudes, the reintegration process calls
for collaboration and coordination of multiple actors and groups, bringing
diverse resources into the process. It is today recognized that local organiza-
tions, management staff, professional workers and, of course, those being
integrated all have the potential to contribute to the success of reintegration
of disadvantaged people to work.
The last consideration that has been decisive in the recognition of an
MSC status was the growing need for home- care services addressed to
people whose autonomy was decreasing. Given the ageing population, a
less interventionist state with regard to social and health services, and a
68 Martine Vzina and Jean-Pierre Girard

process of deinstitutionalization in the mental health field, the challenge of


assisting people with decreasing autonomy loomed large. In order to keep
these vulnerable individuals at home, family members involvement must
be combined with intervention of different types of professional services.
These groups need to be mobilized around the provision of various forms
of assistance and support requiring coordination and harmonization of
approaches.
This brief review of the institutional and political context highlights the
parameters within which some contemporary issues of Quebecs society had
to be addressed. In fact, these issues established the case for an approach that
would incorporate different groups of concerned actors, with an emphasis
on satisfying those needs in an entrepreneurial model combining social
and economic considerations.
Having to deal with the twofold challenge of removing the public deficit
while looking for opportunities for job creation, in 1996, the Quebec govern-
ment held the Economic and Employment Summit, gathering Quebecs social
and economic leaders. One of the summit outcomes was the commitment
from the Quebec government to establish a vast network of collective enter-
prises providing domestic services, including home maintenance. According
to concerned groups, several parameters had to be considered in the new
model: permanent job creation rather than subsidized employment jobs; jobs
that would be essentially performed by women; an approach to help fight
black-market labour; a targeted clientele of mainly seniors and, secondarily,
of busy families; granting exclusive rights to social economy enterprises; and
financial support to help beneficiaries afford those services (Vaillancourt and
Jett 2009).
Consequently, two legal forms were considered: the non-profit7 (NPO)
and the co- operative models. In the latter case, the single stakeholder cat-
egory co- operative (SSC) model was questioned for its inability to mobilize
multiple actors around complex social and economic issues. Therefore, an
amendment to the Co- operatives Act introducing provisions enabling the
creation of a multi-stakeholder co- operative status was endorsed under the
label Solidarity co- operative.

Provisions regarding solidarity co- operatives


While the Italian social co- operative has been the source of inspiration,
there was also concern for the provisions to reflect Quebecs specificities.
Article 226 of the Co- operatives Act gives substance to the concept of solidar-
ity co- operatives.
According to the act: A solidarity co- operative is a co- operative consist-
ing of members who are users of the services provided by the co- operative,
and of members who are workers in the co- operative. In addition, any other
person or partner that has an economic or social interest in the pursuit of
the objectives of a solidarity co- operative may be a member of it. Such a
Multi-stakeholder Co- operative Model as a Flexible Sustainable Framework 69

member shall hereinafter be referred to as a supporting member. In this first


version of the solidarity co- operative act,8 an obligation was made for soli-
darity co- operatives to carry at least two specific member categories: user
members and worker members.
Each member category elects its delegate(s) to the board. The act ensures
that each group has at least one representative on the board of directors.
The co- operative bylaws set the number of directors per category. The act
stipulates however, that no more than one third of directors may be sup-
porting members.
While a co- operative may pay dividends, the act specifies that in the case
of user members that dividends must be in proportion to a members use of
the co- op services. For worker members, the proportion is established accord-
ing to the amount of work performed. The latter can be categorized accord-
ing to the number of hours worked, the members income, or any other
measure set by the co- operative bylaws. Dividends to supporting members
are prohibited. In accordance with the general Co- operatives Act, at least 50
per cent of a solidarity co- operatives turnover has to come from services to
members (versus non-members). As it is prescribed by the law, a portion of
the annual surplus (10 per cent) must be turned into an indivisible reserve
up to an amount of equity equal to least 40 per cent of the debt.
In 2005, in consultation with the co- operative movement, Quebecs
Co- operatives Act was updated to include provisions pertaining to solidar-
ity co- operatives. The most important change concerned the membership.
According to this amendment, a solidarity co- operative may be comprised
of two out of the three categories of members: user or worker members and
supportive members. According to this new provision, a single-stakeholder
co- operative, be it user or worker, may turn into a solidarity co- operative
simply by including a supporting member category. A solidarity co- operative
starting from ex-nihilo, could combine user and worker members.

French Socits coopratives dintrt collectif (SCIC) (2001)

In some ways similar to Italy, France faced significant social and political chal-
lenges in the last quarter of the 20th century. The social fabric has been trans-
formed: the state withdrew from provision of some basic services, and France
undertook the important task of decentralizing its administration. While
seeking to reconcile social and economic objectives, in the 1990s the signifi-
cant limitations of the two main statutes generally addressing such needs were
more and more expressed. In fact, although the 1901 Law of Associations
had not been designed for this purpose, becoming more entrepreneurial,
associations ended up taking charge of economic and commercial activities
with ever-greater emphasis. While co-operatives seemed increasingly relevant
for the coordination of different categories of actors willing to carry on eco-
nomic projects targeting the public interest, the legal framework hindered
70 Martine Vzina and Jean-Pierre Girard

the creation of co-operatives with heterogeneous membership (Margado and


Girard 2008).
In 2001, after the joint lobbying efforts of the National Cooperative
Alliance and the General Confederation of Scop (Socit cooprative et par-
ticipative), the French government adopted legislative enactments relative to
the SCIC (Socits Cooprative dIntrt Collectif ).
While the legislation was in process of preparation, an experiment was
carried as some 20 informal businesses, associations and co- operatives
tested ways to organize in order to develop sustained jobs for youth. These
collective experiments were testing the assumptions under the law relative
to SCICs (Bout 2011: 92). Thus, by the time the law was enacted in parlia-
ment, it had already been put to the test.
SCICs are private enterprises whose activities of producing goods and serv-
ices have a double purpose delineated in their statutes: economic and also
social utility. These co- ops necessarily gather multiple categories of mem-
bers, namely at least one employee, one beneficiary and one member from
another category, including volunteers and public bodies. The democratic
rule one member- one vote applies to each and every member category. In
its first draft, the law governing SCICs required that a newly created SCIC
be approved by the prefect of the department where the co- operatives head
office was located. The SCIC was also required to seek re-approval every five
years in order to steadily increase their social utility purpose, all these pre-
scriptions complicating the process. The democratic process may be organ-
ized around voting pools representing different groups of members. Each
voting pool may hold between 1050 per cent of the total vote. Therefore,
no voting pool can hold the majority of votes. Local bodies may hold up
to 20 per cent of SCIC capital altogether. In addition, SCICs must set aside
more than 57.5 per cent of their annual surpluses in an indivisible reserve.
Table 4.1 shows a comparative analysis of the main features regarding the
respective legislative framework relative to multi-stakeholder co- operatives
in Italy, Quebec and France.

Recent developments in the MSC model

In this section, we describe how MSCs have evolved in recent years under
their respective legislative frameworks and promoters initiatives.

Italian social co- operatives: from social services to disadvantaged


workers
The legal recognition of social co-operatives in 1991, coupled with a favour-
able institutional environment, contributed significantly to the Italian social
co-operatives development. Moreover, the presence of consortia, second-
level co-operatives, contributed to their expansion (impressive figures with
respect to the number of paid employees and volunteers within Italian
Multi-stakeholder Co- operative Model as a Flexible Sustainable Framework 71

Table 4.1 Social co- operatives, solidarity co- operatives and socits coopratives
dintrt collectif: summary and comparison

Socits
Solidarity coopratives
Co-operatives dintrt collectif
Social Co-operatives (Italy) (Quebec) (France)

Membership At least three members. At least two At least one


Obligation B-type co-operatives: categories employee,
disadvantaged people No other at least one
must constitute at least obligation beneficiary and
30% of the co-operatives at least one
workers and, if compatible other person,
with their condition, individual or
be members of the co- legal person
operative (organization)
Possibility Employees Users category: All natural or
Beneficiaries Consumers legal persons,
Volunteers (no more thanProducers including
half the total number of
Workers category volunteers and
associates) Support category public bodies
Financial partners (volunteers
Any other legal persons excluded)
Public bodies Allowed Not allowed, Allowed
membership except for
co-ops in the
wind power
industry
General To contribute to the general No general To produce and
obligations interest of the community obligation supply goods and
for human promotion and services of public
integration of interest having
various citizens through social utility
activities that aim at
integrating disadvantaged
persons into the work
force
Members votes 1 member = 1 vote 1 member = 1 vote 1 member = 1 vote
Voting pools
between 10 and
50% of total
vote
Capital No specific rule No specific rule 20% limit for
public bodies
Interests on Allowed for financial Allowed Allowed but strictly
capital members, strictly limited limited

Continued
72 Martine Vzina and Jean-Pierre Girard

Table 4.1 Continued

Socits
Solidarity coopratives
Co-operatives dintrt collectif
Social Co-operatives (Italy) (Quebec) (France)

Dividend Allowed but strictly limited Allowed except Allowed but


for supporting limited
members.
Tax exemption if
bylaws prohibit
dividend to
any members
category
Reserve Indivisible Indivisible Indivisible
10% of annual 57.5% of annual
operating or surplus
earnings surplus
up to at least
40% co-op debt
Exclusivity of No restriction At least 50% of No restriction
activities operations
with carried out with
members members
Access to Public bodies may conclude No privilege No privilege
public agreements with B-type
market co-operatives under some
conditions

a
Partial reproduction of a table published in a document for the anniversary symposium of the
SCIC (GC Scop 2012).
b
See Pezzini (2008).

social co-operatives are presented by Depedri and Borzaga elsewhere in this


volume).
Social co-operatives, born in northern Italy, are also expanding geographi-
cally, gaining prominence in the countrys southern regions (Pezzini 2012).
In order to offset the cuts of public resources, it appears that social
co-operatives are now more open to engaging in partnerships as well as in
business transactions with the private sector (Pezzini 2012). This is particu-
larly true for B-type co-operatives, while A-type co-operatives still carry on
their activities mainly through agreements with public agencies.

Quebec solidarity co- operatives: opening up the model


The solidarity co- operatives promoters intuition proved to be accurate.
From the mid-2000s, year after year, solidarity co- operatives became the
Multi-stakeholder Co- operative Model as a Flexible Sustainable Framework 73

chief model of newly established co- operatives in Quebec. In fact, it is esti-


mated that since 2006, more than 60 per cent of new co- operatives choose
this status. In some cases, single-stakeholder co- operatives were converted
into solidarity co- ops.
By 31 December 2011, 569 solidarity co- operatives were active in Quebec
(MDEIE 2012). Taking into account the number of solidarity co- operatives
set up, that means a survival rate of approximately 68 per cent over the
five-year period. In 2009, based on a sampling of 282 co- operatives, aver-
age annual sales totalled around 340,150 euros, the average number of
employees being 12 and gathering 602 members, all categories taken
together.
Data show that solidarity co-ops evolved in sectors and activities as diverse as
food and housing, performing arts and leisure, community groups, purchasing
groups, recycling, cable broadcasting, where single-stakeholder co-operatives
were scarce or absent. This diversity is also growing while these organizations
attract categories of people (for example professionals, doctors) who are not
generally familiar with the co-operative model.
In Quebec, solidarity co-operatives did not develop purely by chance. They
benefited from supporting measures, some of which connected to the Quebec
development model (Bourque 2000) that has been described as a model of
partnership governance to socio-economic development. Also, some fiscal
measures to beneficiaries and to solidarity co-operatives delivering domestic
services, as well as the support provided by a previously existing network of
autonomous co-operatives whose purpose is to foster co-operative develop-
ment, contributed to solidarity co-operatives success.

SCIC: still looking for its cruising speed


By 31 December 2010, France had 190 SCICs. There is no doubt that, com-
pared to social co-operatives in Italy and solidarity co-operatives in Quebec,
the SCIC model has up to now been less popular. The main reasons for this
seem to lie in the insufficient legal know-how of supporting local structures,
the absence of financial incentives and the necessity for administrative
approval which weighs down the process to set them up. However, from the
start SCICs could rely on the CG Scop efforts to develop their expertise. Even
if the model is still at an embryonic stage of development, there is reason to
believe in its future. Some administrative limits, such as of the government
approval requirement, have been removed, which should speed up the crea-
tion of SCICs in the future.
All the same, SCICs offer an interesting profile. In 2010, while aver-
age turnover was 625,000 Euros, 28 per cent of them generated turnovers
higher than 500,000 Euros. While SCICs social utility purpose materializes
in their inclusive decision-making process rather than in the strict social
nature of their activities, they are involved in much more diverse sectors
than are Italian social co- operatives. French SCICs develop in such sectors/
74 Martine Vzina and Jean-Pierre Girard

activities as environment, food and agriculture, consulting services for busi-


nesses or community development, culture, local services, housing, health,
medicalsocial and social services. Communities participate strongly in
SCIC capitalization. Local public agencies had shares in more than 40 per
cent of SCICs, with their average participation amounting to 13 per cent of
total capital. In terms of membership and governance, 80 per cent of SCICs
attracted 11,850 members, or an average of 78 members per co- operative.
The remaining 20 per cent had fewer than ten members. The presence of
paid workers and beneficiaries is mandatory in SCICs. In 2012, they respec-
tively accounted for 17 per cent and 35 per cent of the membership. Finally,
SCICs survival rate reflects some stabilization, as 28 per cent have been in
operation for more than five years, 38 per cent between two and five years
and 34 per cent for less than two years.

MSC: sustainability and flexibility in collective


entrepreneurship

The multi-stakeholder co- operative model has been growing in popularity


since the beginning of this century and has received institutional recogni-
tion in several areas in the world. Among others, Italy, France and Quebec
have, under the leadership of their respective national co- operative move-
ments, seen the potential of this innovative collective entrepreneurship
model by establishing a legal framework to foster its development.
The institutional recognition conferred by Italy, France and Quebec on
the MSC model is not simply fortuitous. In fact, these national examples
highlight common conditions for the emergence of this innovative model
that provided an original solution to a set of contemporary societal issues.
It seems that the MSC model emerges in complex social contexts charac-
terized by high levels of instability and diversity. Pezzini (2008) has pro-
posed the conditions for emergence of the MSC model in reference to
Italian social co- operatives. The previous analysis seems to acknowledge
this interpretation.
As shown in the preceding section, far from being a uniform govern-
ance model following some common path for development, and despite its
anchorage in co- operative principles, the MSC takes diverse legal forms that
enable it to consider both collective and societal issues. Despite a common
generic denomination, it has been adapted in some important ways to the
respective national context.
MSCs may be compared according to their more- or-less tight institutional
framework guidelines. The legal requirements in terms of governance (rela-
tive heterogeneity of membership based on the nature of members links
to the co- operative), contribution level (general interest), activities (more
or less specified) and administrative rules (ease of creation) seem to reveal
some diversity among the three national models in the degree of constraints
Multi-stakeholder Co- operative Model as a Flexible Sustainable Framework 75

imposed on them. Of the three, Italian social co- operatives appear to enjoy
a more flexible legislative framework in their governance (no member cat-
egories specification) and regarding the (non)requirement to prove the
organizations contribution to the community interest. However, Italian
social co- operatives activities are highly restricted, their scope of action
being limited to the field of social and health care, and marginalized peo-
ples reintegration into the labour market.
In comparison, the governance of Quebecs solidarity co- operatives has
evolved from quite a restrictive legislative framework making it compulsory
to integrate a worker category to a more flexible one, as this last obligation
was later relaxed. Moreover, the Quebec MSC has no obligation to justify or
demonstrate a general interest purpose. The legislature thus seems to sug-
gest that the mere presence of various categories of stakeholders within the
MSC governance process attests to this concern. In addition, Quebec soli-
darity co- operatives benefit from having no constraints relative to the type
of activities or sectors they can emerge in.
Finally, out of the three MSC models, the French Socits Coopratives
dIntrt Collectif (SCIC) seems to have developed within the most restric-
tive legislative framework. SCICs have to subscribe to a project with a social
purpose alongside economic viability. However, it may be worth point-
ing out that the social utility purpose of SCIC is above all a matter of a
decision-making process based on a broadly heterogeneous membership,
rather than one of offering strict social services, as is the case with Italian
social co- ops. In addition, the initial obligation made to demonstrate this
purpose in an approval process renewable every five years has been relaxed
since. This is a trend to build more flexibility into the SCIC model in order
to reflect more accurately the reality of SCICs evolution and new societal
challenges. With the idea of being an inclusive and societal model, SCIC
must, however, integrate at least three categories of members, including
employees and beneficiaries. This latter obligation indirectly contributes
to constraining, more than in Quebec, the scope of its activities. Some
discussions are also in progress about considering producers or employees
as salaried members.
Although still young, at least in Quebec and France, the legal frame-
work has thus already undergone major changes that may show some
forward-looking elements. Over time, it seems to lean toward a relaxation
rather than tightening of the MSC legal framework. It makes this status
more attractive for groups of promoters in addressing new needs and new
societal challenges and developing more diverse activities in new areas.
Some more flexible and less restrictive modalities for entry and operation
might be an indication of the growing comfort, among both the law mak-
ers and its promoters, with this model of organizing that, in addition,
addresses great challenges with respect to governance and management
(Hansmann 1996; Graeme and Hems 2004; Leviten- Reid and Fairbairn
76 Martine Vzina and Jean-Pierre Girard

2011). From a broader perspective, this trend toward loosening MSCs


legal framework may also be interpreted as public recognition of the MSC
model as a performing tool to address complex challenges relating to the
general interest.
In this view, the loosening of the MSC model could constitute an oppor-
tunity for single-stakeholder co- operatives. In fact, while the history of
co- operatives and co- operative thinking shows an evolution from an origi-
nally multifunctional and multi-stakeholder model toward a simplified
one, both in terms of membership and specialization of activities (Lambert
1964), the example of Quebec regarding the evolution of its MSC status may
be indicative of a potential backward swing. In fact, it is possible to think of
a single-stakeholder co- operative whose activities rely on a close collabora-
tion with civil society actors, transforming itself into an MSC. Integrating
additional categories of members, this MSC would become an organizational
space for closer collaboration, grouping the stakeholders needed to carry its
social and economic project. Indeed, in Quebec, some single-stakeholder
local agricultural co- operatives (agricultural producers) have recently trans-
formed into MSCs in order to take charge of basic local services (grocery,
hardware, gas station, and so on). In diversifying their activities and their
membership, which now integrates non-agricultural user members, they
attest to a concern for the community that transcends the collective inter-
est of farmers only.
The pace at which MSCs have been developing in Italy and Quebec,
and their relative longevity, brings some insights into the debate around
the governance challenge and its alleged fragility. In reality, it seems that
the loosening of the model in some areas is rather a demonstration of its
capacity to adapt around a strong general-interest purpose that contrib-
utes to unification rather than to partition of multiple and complementary
interests.
Moreover, one would be tempted to conclude that the mandatory inclu-
sion of an employee members category in the SCIC governance model
might end up as a limitation to their development. However, the Italian case
shows the limits for this argument as the majority of social co- operative
members come from the workers category, even though the Italian social
co- operatives act makes no prescription for it. In Quebec, the flexibility
provided with the 2005 amendments to the law, which allow the creation
of MSC without an obligation to include a worker members category, gave
the model a new cruising speed. In this respect, and in order to go beyond
a class-struggle perspective, perhaps the very purpose of MSCs might in
some way dictate the relevance of integrating worker members in MSC gov-
ernance. In fact, unlike in Quebec, French and Italian legislators imposed
on MSCs a public-interest purpose whereby workers are central in the serv-
ices delivery. Moreover, in Quebec, MSCs developing in social areas of
activities also generally integrate employees into their membership. On the
Multi-stakeholder Co- operative Model as a Flexible Sustainable Framework 77

other hand, those solidarity co- ops with a purpose of wider community
development seem less heterogeneous on the basis of members categories.
While the workers category does not seem to be as frequent in their govern-
ance, the heterogeneity of membership is reflected in the composition of
users and supportive members categories. These community development
solidarity coops larger scope of activities calls for the mobilizing of more-
diverse interest groups, be they users or supportive, into their governance
process.
In view of Vienneys socio- economic analysis of the emergence and
development of co- operative organizations (1980), this comparative
analysis of MSCs legal frameworks and recent developments draws some
interesting propositions. In his seminal work, Vienney suggested that
the emergence of a new organizational form is not arbitrary. It is a spe-
cific and unique combination of rules (membership and governance),
actors (profile and needs) and activities (which reflect the purpose of
the co- operative). In accord with it, our comparative analysis shows that
MSCs purpose, whether prescribed by law (France and Italy) or left to
the promoters discretion (Quebec), and the nature and diversity of the
activities that ensue, are central with respect to heterogeneity of member-
ship and, more specifically, integration of employees in their governance.
According to this framework one may conclude that, more likely than does
the single-stakeholder model, the MSC model offers an infinite number
of combinations by which to address emergent social and economic chal-
lenges to communities and society. When anchored in a flexible legislative
framework such as the Quebec solidarity coop Act, it has the potential to
turn the single-stakeholder co- op into a more inclusive and integrative
approach, promoting the general interest which is today a societal demand
addressed to all types of organizations.

Notes
1. The authors wish to thank Catherine Friedrich of CG Scop (France) and Enzo
Pezzini of Confco-operatives (Italy) for their comments and suggestions.For more
details on Italian social co-operatives, see Borzaga and Depedris chapter in this
volume.
2. For more details, see Borzaga and Depedris chapter in this volume.
3. See the section on Quebecs solidarity co-ops.
4. For specific features of Italys legislation on social co-ops, see Pezzini and Zandonai
(2010) and Borzaga and Depedri in this volume.
5. In 2012, 3,300 co-operatives and mutuals were in operation in Quebec. Their total
membership reached 8.8 million, while generating revenues of 20 billion euros and
assets of 174 billion euros http://www.coopquebec.coop/fr/statistiques.aspx.
6. For more details on the nature of activities carried on by Quebec co-ops, see http://
www.economie.gouv.qc.ca/objectifs/informer/co-operatives [in French only].
78 Martine Vzina and Jean-Pierre Girard

7. NPO is similar to an association as described in the French Law of Associations of


1901.
8. Amendments were ratified in 2005.

References
Bourque, G. (2000) Le modle qubcois de dveloppement. De lmergence au renouvelle-
ment. Qubec: Presses de lUniversit du Qubec, p. 274.
Bout, T. (2011) La voie de linnovation sociale. Entretien avec Hugues Sibille. Paris: Rue de
lchiquier, p. 123.
CG Scop (2012) Les SCIC ont 10 ans, Brochure pour le colloque anniversaire, Paris.
Graeme, L. and Hems, L. (2004) Socits coopratives dintrt collectif: The Arrival
of Social Enterprise within the French Social Economy, Voluntas: International
Journal of Voluntary and Nonprofit Organization, 15(3): 265286.
Hansmann, H. (1996) The Ownership of Enterprise. Cambridge, MA: The Belknap Press
of Harvard University Press, p. 372.
Lambert, P. (1964) La doctrine cooprative. Brussels: Les Propagateurs de la coopra-
tion, 3e dition, p. 373.
Leviten-Reid, C. and Fairbairn, B. (2011) Multi-stakeholder Governance in
Cooperative Organizations: Toward a New Framework for Research?, Canadian
Journal of Nonprofit and Social Economy Research/Revue canadienne de recherch sur les
OBSL et lconomie sociale, 2(2): 2536.
Margado, A. and Girard, J.-P. (2008) Le contexte franais des coopratives multiso-
citaires, LAction nationale, XCVIII(3): 6267.
MDEIE, Ministre du Dveloppement conomique, de lInnovation et de lExportation
(2012) Qubec: la cooprative de solidarit, CG Scop, Les SCIC ont 10 ans. Paris:
Brochure pour le colloque anniversaire jeudi le 9 fvrier 2012.
Mnkner, H. (2004) Multi-stakeholder Co- operatives and their Legal Framework,
in: C. Borzaga and R. Spear (eds) Trends and Challenges for Co- operatives and Social
Enterprises in Developed and Transition Countries. Trento: Edizioni 31, pp. 4982.
Pezzini, E. (2008) Les coopratives sociales italiennes: contexte et caractristiques,
LAction nationale, XCVIII(2): 92111.
Pezzini, E. and Zandonai, F. (2010) Le dveloppement du multisocitariat dans la
coopration sociale en Italie, Revue de lUniversit de Moncton, 41(1): 524.
Pezzini, E. (2012) Italie: la cooprative sociale dans CG Scop. Les SCIC ont 10 ans.
Paris: Brochure pour le colloque anniversaire.
Vaillancourt, Y. and Jett, C. (avec la collaboration de P. Leclerc) (2009) Les arrange-
ments institutionnels entre ltat qubcois et les entreprises dconomie sociale en aide
domestique. Une analyse socio-politique de lconomie sociale dans les services de sout-
ien domicile. Montral: Collection Recherche, ditions Vie conomique (EVE),
cooprative de solidarit, p. 178.
Vienney, C. (1980) Socio- conomie des organisations coopratives. Paris: CIEM, p. 396.
Part II
Sector-Specific Analysis of Trends
and Evolutions in the West
5
Stakeholder Participation in
Co-operative Capital in Western
Agricultural Co-operatives
Constantine Iliopoulos

Introduction

The last two decades witnessed the emergence of various innovative capitali-
zation methods for co-operatives in Europe, the United States, and Oceania
(Cook and Iliopoulos 1999; Gijselinckx and Develtere 2008; Iliopoulos 2009;
Zhao et al. 2009). Such innovations range from amendments to co-operative
legislation and bylaws to allow non-member, stakeholder investment in
co-operatives or other, co-operatively owned entities, to radically new
ownership structures designed to attract growth capital from members
(for example new generation co-operatives). Several scholars argue that it
was the need to ameliorate a set of property-rights-related constraints that
fuelled these developments (for example Cook and Burress 2009; Iliopoulos
and Hendrikse 2009). Structural changes in the global food and fibre system
have turned farmer-controlled vertical integration into probably the only
means to secure the sustainability of farming (Nilsson 1999; Fernndez-
Guadao 2006). Rapidly decreasing international commodity prices con-
trasted with constantly increasing prices of food products, made it clear that
farmer investment in the production of branded, value-added food items was
the only way to turn farming into a viable business. Given the significant
required investment in both physical and intangible assets, farmers could
integrate vertically only through some form of collectively owned business.
However, the ownership structure of traditional agricultural co-operatives
discourages members from investing significant amounts of risk capital,
while it gives rise to collective decision-making inefficiencies (Cook and
Iliopoulos 2000). Vaguely defined ownership rights result in the realization
of capital acquisition, control, and collective decision-making constraints,
as well as the free rider, horizon, portfolio problems, free cash flow, control,
and influence costs problems (Cook 1995; Cook and Burress 2009). Most of
the above-mentioned innovations in capital structure represent attempts to
address one or more of these problems and make stakeholder participation
in co-operative capital possible (Cook and Iliopoulos 2000; Chaddad and

81
82 Constantine Iliopoulos

Cook 2004). These producer-formed entities incorporate a greater degree of


economic incentive alignment; they are offensive in design, seek to generate
economic rents at multiple levels, and consequently create options for exit
and wealth. However, some of these innovations seem to be associated with
a higher risk of losing member control of the co-operative and, potentially,
risk demutualization.
This chapter focuses on emerging, innovative methods of capitalizing
agricultural co- operatives in countries with an advanced food and fiber
system. The various innovative capitalization models are examined and
analyzed in terms of the involved risks for co- operative stakeholder. We
argue that allowing non-patron stakeholders to invest in a co- operative may
result in members losing control of their co- operative unless bylaws are well
designed to minimize this risk. However, when members view themselves
primarily as investors rather than patrons, then the injection of necessary
capital from outsiders may be the only feasible solution for achieving mem-
bers goals.
The chapter is structured in six sections. The second section briefly sum-
marizes traditional methods of co- operative capitalization. Subsequently, we
discuss challenges facing traditional co- operatives in attracting and manag-
ing the risk capital necessary for surviving in a competitive environment.
In this chapter the traditional co- operative is defined as being user- owned,
user- controlled, and user-benefited in addition to having the following
organizational characteristics: ownership rights are restricted to member
patrons; residual claimant rights are nontransferable, non-appreciable, and
redeemable; and user benefits are distributed to members in proportion to
patronage, but investment may be disproportional to patronage (Cook and
Chaddad 2004: 1249). Section four introduces current trends in capitalizing
agricultural co- operatives in Europe, the United States, and Oceania while
section five discusses relevant implications. Section six concludes the chap-
ter and outlines fruitful avenues for future research.

Stakeholder participation in co-operative capital:


traditional approaches

Traditional co- operatives meet their capital needs primarily by raising equity
or borrowing debt capital. Equity is typically supplied by members but can
also come from nonmember sources. Traditionally, co- operatives have used
one or more of the following methods to raise equity capital. While differ-
ent terms may be used in the various sectors and countries, the basic char-
acteristics of these equity-raising methods are roughly the same.
Direct investment: cash purchases of common or preferred stock, member-
ship certificates, or other forms of equity by members. This method is used
primarily in collecting funds to start a new co- operative. Despite its signifi-
cant advantages as a method of raising equity, direct investment has not
Stakeholder Participation in Co- operative Capital 83

been used extensively in traditional co- operatives as growth capital. This


is because, even if not capital- constrained in their own farm operations,
farmer-members have little economic incentive to provide risk capital that
receives little or no return.
Retained patronage refunds: portions of net income allocated to mem-
bers but retained by the co- operative. The co- operative may issue equity
shares to members in lieu of cash. These are known as allocated retained
earnings. Alternatively, the co- operative can pay corporate taxes on
retained earnings and keep them as permanent unallocated equity. This
is an easy-to-implement system of raising equity, a fact that explains its
extensive use. However, the amount of retained funds is a function of the
co- operatives net income, which may fluctuate significantly from year
to year. Moreover, co- operative leaders and managers may perceive this
source of equity as too easy to collect, thus leading to unwise expansion
or investments.
Retained earnings: the co- operative retains part of the earnings from either
member or nonmember business, pays corporate taxes on them and keeps
them as permanent unallocated equity. Retained earnings are usually called
unallocated equity (see below).
Per-unit retains: this method refers to patron investments that are based
on the volume of patronage handled for each member. Unlike retained
funds, per-unit capital retains are not affected by the level of net income.
However, this method shares most of the disadvantages of retained patron-
age refunds.
Preferred stock: co- operatives have also attracted equity capital by issuing
preferred stock sold to both members and nonmembers. Preferred stock car-
ries a fixed or floating dividend rate that must be paid before returns are
paid on common stock or other equity obligations. Usually co- operatives
convert retained refunds from members or nonmembers into preferred
stock. Co- operatives have also commonly sold preferred stock carrying no
voting rights directly to the public, when the bylaws so permitted.
Investment shares: these securitized financial instruments are issued by the
co- operative to members and, potentially, to nonmembers. They reward not
only patronage but also investment in the co- operative. Investment shares
may be issued as allocated retained earnings, but in some cases they repre-
sent direct member investment.
Appreciating participation rights: upon entry in the co- operative, mem-
bers are often required to purchase participation shares in proportion to
deliveries. Some co- operatives allow these shares to appreciate over time
(based on unallocated reserves), to be transferred to other members, or to
be redeemed.
Dividend-bearing common stock certificates: shares usually carrying no vot-
ing rights and bought by members from allocated refunds or from their own
funds.
84 Constantine Iliopoulos

Stock instruments based on allocated patronage: members are allocated a por-


tion of earnings in the form of a stock instrument. Patronage refunds are
paid in the form of the abovementioned dividend-bearing instruments.
Unallocated equity: the co-operative retains part of the net income that
is not allocated to any member, patron, or other individual account. This
is after-tax retained earnings that remain permanently on a co-operatives
balance sheet. Unallocated equity comes from various sources, such as
non-operating income, or from operating income which was not allocated
or refunded. Unallocated equity is really permanent capital and, thus, is
important in more than one respect. First, it acts as a buffer against possible
co-operative operating losses. This might explain why reserves of unallo-
cated equity are required by law in many countries. Second, because unallo-
cated equity reduces the pressures placed on the board of directors for equity
redemption, lenders such as commercial banks are more willing to give loans
to co-operatives with high amounts of unallocated equity (Cobia and Brewer
1989; Cobia, Royer and Ingalsbe 1989; Cook and Chaddad 2006).
The PLC: a uniquely European phenomenon, the PLC is an investor-oriented,
public limited company owned by a co-operative association. The latter is
exclusively a governance unit, while most of the co-operatives value-added
business takes place through the former. In the past, PLCs were exclusively
owned by co-operative associations and their individual members. In recent
years, however, an increasing number of these PLCs have issued stock to non-
member investors. In this way, and through the PLCs, wholly or partially
owned subsidiaries, the co-operative raises risk capital in addition to that con-
tributed by members (Nilsson and Gunnarsson 2000; Pellervo 2000).
Co- operatives also use debt capital to finance their operations and make
investments in various tangible and intangible assets. Long-term debt has
been usually provided by sister co- operative banks, commercial banks, and
by members. The latter leave their money in the co- operative, given that
they receive interest and are assured of a payback date. The financial instru-
ments used in this case include various interest-bearing instruments such
as bonds, individual notes, and member accounts that act like demand
deposits or savings accounts.
In securing short-term debt, co- operatives utilize all sources as investor
owned firms (IOFs). In addition to these sources, long-term lending is pro-
vided by co- operative or commercial banks and by federated co- operatives
to their local co- operative-members, or farmer-members. In the latter case,
by deferring payment to members for commodities delivered, marketing
co- operatives gain access to considerable financial resources.

Challenges in capitalizing agricultural co-operatives

The global food and agribusiness industry has experienced dramatic changes
since the early 1980s, and the pace of change seems to be increasing. These
Stakeholder Participation in Co- operative Capital 85

changes have been shaped by the predominant influence of industrializa-


tion, globalization, government decreases in income and price supports
to agriculture, and technological and demographic changes (for example
Menard and Klein 2004; Olson and Boehlje 2010; Boland 2010; Senauer
and Seltzer 2010). As a result, the agricultural sector has to survive in an
environment in which: (a) decisions must be made under uncertainty and
increasing risk; (b) developing and adopting technology and innovations
are critical to long-term financial success; and (c) responding to changes in
industry structure and the competitor landscape and industry boundaries
is essential to maintain market position (Boehlje, Roucan-Kane and Brring
2011). These forces are increasingly leading to, among other things, highly
segmented markets, competitive pressures to add more value to agricultural
products and reduce transactions costs, the need for rapid decision making,
and close supply- chain-participant relationships. Cook and Chaddad (2006)
suggest three generic strategy options as the most important responses of
producer- owned co- operatives to the aforementioned developments: prod-
uct differentiation, coordination costs minimization, and control of sup-
ply. However, the implementation of these strategies requires substantial
investments and is conditioned upon addressing internal organizational
flaws inherent in traditional co- operatives. These flaws arise due to six basic
problems: free rider, horizon, portfolio, free cash flow, control, and influ-
ence costs (Jensen 1986; Cook 1995).
The free-rider problem can be of two types; external and internal. The
first problem refers to the situation in which a non-member receives ben-
efits associated with the provision of public goods by the co- operative (for
example higher commodity prices), but avoids becoming a member and
thus eschews contributing to the costs associated with this provision, which
are incurred by members alone. A similar problem occurs when a member
stops patronizing the association temporarily when the member finds it in
her/his best interest.
The internal free-rider constraint hints at a common-property problem
that occurs in co- operatives when newly entering members are entitled
to the same payment per unit of patronage as existing members and thus
receive, in part, a return on an investment for which they did not contribute
equity. In the absence of active compensation by new to existing members,
a clear disincentive is created for the existing members to invest equity capi-
tal in the co- operative.
The investment horizon problem refers to the creation of a business
environment in which there is a disincentive for members to contribute to
growth opportunities because a members residual claim on the net income
generated by an asset is shorter than the productive life of that asset (Porter
and Scully 1987).
The portfolio problem refers to the lack of transferability, liquidity, and
appreciation mechanisms for exchange of residual claims, which prevents
86 Constantine Iliopoulos

members from adjusting their co- operative asset portfolios to match their
personal risk preferences. Those members who are forced to accept more risk
than they prefer will pressure co- operative decision makers to rearrange the
co- operatives investment portfolio, even if the reduced risk portfolio means
lower expected returns (Cook and Iliopoulos 2000).
The free cash flow problem refers to situations in which cash flow is in
excess of that required to fund all projects that have positive net present
values when discounted at the relevant cost of capital. Conflicts of inter-
est between co- operative members and managers over payout policies are
especially severe when the organization generates substantial free cash
flow. Designing incentive mechanisms that motivate managers to disgorge
the cash rather than investing it at below the cost of capital or wasting it
on organization inefficiencies poses several challenges to co- operatives.
The control problem refers to the agency costs arising from the divergence
of interests between the principals (membership and board of directors) and
the agent (manager) in agricultural co-operatives (Cook 1995). Two major cat-
egories of such costs exist: the costs of monitoring the manager and the costs
of managerial opportunism that result from the failure to monitor the man-
ager with perfect effectiveness (Hansmann 1996). This failure entails that
members either cannot monitor the manager effectively or they prefer to free
ride. The latter case implies the existence of a control-free rider problem.
The influence- costs problem refers to the influence activities that
arise whenever the decisions of the board of directors and management
create quasi-rents within the co- operative. Co- operative stakeholders,
attempting to capture these quasi-rents by influencing co- operative deci-
sions, impose costs on the co- operative and on their individual farms.
Illiquid ownership rights cause this problem. Members who wish to exit
the co- operative, but cannot, have an additional incentive to attempt to
influence the co- operatives decisions in order to capture as much of the
generated quasi-rents as possible. Producer- oriented co- operatives incur
higher influence costs than their IOF counterparts because: (a) member-
owners are the patrons of the firm and thus have easier access to managers
and the board of directors, and (b) absent the market-monitoring mecha-
nisms available to IOFs, co- operative managers are more easily influenced
toward advancing the interests of subgroups of members (Iliopoulos and
Hendrikse 2009).
In addition to the investment disincentives for members caused by these
problems, the ownership structure of traditional co- operatives results in
limited access to external sources of funds. Given that co- operative equity
capital is not permanent, and residual control rights are allocated exclu-
sively to member-patrons, outsiders, too, have little incentive to invest in
co- operatives (Cook and Iliopoulos 2000).
Scholars and practitioners alike increasingly perceive the abovemen-
tioned property-rights constraints as major inhibitors of growth activities
Stakeholder Participation in Co- operative Capital 87

for co- operatives especially in the capital-intensive, value-added down-


stream levels of the agri-food chain. Yet, in response to the competitive
forces and resulting structural changes in the food system described
above, agricultural co- operatives in Europe, the United States, and
Oceania increasingly pursue offensive value-added strategies that require
substantial capital investment. Attracting and efficiently managing suf-
ficient amounts of risk capital have become prerequisites for implement-
ing growth-related strategies and remaining competitive. Consequently,
traditional agricultural co- operatives have become more conscious of the
need to address their financial problems related to both the acquisition
and sustainability of their equity and debt- capital structure (Cook and
Chaddad 2006). Depending on the institutional environment facing a
co- operative (including both formal and informal institutions), and the
inter- co- operative considerations, agricultural co- operatives have adopted
various innovative ownership structures in order to address the aforemen-
tioned problems and attract risk capital.

Recent development in capitalizing agricultural co-operatives

Chaddad and Cook (2004) identify, and Cook and Chaddad (2004) fur-
ther expand, a typology of discrete institutional arrangements (that is,
co- operative models) based upon a broad definition of ownership rights.
These authors argue that co- operative models can be distinguished by how
ownership rights are defined and assigned to economic agents tied contrac-
tually to the co- operative (members, patrons, and investors). Given that this
typology refers exclusively to alternative allocations of ownership rights
whose target is to attract risk capital from members and/or nonmembers, it
can also be viewed as a typology of innovative capitalization methods.
When ownership rights are restricted to member-patrons, equity capital is
provided exclusively by members. In addition to the traditional co- operative,
three more types of co- operatives belong to this category: proportional
investment, member-investor, and new generation. In proportional invest-
ment co- operatives, ownership rights are restricted to members, are non-
transferable and non-appreciable, and are redeemable, but members are
expected to invest in proportion to patronage. Cook and Chaddad (2004)
argue that as membership heterogeneity increases, proportional investment
co- operatives tend to operate more like traditional co- operatives and, after
realizing this, they adopt capital management policies to ensure propor-
tionality of internally generated capital such as separate capital pools and
base capital plans.
Member-investor co- operatives distribute returns to members in propor-
tion to shareholdings in addition to patronage. Usually, this is achieved by
distributing dividends in proportion to shares and allowing appreciation of
co- operative share value.
88 Constantine Iliopoulos

In new generation co- operatives, ownership rights are in the form of trad-
able, appreciable and nonredeemable delivery rights restricted to current
member patrons. Further, member patrons are required to purchase delivery
rights in proportion to their expected patronage so that usage and capital
investment are proportionally aligned.
All four types of co- operatives with ownership rights restricted to
member patrons have developed vertical investment strategies (Cook
and Chaddad 2004). For example, many traditional co- operatives have
invested in limited liability companies, joint ventures, or other forms
of strategic alliances. Some traditional co- operatives also have made, or
are attempting, a transition to a new generation co- operative ownership
structure. In the case of new generation co- operatives, another variation
of the basic model is called new generation co- operative collaboration
where a traditional, proportional, or member investment co- operative has
an equity interest in the new generation co- operative or the new genera-
tion co- operative has an equity interest in another co- operative (Cook
and Chaddad 2004).
Chaddad and Cook (2004) also identify three forms of co- operatives in
which ownership rights are not restricted to member patrons and thus non-
members also capitalize the co- operative. In capital-seeking companies,
investors acquire ownership rights in a separate legal entity wholly or partly
owned by the co- operative. While similar to the vertical investment strate-
gies of the previously discussed set of co- operative models, the two differ
by the degree of control conceded and the importance of permanent capital
contributions.
Investor-share co- operatives issue to different owner groups more than one
class of shares, such as nonvoting fixed returns preferred stock and nonvot-
ing publicly tradable common stock. Member patrons, however, maintain
their traditional ownership rights linked to patronage of the co- operative.
Lastly, co- operatives may convert to an investor- oriented firm (IOF). In
most cases, members lose control of the company as both the structure and
the objective of the business are fundamentally altered. Empirical studies
have reported very few such conversions in the United States and Oceania
(for example Schrader 1989). Similar is the situation in Finland, where the
adoption of the PLC structure may have shielded agricultural co- operatives
from the threat of hostile takeovers by IOFs. In the United States, some
co- operatives have converted into farmer- owned limited liability compa-
nies. Rationales stated for this type of conversion include the optimization
of collective decision-making costs, increased access to nonmember capital,
and eligibility for tax breaks (Chaddad and Cook 2007; Fulton and Hueth
2009; Lamprinakis and Fulton 2011; Lind 2011).
Along similar lines, van Bekkum (2009) identifies five generic capi-
talization models. The collective capital model refers to capitalization
through earnings that are retained by the co- operative in order to form
Stakeholder Participation in Co- operative Capital 89

collectively owned reserves while no individual members holdings are


issued.
In the proportional capital model, the co- operatives assets are wholly
or partially owned by members on an individual basis, in proportion to
patronage. Co- operatives adopting this model can use one or more of the
following equity and debt instruments:

1. fair value tradable and/or redeemable shares;


2. appreciable, dividend-bearing, redeemable shares;
3. bonus shares; nominal, dividend-bearing, redeemable shares; nominal,
limited interest, redeemable shares;
4. nominal, zero interest, redeemable shares (patronage rights);
5. member subordinated debt accounts;
6. member liability; and
7. member debt accounts.

The de-linked capital model refers to a co- operative whose members invest on
a voluntary basis. Co- operatives adopting this model can use one or more of
the following equity and debt instruments: subsidiary joint ventures; inter-
nal freely tradable investor shares; capped, tradable member-investor shares;
internally tradable, perpetual, subordinated bonds; externally tradable, sub-
ordinated bonds; privately placed subordinated bonds; internally tradable
subordinated bonds; internally or externally tradable bonds.
Another model in van Bekkums classification is the external capi-
tal model, in which nonmembers (for example employees, retired mem-
bers, industry competitors, institutional investors, traders on the stock
exchange, private equity funds) own a minority stake in the co- operative.
Co- operatives adopting this model can use one or more of the following
equity and debt instruments: corporate-level joint ventures; minority list-
ing of ordinary shares; private- equity minority interest; external minor-
ity shareholder; minority-listed B class shares; minority-listed preferred
shares/perpetual subordinated bonds; minority of redeemable preferred
shares; publicly-listed subsidiaries; mezzanine capital. Finally, the conver-
sion/exit model refers to co- operatives with majority external ownership,
and co- operatives converted into, or taken over by, IOFs.
Table 5.1 summarizes the aforementioned ownership and capitalization
models, and provides examples of co- operatives that have already adopted
each model.

Discussion

The ownership models and corresponding capitalization methods adopted


by agricultural co- operatives worldwide can be usefully clustered into two
distinct groups. The first is comprised of co- operative ownership structures
Table 5.1 Ownership and capitalization models adopted by agricultural co- operatives

Ownership Capitalization Investors


model Ownership rights attributes Variations methods targeted Selected examples*

Traditional Restricted to member-patrons; residual Traditional Co-operative Collective Member- The majority of local
Co-operative claimant rights are nontransferable, Vertical Investment Capital patrons agricultural co-operatives
nonappreciable, and redeemable; user Traditional Co-operative Proportional in Europe, the US, and
benefits are distributed to members in Transitioning to New Capital Oceania
proportion to patronage but investment Generation Co-operative
may not be proportional
to patronage
Proportional Restricted to member-patrons; Proportional Investment Proportional Member- Riceland; Dairy Farmers of
Investment nontransferable, nonappreciable, and Co-operative with Capital patrons America; Land O Lakes
Co-operative redeemable, but members invest in Vertical Investment dairy division (USA);
proportion to patronage Lantmnnen (SE); Arla
Foods (DK/SE/DE); Murray
Goulburn (AU)
Member-Investor Restricted to member-patrons; Member-Investor Proportional Member- FrieslandCampina (NL);
Co-operative nontransferable, appreciable, and Co-operative with Capital patrons Fonterra; LIC; Satara (NZ);
redeemable; members invest in Vertical Investment De-Linked Capital UFA; Agropur (CA); Walgett
proportion to patronage; returns Special One Co-operative;
distributed in proportion to Tatura Milk Industries
shareholdings in addition to Limited (AU)
patronage
New Ownership rights in the form of tradable, New Generation Proportional Member- North American Bison;
Generation appreciable and nonredeemable delivery Co-operative with Capital patrons American Crystal; Northeast
Co-operative rights restricted to current member- Vertical Investment Missouri Soybean Processors
patrons. Delivery rights New Generation (USA)
issued in proportion to expected Co-operatives
patronage Collaboration
Co-operative Nonmember investors acquire n/a External Primarily Dairy Farmers of America;
with ownership rights in a separate legal Capital nonmember Diamond Growers; Gold
Capital-Seeking entity wholly or partly owned by the investors Kist; Agrilink (USA);
Entities co-operative but also CrditAgricole (FR);
members Granarolo (IT); Sodiaal (FR);
Coprob (IT)
Investor-Share In addition to traditional ownership rights n/a External Capital Primarily DFA; CoBank; Cenex Harvest
Co-operative allocated to members, the co-operative nonmember States; Pro-Fac/Birdseye
issues additional classes investors Foods (USA); Australian
of shares to different potential owner but also Agricultural Co.; AWB
groups members Ltd (AU); Metsliitto; LSO
Co-operative (FI); Atria (FI)
Investor- Ownership rights are allocated to both n/a Conversion & Nonmembers American Rice; Capitol Milk
Oriented Firm members and nonmembers on the basis Exits Producers Co-operative;
of investment, not patronage Calavo Growers; Dakota
Growers Pasta; South
Dakota Soybean Processors
(USA); Saskatchewan Wheat
Pool (CA); Donegal (IR)

Source: Chaddadand Cook (2004); Van Bekkum (2009); authors personal experience.
92 Constantine Iliopoulos

in which only farmer-patrons own residual control and claimant rights: tra-
ditional, proportional investment, member-investor, and new generation
co- operatives. In this way, member control of the co- operative is guaran-
teed as long as the organization conducts its business successfully. The other
group includes co- operatives with capital-seeking entities, investor-share
co- operatives, and various forms of demutualization. Figure 5.1 arranges
these capitalization/ownership models so that member control diminishes
as investor interest increasingly replaces patron interest moving from left
to right.
Figure 5.1 implies two types of tradeoffs that members and leaders have to
make in various critical moments in their co- operatives lifecycle. The first
tradeoff is between accumulating additional growth capital and maintain-
ing control in the hands of member-patrons. Up until the new generation
co- operative model in Figure 5.1, capital comes exclusively from members
who, consequently, control the co- operative. The next capitalization model,
though, represents a key turning point as outside investors are invited to
contribute capital and thus acquire part of residual control rights. If the law
or the co- operatives bylaws explicitly restrict this contribution to a minor-
ity stake, then farmer-members still maintain control of the entity formed
to seek outside capital.
The other implied important tradeoff is between maintaining member
control and accommodating a predominant investor mentality among the

Member-patron control

Co-opera-
Proportional Member New tives with Investor-
Traditional
investment investor generation capital- share Demutualization
co-operative
co-operative co-operative co-operative seeking co-operatives
entities

Investor mentality

Figure 5.1 Co-operative capitalization models, member control and investor mentality
Stakeholder Participation in Co- operative Capital 93

co- operatives membership. In other words, as farmer-members increasingly


feel and think more like investors and less like patrons of the co- operative
firm, they may be less reluctant to share control of the firm with outside
investors in order to finance future growth. The investment preferences of
members are linked to their farm operations and thus are affected by the
characteristics and objectives of members farms. The diachronic increase in
heterogeneity of members interests due to varying farm sizes and diversifi-
cation strategies may lead to conflicts over the growth strategies adopted by
the co- operative (Cook and Burress 2009).
Whether a co- operative decides to jeopardize member control in order
to finance growth depends on a number of factors. For example, the struc-
ture and performance of an industry crucially influence this decision.
Co- operatives in industries characterized by capital-intensity, a few large
competitors, significant barriers to exit, and predominance of value-added
products over commodities, are expected to invite outside investors more
often than would co- operatives in industries with the opposite character-
istics. The assets available to members for investing in their co- operative
as well as their risk preferences also influence the capitalization method
adopted. The latter two factors may become more important as heterogene-
ity of members interests/preferences increases. The quality of co- operative
leadership is yet another determining factor of whether control of the
co- operative stays in the hands of farmer-patrons. The chapter by Cook in
this volume addresses the issue of member control as manifested in the gov-
ernance practices adopted by a co-operative.
Considering the continuum of capitalization models in which member
control diminishes as we move from left to right in Figure 5.1, then where
should a co- operative stop? Is demutualization inevitable? Member prefer-
ences will determine the answer to both of these questions. If members feel
more like investors, then adopting an IOF-like structure or even converting
into an IOF might not create future problems for them. If, however, members
view themselves primarily as farmer-patrons rather than investors, adopting
ownership structures that will eventually result in majority control of the
business being passed on to outside investors might be a harbinger for worst
things to come.
In line with current thinking, the continuum of capitalization models
also suggests that, in an industrialized food system, co- operatives might
be a transitional form of business organization (Cook and Chaddad 2004).
However, this observation does not take into account two potentially
important parameters. Farming is still predominantly organized in small
to medium family farm units that favour collective marketing and procure-
ment of farm supplies by farmers through producer-owned, controlled,
and benefitted co- operatives (Hansmann 1996; Valentinov 2007). Further,
the adverse effects of the current economic crisis have, in many countries,
resulted in the resurgence of the co- operative business form.
94 Constantine Iliopoulos

Another aspect of co- operatives evolution in recent decades is govern-


ance. The reported significant variation in capitalization methods during
the last 22 or so has not been matched by similar developments in govern-
ance models (Chaddad and Iliopoulos 2013; see also the chapter by Cook).
While research has not yet addressed this issue, two factors seem to explain
this phenomenon: institutional constraints and the homogenization of
members interests achieved through the reallocation of residual claim-
ant rights imposed by the various innovative ownership models. The latter
implies that capitalization models are never considered in isolation from
governance decisions.

Conclusions and future research

The need to acquire additional growth capital for agricultural co- operatives
is dictated by pressures from both the external environment and from
members. As farmer-members view their relationship with the co- operative
as an investorinvestment relationship, while their patron role becomes
less important, these farmers may be willing to invite non-patron stake-
holders to inject growth capital into the co- operative or even to convert
their co- operative into an IOF. In case the majority of members share this
predominantly investor mentality, converting the co- operative into an IOF
may represent a rational development. Yet, this decision might impose sig-
nificant, unforeseen negative externalities on local, non-patron stakeholders
of the co- operative. As the firms objective changes to profit maximization,
the long-term benefits accruing to the local community might be jeopard-
ized, particularly in case the former co- operative decides to relocate its plant
and offices.
In light of the aforementioned conversions, discussions have emerged on
whether the co- operative represents a transitional business form destined
to vanish. While this issue remains largely unresolved, recent research has
shown that the dominance of co- operatives in agriculture is linked to the
structure and organization of farms. As long as agriculture is organized in
small to medium family farms, the co- operative business model seems to
be viable.
The institutional environment in which a co- operative operates is a crucial
determinant of the capitalization options available to the co- operative. The
more flexible are the laws and regulations, the more variance in methods of
capitalization should be expected. Demand for such flexibility during the
last two decades has resulted in institutional reforms in several countries.
For example, since 2000, several U.S. states have passed laws allowing both
member and non-member ownership rights in co- operatives. Similar devel-
opments have been reported in France and other European countries.
This chapter has delved into the fascinating world of co- operative finance
in order to highlight recent developments in the methods of financing
Stakeholder Participation in Co- operative Capital 95

growth of agricultural co- operatives by both member-patrons and non-


member stakeholders. Given the scope of the chapter, several important
issues remain open to future scholarly inquiry. Future research should shed
light on the consequences of conversions for former farmer-members, their
local communities, and national economies. As the number of these con-
versions and exits has increased in recent years, data for in- depth empirical
studies may be easier to find.
Another topic that deserves the attention of researchers involves the links
between ownership, capitalization, and governance models adopted by a
co- operative. In other words, how does a particular allocation of residual
claimant rights influence the allocation of residual control rights? Or,
how does a particular combination of residual claimant and control rights
allocated to the various co- operative stakeholders enhance or constrain a
co- operatives ability to experiment with innovative methods of capitaliza-
tion? Addressing these and related questions will significantly inform the
theory and practice of the co- operative firm.

References
Boehlje, M., Roucan-Kane, M. and Brring, S. (2011) Future Agribusiness Challenges:
Strategic Uncertainty, Innovation and Structural Change, International Food and
Agribusiness Management Review, 14(5): 5382.
Boland, M.A. (2010) Increasing Coordination in the Plant and Plant Product
Processing and Handling Sector, Choices, 25(4): pp. unavailable.
Chaddad, F.R. and Iliopoulos, C. (2013, forthcoming) Control Rights, Governance
and the Costs of Ownership in Agricultural Co- operatives, Agribusiness: An
International Journal.
Chaddad, F.R. and Cook, M.L. (2007) Conversions and Other Forms of Exit in
U.S. Agricultural Cooperatives, in: K. Karantininis and J. Nilsson (eds) Vertical
Markets and Cooperative Hierarchies: The Role of Cooperatives in the Agri-Food Industry.
Dordrecht, The Netherlands: Springer, pp. 6172.
Chaddad, F.R. and Iliopoulos, C. (2013) Control Rights, Governance and the Costs
of Ownership in Agricultural Cooperatives, Agribusiness: An International Journal,
29(1): 322.
Chaddad, F.R. and Cook, M.L. (2004) Understanding New Cooperative Models: An
Ownership- Control Rights Typology, Review of Agricultural Economics, 26(3): 348
360.
Cobia, D.W. and Brewer, T.A. (1989) Equity and Debt, in: D.W. Cobia (ed.) Cooperatives
in Agriculture. Englewood Cliffs, NJ: Prentice Hall, pp. 243266.
Cobia, D.W., Royer, J.S. and Ingalsbe, G. (1989) Equity Redemption, in: D.W. Cobia
(ed.) Cooperatives in Agriculture. Englewood Cliffs, NJ: Prentice Hall, pp. 267285.
Cook, M.L. (1995) The Future of U.S. Agricultural Cooperatives: A Neo-Institutional
Approach, American Journal of Agricultural Economics, 77(5): 11531159.
Cook, M.L. and Iliopoulos, C. (1999) Beginning to Inform the Theory of the
Cooperative Firm: Emergence of the New Generation Cooperative, The Finnish
Journal of Business Economics, 4: 525535.
Cook, M.L. and Iliopoulos, C. (2000) Ill- defined Property Rights in Collective
Action: The Case of US Agricultural Cooperatives, in: C. Menard (ed.) Institutions,
96 Constantine Iliopoulos

Contracts, and Organizations: Perspectives from New Institutional Economics. London:


Edward Elgar Publishing, pp. 335348.
Cook, M.L. and Burress, M.J. (2009) A Cooperative Life Cycle Framework. University
of Missouri- Columbia, Working Paper.
Cook, M.L. and Chaddad, F.R. (2004) Redesigning Cooperative Boundaries: The
Emergence of New Models, American Journal of Agricultural Economics, 5: 1249
1253.
Cook, M.L. and Chaddad, F.R. (2006) Capital Acquisition Methods in North American
and European Cooperatives. Madison, WI: Filene Research Institute.
Fernndez- Guadao, J. (2006) Structural Changes in the Development of European
Co- operative Societies, Annals of Public and Cooperative Economics, 77(1): 107127.
Gijselinckx, C. and Develtere, P. (2008) The Co- operative Trilemma: Co- operatives
between Market, State and Civil Society. Working Papers on Social and Co-
operative Entrepreneurship, WP- SCE 0801: 25.
Hansmann, H. (1996) The Ownership of Enterprise. Harvard: The Belknap Press of
Harvard University Press.
Iliopoulos, C. (2009) Organisational Remodelling of Agricultural Co- operatives: A
Research Agenda, in: H.J. Rsner and F. Schulz-Nieswandt (eds) Beitrge der genos-
senschaftlichen Selbsthilfe zur wirtschaftlichen und sozialen Entwicklung [Contributions
of cooperative self-help to economic and social development]. Berlin: LIT Verlag: pp. 627
642.
Iliopoulos, C. and Hendrikse, G.W.J. (2009) Influence Costs in Agribusiness
Cooperatives: Evidence from Case Studies, International Studies of Management and
Organization, 39(4): 6080.
Jensen, M.C. (1986) Agency Cost of Free Cash Flow, Corporate Finance, and
Takeovers, American Economic Review, 76(2): 323329.
Menard, C. and Klein, P.G. (2004) Organizational Issues in the Agrifood Sector:
Toward a Comparative Approach, American Journal of Agricultural Economics, 86(3):
750755.
Nilsson, J. (1999) Co- operative Organisational Models as Reflections of the Business
Environments, The Finnish Journal of Business Economics, 4: 449470.
Nilsson, J. and Gunnarsson, P. (2000) The PLC Co- operatives in the Irish Dairy
Sector, in: J. Birchall (ed.) The World Co- operative Enterprise 2000. Oxford: Plunkett
Foundation, pp. 6778.
Olson, K. and Boehlje, M. (2010) Theme Overview: Fundamental Forces Affecting
Agribusiness Industries, Choices, 25(4): pp. unavailable.
Pellervo (2000) Corporate Governance and Management Control in Cooperatives, Workshop
Report. Helsinki: Confederation of Finnish Cooperatives. Available at: http://www.
pellervo.fi/cg/raportti.pdf.
Porter, P.K. and Scully, G.W. (1987) Economic Efficiency in Cooperatives, The Journal
of Law & Economics, 30(2): 489512.
Schrader, L.F. (1989) Equity Capital and Restructuring of Cooperatives as Investor-
Oriented Firms, Journal of Agricultural Cooperation, 4: 4153.
Senauer, B. and Seltzer, J. (2010) The Changing Face of Food Retailing, Choices, 25(4):
pp. unavailable.
Valentinov, V. (2007) Why are Cooperatives Important in Agriculture? An
Organizational Economics Perspective, Journal of Institutional Economics, 3(1):
5569.
Van Bekkum, O.F. (2009) Cooperative Champions or Investor Targets? The Challenges
of Internationalization and External Capital. Working Paper: The Netherlands
Stakeholder Participation in Co- operative Capital 97

Institute for Cooperative Entrepreneurship. Nyenrode, the Netherlands: Nyenrode


Business Universiteit.
Zhao, L., Develtere, P., Zhiyuan, C. and Wang, D. (2009) New Co- operatives in China:
the Emergence of an Indigenous Model of Social Enterprises. EMES Conferences
Selected Papers Series, ECSP-T0916: 29.
6
Stakeholder Participation in
Co-operative Governance in U.S.
Agricultural Co-operatives
Michael Cook

Introduction

This chapter has the following objectives: to briefly review the legal history
of agricultural co-operation in America; to describe the evolution of entities
from small community-oriented forms of collective action to their complex
organizational forms today; to succinctly define their legal status and for-
mal recognition of agricultural co-operatives; to review the different types
of agricultural co-operatives found in the United States; to review the gov-
ernance roles of the primary stakeholders in agricultural co-operatives; to
view, through multiple lenses of corporate governance literature, the types
of stakeholder governance of agricultural co-operatives in America and draw
implications for the different types of agricultural co-operatives utilizing
frameworks drawn from the corporate-governance schools of thought.

Evolution of U.S. agricultural co-operatives

From the early 1800s until the 1870s, North American farmers attempted
various collective action experiments. These attempts were characterized
by independent group efforts and informal organization there was lit-
tle coordinated leadership, and it was normally restricted to community
co-operatives, seldom successful, and a legal foundation did not develop.
Starting in 1870, a farm organization called the Grange (The National
Grange of the Order of Patrons of Husbandry) attempted to bring a for-
mal organizational structure to co-operatives, but it was not until the
Rochdale Principles were adopted in 1875 that growth was sustained.
This group became the impetus to formalize legal standing for a co-op-
erative form of agricultural organization in the United States (Rizzuto,
Suhler and Cook 1993).
However, the first co-operative-enabling laws were basically revisions of
the general corporation laws and it was not until the early 1900s that pro-
ducers began to take the lead in a movement to secure laws under which

98
Stakeholder Participation in Co-operative Governance 99

co-operatives would be most advantageously established and operated.


Co-operative leaders did not like the emphasis on capital stock and the non-
exclusivity provisions, so a new form of non-stock co-operative, in contrast
to the stock co-operative, was formed, with unique equity capital provisions,
elimination of market price practices and, for governance purposes, the co-
operative would become a purely exclusive membership form of organiza-
tion somewhat on the principles of a fraternal organization.
Three different sets of non stock co-operative laws emerged: the Alabama
model, the Texas model and the California model. The California model
established a departure from previous models in that: one member equals
one vote; membership is personal; and the rights of all members are equal.
The co-operative was not a company of shareholders but rather an associa-
tion of persons engaged in a like undertaking and accepting the discipline
of an association.
By 1909, the California law allowed for proportional and proxy voting,
while the other two models kept the one person, one vote provision. These
Rochdale (stock) versus Purist (non-stock) approaches created friction within
the U.S. agriculture co-operative movement, which led to the call for more
uniformity to clarify the confusion created by differences in various state
statutes, and to reconcile the gap between stock and non-stock co-operative
law. In the United States, each state is the statutory incorporation entity,
assuring the country of a minimum of 100 co-operative incorporation laws
(Nourse 1928; Bakken and Schaars 1937).
As a means of bringing about uniformity in state and federal laws, the U.S.
Department of Agriculture (USDA) drafted a bill in 1917 that was suggested
as a model for states enacting co-operative legislation. The bill included pro-
visions that allowed incorporation as either capital stock or non-stock asso-
ciations, provided for marketing agreements and suggested penalties in the
event of breach of contract. Further, the voting and membership provisions
of this document followed the pattern established in non-stock laws.
However, the draft bill developed by California attorney, Aaron Sapiro,
became the dominant model for state co-operative law between 1921 and
1925. The provisions of these laws closely resembled the tenets of the non-
stock co-operative statutes and the commodity marketing movement. Two
provisions in the Bingham Act enacted by the Kentucky legislature in 1922
(Sapiro Bill) are of special interest. One component of the membership pro-
vision stipulating that products of non-members were taken for storage
only, precluded co-operatives from doing business with non-members. It
stated that co-operatives were not organized to make a profit for the asso-
ciation or for their members, but for their members as producers (Nourse
1928: 100103). This provision reinforced the service at cost principle of
co-operative association.
At the same time that the USDA draft bill and the Sapiro Law were shap-
ing state statutes to conform to a more restrictive and pure interpretation
100 Michael Cook

of co-operation, federal legislation was enacted that actually broadened the


definition of co-operatives. In 1922, the Capper-Volstead Act was passed by
the U.S. Congress. In many ways, the provisions of the act reflected the basic
principles of the Rochdale period of co-operative law, which had dominated
prior to 1911. The primary features of the Capper-Volstead Act were:

each member had one vote, or dividends on stock would be limited to 8


per cent or less;
non-member business could not make up more than 50 per cent of a co-
operatives business;
co-operative associations were to operate for the benefit of their members;
co-operative associations with or without capital stock were legal.

An examination of the provisions of Capper-Volstead indicates that, in


several ways, it was significantly more liberal than the non-stock laws. First,
by permitting co-operatives to pay as large a dividend on stock as they
desired, as long as voting was on a one member, one vote basis, Capper-
Volstead weakened the nonprofit interpretation of co-operatives espoused
by the proponents of non-stock laws. Second, the fact that up to 50 per cent
of a co-operatives business could be conducted with non-members liberal-
ized the view of what really constitutes a co-operative. Further, the possibil-
ity of making net profits on this non-member business, and of having such
profits accrue to the benefit of members alone, placed the co-operative in
somewhat the same category as that of an investor-oriented firm (Bakken
and Schaars 1937: 281282).
By the mid-1920s, co-operative law had evolved to a point where fed-
eral and state statutes had taken somewhat different paths. State law had
become increasingly narrow in its interpretation of proper co-operative
behaviour and principles. On the other hand, federal law, as embodied
in the Capper-Volstead Act, had become more liberal in its definition and
principles of co-operation. Thus, from the perspective of hindsight, it
would seem that the development of stock/non-stock laws partially laid
the foundation for the user-driven versus investor-driven conflict in North
American co-operatives, a conflict that is still seen today. The state stock
statutes provided for a more investor-oriented mentality in co-operatives;
the state non-stock statutes eliminated stock and profits and emphasized,
instead, user benefits based on patronage. Federal law, on the other hand,
allowed either form of co-operative organization was less restrictive regard-
ing the benefit clauses, and granted antitrust immunity to both (Rizzuto
Suhler and Cook 1993).
In a sense, the conflict in co-operative legislation was due, in part, to the
fact that co-operative laws have tried to chase ideology. Variation in the
co-operative ideology, and in the emphasis placed on components of this
ideological underpinning, has resulted in conflicting legal provisions, both
Stakeholder Participation in Co-operative Governance 101

among state laws and between state and federal legislation. Consequently,
instead of a well-defined, standardized national co-operative organization
in the United States, there exist more than 100 different state co-operative
incorporation statutes, which vary in their content and requirements.
The resulting practical dilemma for co-operatives in the post-1925 period
has been threefold. First, co-operatives must incorporate under state law,
which in most cases is more restrictive than federal law. Therefore, co-op-
eratives have had difficulty taking advantage of the more liberal provisions
of federal law that would help in dealing with their capital problems and
in adapting to different market settings. Second, the unwritten guiding
principles of co-operation tend to reinforce more strongly the principles
incorporated in non-stock laws rather than those of stock laws. Third, the
variation in state laws results in a high degree of non-uniformity in co-
operative organization, and in confusion among co-operative members and
decision-makers concerning proper agriculture co-operative behaviour.

Description of co-operative basics in the United States

Under U.S. law, co-operatives are distinct businesses (compared to propri-


etorships, partnerships and other corporations) that operate under three
principles: user ownership, user control and user benefits (generally referred
to as business-at-cost). In the United States, co-operatives are one of three
primary types of corporation. The other two are investor-oriented corpora-
tions and nonprofit corporations.
An agricultural co-operative is a business controlled by voting members,
usually on a democratic (one person, one vote) basis. Nine of the 50 states
allow for limited proportional voting at the primary level and proportion-
ately at the secondary and federated level. The agricultural co-operative is
owned by its patrons. Two methods of investment are common: (a) a dis-
tribution of net income to the patron in the form of an equity investment
called a retained patronage refund, or (b) the retention of a portion of the
transaction price as an equity investment, called a per-unit capital retain.
Direct investment, the most common method in other businesses, is mini-
mal in the United States.
The financial benefits to patrons of a co-operative have both similari-
ties and differences when compared to other businesses. Products, serv-
ices and pricing are usually similar to competing businesses. However, the
net income earned from patron business is distributed differently in some
respects. The most distinguishing financial benefit is the distribution of net
income, usually the larger part, in the form of patronage refunds. In other
words, most net income is distributed to patrons or customers on the basis
of business volume, not to owners on the basis of investment. Some net
income may be retained as retained earnings in a manner similar to other
businesses. For working capital purposes, some may also be distributed to
102 Michael Cook

owners in the form of dividends on their investment. However, co-opera-


tives limit themselves to paying a maximum amount, usually 8 per cent of
patron investment. In practice, most co-operatives pay no dividends.
Public policy in the United States has generally been favourable toward
the creation and operation of co-operatives. State laws generally include
special incorporation statutes for co-operatives, both agricultural and non-
agricultural. Federal laws include the Capper-Volstead Act, which permits
group action to form agricultural marketing co-operatives without being
in violation of antitrust laws. Tax codes include provisions which permit
co-operative income, classified as patronage refunds, to be taxed only once,
either at the co-operative level or the patron level.
One of the distinctive features of the co-operative form of business is the
promotion and adherence to a set of principles. Other forms of business do
not openly claim to abide by a set of principles. Principles play a central role
in the co-operative culture and define to a great extent the nature and role
of co-operatives. In the United States, co-operative principles have evolved
over the last century and a half, beginning with the Rochdale Principles
and, currently, the 1989 USDA-developed three basic principles: user-owner,
user-control and user-benefit. (For more details on the U.S. interpretation,
see Dunn 1988; Cook 1993 and Cook 1995.)
U.S. agricultural co-operatives numbers and memberships have followed
the decline in numbers of farms and farmers that has been occurring since
1935. But as farms have become fewer and larger, so have their co-opera-
tives. A majority of farmers use co-operatives and have gradually increased
their use. By 2012, farmers were purchasing approximately 32 per cent of
their major supplies and marketing approximately 35 per cent of their com-
modities through some form of co-operative.
In terms of how they are organizationally structured, co-operatives can be
classified as first tier, second tier, or a combination. Federated co-operatives
are owned by other co-operatives, while farmers hold direct membership
in centralized co-operatives. Operationally, co-operatives organization and
internal management control is as varied as other businesses in terms of
strategic alliances, subsidiaries and joint arrangements with other co-opera-
tives or investor-owned firms (IOFs).
Co-operatives may also be classified by function (marketing, supply,
processing, bargaining and service). Marketing co-operatives account for
approximately 60 per cent of all U.S. agricultural co-operatives, 46 per cent
of the membership and 72 per cent of the business volume transacted by
agricultural co-operatives. Many U.S. agricultural marketing co-operatives
are vertically integrated, controlling more than 350 well-known brands,
including Land OLakes, Ocean Spray, Blue Diamond, Sunkist, Sun Maid and
Floridas Natural. Pure bargaining co-operatives have no physical handling,
ownership, or control over the actual commodity. Processing co-operatives
emphasize the processing of raw farm products supplied by their members.
Stakeholder Participation in Co-operative Governance 103

Supply co-operatives handle all types of farm production supplies and


equipment. Some also handle various consumer items. Agricultural serv-
ice co-operatives provide farmers with a wide variety of services, including
credit, utilities, insurance, artificial insemination, irrigation and others.

Co-operative schools of thought in the United States

Drawing from this background, we now address the stakeholder govern-


ance section of the chapter. Given the historical evolution of agricultural
co-operatives in the United States, it is not surprising that several schools
of thought have emerged that affect the governance structure and purpose
of the current co-operative organization forms. The dominant two U.S.
schools of agricultural co-operative thought are known as the Sapiro School
and the Nourse School.
The Sapiro School originated in the 1920s with Aaron Sapiro designing
and sculpting this model. It advocated a form of orderly commodity mar-
keting that was at that time unique to organizational efforts within the
United States and had several distinct features. Included among the features
of Sapiros School were association on a commodity basis; long-term legally
binding contracts with grower members; a centralized organizational struc-
ture; pooling of products according to grade; controlling a large enough
portion of the crop to be a dominant market factor; democratic control of
the co-operative by members; use of professional experts in management
and other technical positions within the co-operative; and limitation of
membership to growers (Larsen and Erdman 1962: 242268; Sapiro 1923:
8496).
Sapiros goal or objective was to organize countervailing monopoly power
for farmers through a strong single-commodity co-operative which main-
tained long-term supply and production contracts as necessary. Contracts
were designed to be a production-marketing coordinating device so that
co-operatives could provide a predictable quantity of products for sale.
This type of aggressive and top-down organizational philosophy was sub-
sequently challenged by another distinctly American school of co-operative
thought advocated by E.G. Nourse.
The Nourse School became known as the competitive yardstick school
and was organized around a more geographic and community concept.
Co-operatives were viewed, as in the Sapiro School, as being part and parcel
of the existing capitalist system and a legitimate form of business activity.
But they were viewed as serving to restrain the capitalist system and to mod-
ify excesses that were associated with it. Stated in other words, co-operatives
were viewed as being a yardstick by which co-operators could measure the
performance of the capitalist system at levels where they felt exploited, and
also the performance of the conduct of the firms in it. Co-operatives were
also viewed as correcting many evils of capitalism and performing a balance
104 Michael Cook

wheel or checkpoint function that improved the competitive performance of


the economic system itself (Nourse 1946: 8). Co-operatives were thus viewed
as being supplementary to capitalist enterprise, a view held in common with
a late 1800s German school of thought, led by Herman Schulze-Delitzsch.
The competitive yardstick school attributed to co-operatives a broader
societal function in the political economy than was ever endorsed or con-
ceived by the Sapiro School. A co-operatives major attribute, according to
Nourse and subsequent followers, was enhancing competition and perfect-
ing the capitalist system compared to a system performing without the co-
operative alternative.

Developing a taxonomy of American agricultural cooperatives

Building a co-operative taxonomy school of thought which informs discus-


sion of co-operative governance leads to the following:
Sapiro I co-operatives: bargaining co-operatives. U.S. bargaining co-operatives
address market failures through horizontal integration. Producers organize
Sapiro-inspired associations in an attempt to affect the terms of trade in
favour of members when negotiating with first handlers. The functions of
bargaining co-operatives can be described as twofold; (a) to enhance margins
and (b) to guarantee a market for members output. These types of associa-
tions are found most often in perishable commodities where temporal asset
specificity creates a situation of potential post-contractual opportunism.
Sapiro II co-operatives: marketing co-operatives. Marketing co-operatives in
North America are a form of producer vertical integration pursuing a strat-
egy of circumventing and competing with proprietary handlers. They usu-
ally can be categorized in one of two ways: single or multiple commodity.
The objectives are similar to bypass the investor-owned firms, enhance
prices and in general pursue the Sapiro goals of increasing margin and coun-
ter-balancing market power. Because of property rights and benefit distri-
bution issues, management and governance functions are considered more
complex in a multiple-commodity marketing co-operative.
Nourse I co-operatives: local associations. Local co-operatives, mainly located
in the U.S. Midwest, are economic units operating in geographical space
where achieving scale economies in commodity assembly (usually grains or
oilseeds) and input retailing might dictate the presence of a spatial monopo-
list/monopsonist. Founded to provide a missing service or to avoid monop-
oly power behaviour or to reduce risk or achieve economies of scale, they
epitomized the Nourse philosophy of co-operation that of a competitive
yardstick with the objective to keep investor-oriented firms competitive.
Until the rapid expansion of regional structures in the 1920s, local associa-
tions were the predominant type of agricultural co-operative organization
in the United States. Today, after much consolidation, local associations are
still the largest type of co-operative in number.
Stakeholder Participation in Co-operative Governance 105

Nourse II co-operatives: multi-functional regional co-operatives. Competitive


yardstick-driven regional co-operatives, owned by the Nourse I co-opera-
tives, usually perform a combination of input procurement, input man-
ufacturing service provision and/or product marketing. Many integrate
forward or backward beyond the first handler or retailing levels. They
might be organizationally structured as federated, centralized, or a com-
bination. They differ from Nourse I local co-operatives in that there is
little probability of being a spatial monopolist/monopsonist in their geo-
graphic markets. Nourse-driven regional co-operatives were originally
founded to achieve scale economies or provide missing services in contrast
to the additional margin oriented Sapiro regional commodity marketing
co-operatives.
Sapiro III co-operatives: new generation co-operatives. These vertically inte-
grated single-commodity processing and marketing co-operatives address
market-failure situations, excess supply-price depression; co-operative prop-
erty rights structural weaknesses and free rider issues. Specific solutions in
the form of asset-appreciation mechanisms, liquidity-creating delivery-right
clearinghouses, one member-one vote distributed control, base equity capi-
tal plans and membership policies controlling entrance are established in
their bylaws and operating practices. The initial organizers of these co-op-
erative associations behave in a user-driven and co-operative-driven man-
ner, but incorporate incentives drawn from an investor-driven form of legal
structure.

Stakeholders in American co-operatives

U.S. agricultural co-operatives are owned and controlled by their mem-


bers. In 2012, there were 2,310 agricultural co-operatives, with 2.2 million
members transacting a total of 170 billion U.S. dollars worth of goods and
services. The size of these co-operatives ranges in revenue from 5 million
to 37 billion U.S. dollars, with an average of 75 million U.S. dollars. There
were 1,218 marketing (Sapiro type) co-operatives, 130 agriculture service
co-operatives and 975 supply (Nourse type) co-operatives. The Sapiro type
co-operatives marketed 101 billion U.S. dollars, with grain and oilseed co-
operatives accounting for 40 per cent and dairy co-operatives accounting
for 32 per cent. Fruit, vegetable and sugar sectors were the next largest.
These co-operatives are owned and controlled by their members. U.S. agri-
cultural co-operatives are governed by a single-tier board structure, assum-
ing fiduciary and principal duties and authority. The members elect the
board of directors and vote on major policies. Members must meet certain
qualifications, which are stated in the co-operatives bylaws. Bylaws can be
changed at the annual meeting.
There are certain provisions in the bylaws that are mandated by state
incorporation law, and other provisions can be added by the membership.
106 Michael Cook

For example, state incorporation requirements often necessitate that a


member of an agricultural co-operative be an agricultural producer. These
members are usually patrons, those who transact with a co-operative by
selling raw material or buying materials and inputs. Patrons usually are
expected to contribute equity or risk capital in proportion to their patron-
age and are recipients of the surplus or residual claims in proportion to
their patronage. However, their control rights, no matter the percentage of
patronage, are usually one member-one vote, with exceptions mentioned
previously.
The relationship between ownership, control and distribution of benefits
in American co-operatives is quite complex. It is easiest to understand that
American co-operatives are user-owned in proportion to patronage, user-
benefited in proportion to patronage and user-controlled equally. As stated
previously, most second-tier co-operatives control rights are distributed to
their tier-one local co-operative owners in proportion to patronage.
The formal way members control their co-operatives is by electing a board
of directors who, acting as principals, select a general manager or chief exec-
utive officer. The manager then becomes the agent of the members of the
co-operative.

Agricultural boards of directors: descriptions

In a 2011 survey of board chairmen, Burress and colleagues (2012) present


summary statistics on the board demographics of U.S. agricultural co-
operative boards of directors. A brief summary demonstrates a relatively
clear picture of what boards of directors currently look like in the United
States. The average size of the board for Sapiro I, Sapiro II, Sapiro III,
Nourse I and Nourse II type co-operatives is 9.07 members, with a range
from a minimum of five to a maximum of 51. The mode was seven. Only
4.4 per cent of the surveyed co-operatives (460, representing approxi-
mately 80 per cent of U.S. co-operative dollar value transacted) had out-
side or independent directors and only half of those co-operatives granted
voting rights to the outside directors, meaning more than 95 per cent of
the directors in U.S. agricultural co-operatives are active farmers. The ten-
ure of the entire board was approximately ten years, with the minimum
of three years and the mode of six years. The chairmans tenure averaged
6.5 years. The average age of a board member was almost 52 years, with a
range from 35 to 68. Boards of directors averaged seven hours of director
training per year, with the range being zero to 60 hours. US agricultural
co-operative boards were found to be male-dominated, with 12 per cent
of the co-operatives having female directors, and the maximum number
of females on any one board was three (Burress, Livingston and Cook
2011).
Stakeholder Participation in Co-operative Governance 107

Discussion of recent work on stakeholder participation in


cooperative governance

Burress and colleagues (2012) found that U.S. agricultural board mem-
bers averaged 14 days of board meetings. The vast majority of co-operative
boards, 76 per cent, was involved in strategy development, and a significant
majority, 67 per cent, monitors closely the progress of approved strategic ini-
tiatives. Of the boards surveyed (461 responses), 83 per cent utilized a com-
mittee system for improving monitoring and governing. The most prevalent
committee is the executive committee, followed by the audit committee,
the finance committee, the member relations committee and the govern-
ment relations committee. The board chairs also provided information on
co-operative performance. Financial measures of return on equity capital
and return on assets were deemed important, as were self-designed assess-
ments with co-operatives competitive position in the industry, overall
profitability (meaning the co-operatives plus the farmer member), member
satisfaction (subjective view of the board chairs), ability to achieve vision
and overall performance were determined to be very important measures of
co-operative performance (Burress, Livingston and Cook 2012).
For comparisons with the United States, in the Netherlands, Bijman and
Van Dijk (2009) examine changes in stakeholder governance occurring over
the past 20 years in the 30 most prominent Dutch agricultural co-operatives.
They found that all 80 Dutch co-operatives established a legal separation
between the co-operative association and the co- operative firm to reduce
co-operative liability and to speed decision-making. Another finding from
their study was the replacement of the general assembly with a member
council. As to outside directors occupying seats on the board of directors,
more than half of the Dutch co-operatives practiced bringing in outside
expertise. Bijman and Van Dijk found an emerging phenomenon among
agricultural co-operative governance. In addition to the existing traditional
model, they identified two new co-operative governance models: the man-
agement model, where the agent assumes more decision-making authority
and the corporate model, where the traditional two-tier supervisory board
and the board of directors roles and functions are merged into one govern-
ance entity. This model is somewhat similar to the U.S. model described
above (Bijman and Van Dijk 2009).
Utilizing the hypothesis of Cornforth (2004) regarding emerging tensions
in co-operative governance, Bijman and Van Dijk conclude there has been a
shift from a purely user-dominated board to one where outside non-co-op-
erative functional expertise is accessed. They also identify a shift from con-
formance to performance, and they observe no distinct trends in whether
the stakeholder-partnering-advising model of corporate governance or the
monitoring-agency school model is emerging as the distinct dominant
108 Michael Cook

model in co-operative stakeholder governance. Van de Sangen and Bijman


(2012) describe, in greater detail, these issues for European co-operatives.
Underlying these shifts and the vagueness or subjectivity of the U.S. board
chair ranking of non-financial performance measures lurks the preference
functions of an increasingly heterogeneous membership, thus exacerbat-
ing the challenge of governing patron-owned and controlled organiza-
tions. These tensions are termed as vaguely defined property rights, which
include free riding, horizon, portfolio, collective decision-making, influ-
ence and agency cost behaviours (Cook 1995).

Observations

Studying the relationship between stakeholder governance and co-operative


performance is complicated because the co-operative organizational model
must address two very challenging conceptual elements: (a) patron-driven,
multiple objective functions, and (b) vaguely defined property rights.
The results of the reviewed research suggest governance might impact co-
operative performance. There is little empirical work on this topic, although
some evidence is provided in a forthcoming piece by Cook and Burress (2013).
They also unveil a valuable message, not to be overlooked. Co-operatives,
both in terms of governance and performance, are more complex than inves-
tor-owned firms. Therefore, co-operatives should not necessarily, nor entirely,
emulate best corporate governance practices recommended by governance
studies from investor-oriented, publicly listed corporations (Chaddad and
Iliopoulos 2012). Applying lessons from the study of corporate governance
to co-operatives should be done only with great caution.
Co-operative performance in the cited references measures financial indi-
cators as well as self-reported assessments of co-operative health. The finan-
cial measures include traditional financial-performance indicators, such
as return on assets, return on equity and an extra-value financial index
designed to recognize the opportunity cost of member capital contribu-
tions to the co-operative. The self-evaluation of perceptions of co-operative
health by co-operative board chairs provides a means to measure non-fi-
nancial aspects. Self-reported measures include perception of competitive
position in the industry; overall profitability; perceived member economic
health and, in addition to the co-operative financial performance, member
satisfaction and ability to achieve vision.
The Burress and colleagues studies reveal that co-operative success
requires boards to effectively balance financial performance and patron
satisfaction. This is supported by Iliopoulos and Hendrikse (2009). Policies
relevant to the corporate world may need to be selectively applied in the
co-operative setting. For example, corporate governance recommenda-
tions regarding smaller boards should be counterbalanced by considera-
tions of member representation. In addition, some aspects of governance
Stakeholder Participation in Co-operative Governance 109

highly relevant to co-operative performance are not well addressed by the


corporate context. Specifically, member engagement has a strong, positive
impact on co-operative performance (Cook and Burress 2013). Member
engagement in the co-operative appears to be a stronger predictor of co-
operative performance due to the dual relationship of the member as
patron and investor (Cook and Burress 2013).
One of the key findings from their survey can be summed up as: Its proc-
ess, not structure. Rather than uniformly adopting best corporate govern-
ance practices, co-operative boards must adapt policies to fit the needs of the
co-operative. Many of the variables regarding board structure considered in
corporate governance literature board size, director tenure and director
age are not the predominant predictors of success in the co-operative envi-
ronment. Board processes transparency, inclusiveness, the engagement of
the entire board and an active membership tend to have a greater impact
on co-operative performance measures than do variables related to struc-
ture (Cook and Burress 2013).
For agricultural co-operative boards considering changes to structure
and processes as a method to improve performance, results from board
chair responses suggest financial performance as well as member satisfac-
tion may be positively impacted by considering the following factors.

Establish board size to balance multiple roles


Analysis of the relationship between board size and performance suggests
co-operatives, more so than investor-owned firms, may need to balance
monitoring, networking and visioning roles as well as the representational
role unique to patron-owned firms. While smaller boards enhance financial
performance, slightly larger boards contribute to increased performance on
a range of non-financial co-operative health indicators, providing increased
member satisfaction.

Consider continued training for the full board


Board training contributes to improving co-operative performance. Results
from the Burress and colleagues analysis indicate continued training of the
entire board is the single most-significant predictor of co-operative success
measured.

Review board processes to enhance active engagement


The number of days boards spend in session does not show a significant
impact on performance. However, board chair responses reveal co-opera-
tive matters seem to be best addressed during board sessions rather than
between sessions. And directors who describe their boards as active and
engaged exhibit higher levels of financial performance as well as member
satisfaction. This indicates boards may be well served to adopt mechanisms
that enhance the productivity and efficiency of board sessions.
110 Michael Cook

Reconsider director-selection criteria


Simple metrics such as age or length of tenure are often used as director
eligibility criteria. However, the hypotheses that older board members and
longer tenures are detrimental to financial performance and co-operative
health are not supported by current studies. It may be wise to question the
relevance of tenure limits by considering whether limitations will increase
or decrease the level of engagement on the board. Rather than relying on
inadequate proxies such as age and tenure limits to determine whether
candidates will make an active contribution to the co-operative, the focus
should be director-selection processes to identify and attract candidates
with a passion for serving the co-operative.

Consider the boards role in increasing member engagement


In addition to working to improve active participation of directors, co-
operative performance may be enhanced if the board seeks out oppor-
tunities to promote member engagement. An active membership may
provide important information critical to decision-making. Active mem-
bers also complement and reinforce the board as effective monitors of
the organization. The board may want to consider ways to improve the
quality of communication with members, review voting policies and
reconsider the timing and format of member meetings to determine if
there are ways to increase member participation. Boards may also want
to consider developing new forums for members to provide feedback to
the board.

Consider granting voting rights to outside directors


The Van der SangenBijmanVan Dijk and Burress and colleagues studies
are limited in their ability to measure the impact of outside directors on co-
operative performance because the practice of utilizing outside directors is
not prevalent among U.S. agricultural co-operatives and was not measured
in the Dutch study. However, among the limited number of co-operatives
in the Burress and colleagues study with outside directors, results indicate
a positive impact on performance when outside directors are extended vot-
ing rights. Therefore, for boards considering inclusion of outside directors,
extending voting rights and actively pursuing the input of outside directors
in board discussion should also be considered to gain the full benefit of
their presence.

Find the right balance


Measuring stakeholder performance in co-operatives is complicated and
can be problematic. Traditional financial performance measures may not
fully address the patron-driven, multiple objectives of co-operative mem-
bers. Co-operative health measures utilized by co-operatives and their
Stakeholder Participation in Co-operative Governance 111

members may include financial performance compared to competitors, but


might also include service and social factors. Results suggest financial per-
formance and co-operative health are positively correlated (Nilsson 1999).
Member satisfaction is also highly correlated with financial performance.
Unbundling these performance measures becomes one of the key areas
for further research. These results suggest financial measures and non-fi-
nancial performance measures may not be trade-offs. Rather, they may be
complements.

References
Bakken, H.H. and Schaars, M.A. (1937) The Economics of Cooperative Marketing. New
York: McGraw-Hill Book Co.
Bijman, J. and Dijk, G. van (2009) Corporate Governance in Agricultural
Cooperatives: a Dutch Perspective. Paper presented at the International Workshop
Rural Co-operatives in the 21st Century, 1517 June, Rehovot, Israel.
Burress, M.J., Livingston, K. and Cook, M.L. (2011) Cooperative Boards: A Descriptive
Summary of Survey Finding Regarding Demographics, Director Development and
Member Engagement, The Cooperative Accountant, 64(3): 2031.
Burress, M.J., Livingston, K. and Cook, M.L. (2012) Board Processes, Board
Engagement and Cooperative Health: A Descriptive Summary of Survey Findings,
The Cooperative Accountant, 65(1): 1629.
Chaddad, F., and Iliopoulos, C. (2012) Ownership and Control in Agricultural
Cooperatives. Paper presented at the International Conference on Cooperative
Responses to Global Challenges, Humboldt University, Berlin, March 2123.
Cook, M.L. (1993) Cooperatives and Group Action, in: D. Padberg (ed.) Food and
Agricultural Marketing Issues for the 21st Century. Texas A&M University, FAMC 931,
pp. 154169.
Cook, M.L. (1995) The Future of US Agricultural Co-operatives: A Neo-Institutional
Approach, American Journal of Agricultural Economics, 77(5): 11531159.
Cook, M.L. and Burress, M.J. (2013) The Impact of CEO Tenure on Cooperative
Governance, Managerial and Decision Economics, forthcoming.
Cornforth, C. (2004) The Governance of Co-operatives and Mutual Association: A
Paradox Perspective, Annals of Public and Co-operative Economics, 75(1): 1124.
Dunn, J.R. (1988) Basic Cooperative Principles and Their Relationship to Selected
Practices, Journal of Agricultural Cooperation, 3: 8393.
Iliopouls, C. and Hendrikse, G.W.J (2009) Influence Costs in Agribusiness
Cooperatives: Evidence from Case Studies, International Studies of Management and
Organization, 39(4): 6080.
Larsen, G.C. and Erdman, H.E. (1962) Aaron Sapiro: Genius of Farm Co-operative
Promotion, The Mississippi Valley Historical Review: 242268, September.
Nilsson, J. (1999) Co-operative Organisational Models as Reflections of the Business
Environments, The Finnish Journal of Business Economics, 4: 449470.
Nourse, E.G. (1922) The Economic Philosophy of Cooperation, The American
Economic Review, 12: 577597.
Nourse, E.G. (1928) The Legal Status of Agricultural Cooperation. New York: Macmillan Co.
Nourse, E.G. (1946) From Dogma to Science in Cooperative Thinking, American
Cooperation, Washington, D.C.: American Institute of Cooperation, pp. 613.
112 Michael Cook

Rizzuto Suhler, D. and Cook, M.L. (1993) Origins of a Current Conflict? An


Examination of Stock-Nonstock Cooperative Law, Journal of Agricultural Cooperation,
8: 5462.
Sangen, G. van der and Bijman, J. (2012) Support for Farmers Cooperatives. Case study
on internal governance of cooperatives. Wageningen: Wageningen UR.
Sapiro, A. (1923) True Farmer Cooperation, Worlds Work, May, pp. 8496.
7
Co-operative Banks: Their
Contribution to the Stability and
Diversity of the Financial System
Giovanni Ferri and Panu Kalmi

Co- operative banks are an important part of the European and North
American financial landscape. They exist in most continental European
countries and are especially prominent in France, Italy, Austria, the
Netherlands and Finland. They are less common in the formerly socialist
countries of Eastern Europe, where the majority of banks are typically under
foreign ownership, and in the Scandinavian countries, except Finland. In
the UK they take the form of building societies and credit unions, but there
the market shares are much below continental European averages. In the
United States and in Canada they consist of credit unions and, in both
countries, they serve close to 50 per cent of the economically active popula-
tion (WOCCU 2012).
In continental Europe, co- operatives are typically organized in tightly
integrated groups, where local customers are served by local co- operative
banks, which are in turn served by their central organizations. Most often
there is a national apex, but sometimes there is also a regional middle struc-
ture (typical, especially, in France). The members of local co- operatives are
usually individual consumers and households. Sometimes, small enterprises
also can be members.
The main tenets of co- operative banks are:

1. the voting structure is one member, one vote at the local level. If
co- operative banks are organized in the form of network (as they fre-
quently are), the local level banks control member banks in the network,
so that the ultimate control in principle belongs to the members of local
co- operatives;
2. the shares of the co-operative are typically not directly tradable, and the
shares are not valued according to market but to nominal values (though
there are exceptions, especially the Italian Banche Popolari);
3. profitability is not the ultimate goal of the co- operative, but provision of
high- quality services, economic support to members and customer satis-
faction are the main goals;

113
114 Giovanni Ferri and Panu Kalmi

4. the co- operative banks are attached to their localities and they are impor-
tant lenders to local small- and medium-sized enterprises (SMEs);
5. co- operatives are run not only to cater for the current generation of mem-
bers but also to the benefit of future generations; one practical manifesta-
tion of this principle is the accumulation of indivisible reserves.

These tenets may appear incomprehensible from the perspective of maximi-


zation of profits and individual utility, and each of them has been heavily
criticized. The voting structure has been accused of leading to insurmount-
able agency problems and irresponsible managers; the non-tradability of
shares and dispersion of voting rights rule out takeovers which, again, is
said to vastly increase agency problems; the primacy of social goals over
profitability has been claimed to complicate the managerial mission and
ultimately make managers unaccountable to shareholders; the focus on
localities has been said to lead into concentration of risk; and the concern
for future generations appears just odd from the viewpoint of observers who
are accustomed to the primacy of individuals and their immediate needs
(for example see OHara 1981; Rasmusen 1988; Gorton and Schmid 1999).
In the background of this criticism is the inability and unwillingness
to view co- operatives beyond the terms of a worldview that adores short-
termism, immediate consumption and individualism. Co- operatives,
however, should be seen as more than a collection of the individuals they
currently serve; they also represent commitment to communities, localities
and future generations.
The rest of the chapter is organized as follows. First, we discuss the his-
tory of co- operative banks and examine how they have evolved into the
financial powerhouses they are today. Then, we discuss the criticisms they
have faced from scholars who favour profit-maximization. We argue that
at least some of these criticisms are based on misunderstanding of the
nature and purpose of financial co- operatives. We then explore the limits
of profit-maximization in banking. Thereafter, we discuss the benefits of
organizational diversity in banking, that is having the market featuring
organizations that have different objectives. We then explore the perform-
ance of financial co- operatives in the latest financial crisis. We conclude by
offering some thoughts on the future of co- operatives in banking services.
This chapter is based on both literature survey and on our ongoing research
projects in the field of co- operative banking.

Development of co-operative banks

Co- operative banks originated in the second half of the 19th century in an
environment where markets were not only imperfect, but largely missing.
Co- operatives did not emerge in a complete institutional vacuum. Savings
banks, financial institutions run on behalf of depositors but not by them,
Co- operative Banks 115

have been created in several countries since the early 19th century. Savings
banks differ from co- operative banks in their ownership arrangements:
savings banks are not customer- owned, but the control is held by a self-
perpetuating board and they are run to the benefit of customers, but not by
their customers.
Co- operative banks have several strands. Building societies originated
from co- operative housing savings groups in the late 18th century. The first
building societies were self-terminating. Once every member had a house,
the society was wound up. The first permanent financial institutions were
created in the 1840s. In the United States, savings and loan associations
were created for the same purpose.
The first mutual or co- operative banks were created to finance entrepre-
neurial projects. These include the Union du Credit des Bruxelles, established
in 1848, and the co- operative credit associations established by Hermann
Schultze-Delitzsch in the early 1850s. Especially the co- operatives estab-
lished by Schultze were taken as models in several countries, for instance in
Italy, where the Banche Popolari was promoted by Luigi Luzzatti. They also
influenced the agricultural credit co- operatives promoted later by Friedrich
Wilhelm Raiffeisen (Wolff 1896).
The banks established by Raiffeisen differed from the preexisting ones in
several ways. Focusing on poor farmers, they included less well- off members
of society rather than small entrepreneurs targeted by previous co- operatives.
Initially, Raiffeisen co- operatives almost completely lacked financial incen-
tives: managerial services were to be provided voluntarily out of a sense of
duty. Members did not make any equity investments, and any surplus was
reinvested into collective reserves that were used to enhance the lending
capacity of the co- operatives. All members had unlimited liability of the
debts of the co- operative. The co- operatives were small; ideally, each parish
had its own co- operative. This ensured both careful selection of members
and moral suasion in repayment. From early on, co- operatives also formed
networks in which network members supported each other and could also
transfer funds from surplus to deficit banks (Guinnane 2001).
In many ways, co- operative banking represented a radically different
conception of banking. Instead of private profit, it stressed mutual gains.
There had been charitable financial institutions since at least the time of
the Catholic Monte di Pieta in late-Renaissance Tuscany, in Spain and else-
where in Southern Europe and, later, savings banks, but the conception of
mutual self-help was novel to co- operatives. Raiffeisen, with his insistence
on improving the material and spiritual conditions of the poorer classes, had
an even more radical vision towards restructuring the financial services.
By the early 20th century, co- operatives of the Schultze or Raiffeisen type
had been established in most European countries. The main exception was
the UK, where building societies remained the dominant form of finan-
cial co- operatives. Similarly, in the United States, co- operative financial
116 Giovanni Ferri and Panu Kalmi

organizations outside housing finance did not really take off before the
1920s, when the formation of credit unions really accelerated. Even though
the founders of the credit unions did look at European co- operatives as
models, the development of financial co- operatives in the United States
was in many ways different from Europe: whereas in Europe co- operatives
were usually defined by geographical areas, in the United States they were
most commonly workplace-based. In North America the networks among
financial co- operatives became much looser than was the case in Europe.
This applies also to credit unions outside Quebec, whereas the co- operatives
belonging to the Desjardins movement (which is the oldest credit union
movement in North America) are more closely aligned with the European
model.
Co- operatives were thus well establishedby the early 1980s. However, the
deregulation and financial liberalization processes initiated around that
time generated new challenges for them. This became obvious for instance
in housing finance, where different types of organizations were allowed to
compete with each other, and co- operatives were also allowed to change
their ownership structures. Both in the United States and in the UK, many
co- operatives took the demutualization option. Together with a general
decline of the sector (and in the United States, a full-blown crisis), this led
to a significant fall of mutual ownership in the housing finance sector.
However, elsewhere in Europe the deregulation did not affect negatively
the market share of co- operative banks; it kept growing instead. Probably
the steady decline of savings banks since the mid-1980s has also contrib-
uted to the increase of co- operative banks. This stemmed partly from the
commercialization of savings banks (for example in Italy) or from banking
crises that at times disproportionately affected savings banks (for example
in Finland). In France, savings banks were transformed into co- operative
banks. The market share of co- operative banks in 2010 was around or
over one-third in countries such as France, Italy, Austria, Finland and the
Netherlands (Table 7.1). Studies on the performance of co- operative banks
from the period prior to the great financial crisis of 20072009 showed that
they were not disadvantaged and, in some respects, such as loan quality and
cost efficiency, might in fact have had an advantage compared to commer-
cial banks (for example Ayadi et al. 2010; Ferri, Kalmi and Kerola 2012).
At the start of the 2000s, co- operative banks still shared some of the fea-
tures they had in the beginning but had also significantly transformed.
The banking industry had changed, emphasizing the role of the centre;
for instance, in developing ICT systems and Internet banking, operating
the payment systems and participation in the international money mar-
kets. All of these were functions that were impossible for small local banks
to carry out by themselves. Even though the local banks still owned the
centres, in many cases the governance relations really went both ways,
the centre exerting substantial power over local banks. This was to some
Co- operative Banks 117

Table 7.1 Market shares of co- operatives in selected countries in 2010 (%)

Country Market share in deposits Market share in loans

France* 43 47
Germany 19 17
Italy 34 32
Finland** 36 35
Austria 37 33
The Netherlands 40 29
Spain 7 5

* For 2009.
** Includes POP Group.
Source: EACB (2012), with amendments.

degree advantageous because it helped to solve the corporate governance


problem at the local level. The centre was often in a much better position to
monitor the local management than were the grass-root members. However,
the problem remained that the centres themselves became rather manage-
rial and often represented disproportionately the interests of large mem-
ber banks. At the same time, there was a move towards greater integration
through joint liability of all constituent parts of the co- operative groups.
This development, in which the Dutch Rabobank was a forerunner, was also
favoured by the desire of co- operative banking groups to get better ratings
from ratings agencies and in some cases (for example Finland) was also due
to regulatory bias.
Co- operative banks have experienced a number of challenges coming
from increased outside pressures. One of the main developments during
the recent decades has been the integration of European financial markets.
Inherently embedded in certain localities, the structure of co- operative
banks has often been seen as an impediment to further financial integra-
tion. On the other hand, co- operative banks have become increasingly
integrated into the international money markets. Some co- operative banks
have also participated in globalization by setting up foreign subsidiaries.
For instance, the Austrian co- operative banks were quick to seize the oppor-
tunities in the opening up of the East European markets while the Dutch
Rabobank became involved in lending to agribusiness all over the world.
Many co- operative banks have also participated increasingly in investment-
banking activities. As we will discuss later, this expansion of activities has
not proceeded without problems.
At the same time, some co- operative banks (for example French Crdit
Coopratif, Italian credit co- operatives, the Co- operative Bank in the UK)
have deliberately remained outside these developments and have instead
branded themselves as part of the emerging ethical banking movement.
The ethical banking label denotes banks that have broader goals than just
118 Giovanni Ferri and Panu Kalmi

profitability. They are involved for instance in financial inclusion, funding


third-sector organizations or environmental investment. The ethical bank-
ing movement does not consist entirely of co- operatives around one third
of the members of their European Federation of Ethical and Alternative
Banks (FEBEA) are co- operatives, another third being savings banks and
the remaining third joint-stock companies. However, co- operatives play an
increasingly important role in that industry. The connection of the social
goals of ethical banking with Raiffeisens social vision is quite evident. It
should be noted that ethical banks, even when co- operatives, differ from
traditional co- operatives in that their members and beneficiaries are not
necessarily the same group: they are closer to solidarity-based organiza-
tions rather than traditional mutual self-help organizations. In this, they
have commonalities with the new social co- operatives (Defourny and
Nyssens 2012).

Criticisms of co-operative banks

There are many misconceptions about co- operative banks: (a) that they are
inefficient compared to shareholder banks; (b) that they are unsophisti-
cated; (c) that they are an anachronism from an earlier period when finan-
cial markets were underdeveloped and, thus, their structure is no longer
suitable; (d) that they are particularly inadequate at a time of financial stress
because they are less able than other banks to raise capital quickly. In this
section, we address these claims.
Regarding the presumed inefficiency of co-operative banks, a recent paper
(Ferri, Kalmi and Kerola 2012) offers an in- depth review of the literature
and provides new evidence. After showing that the literature does not reach
unanimous conclusions on relative efficiency of co-operative banks, using
two large panel data sets of European banks over the period of 11 years during
the pre-crisis period, the authors examine the impact of ownership structure
on performance. Using profitability, loan quality and cost efficiency as meas-
ures of performance, their specific contributions vis--vis previous literature
include employing more refined ownership classifications and comparing
consolidated data accounting for group structure to bank-level uncon-
solidated data. Their results indicate that both shareholder and stakeholder
banks have distinct advantages, while in all three measures no one owner-
ship type is preferred over another. The results prove insensitive to the con-
solidated versus unconsolidated data choice, with considerable heterogeneity
existing among stakeholder banks. Furthermore, distinguishing stakeholder
banks into the four sub- categories of tightly federated co-operatives loosely
federated or independent co-operatives (the two types of co-operative banks),
private savings banks and government- owned savings banks (the two types
of savings banks) the study finds performance to be significantly better
for co-operative versus savings banks and, within the co-operative banks,
Co- operative Banks 119

the tightly federated co-operative banks often outperform the loosely fed-
erated/independent co-operative banks. More generally, it should be noted
that the co-operative banks are often judged poor performers only on the
basis of having a lower return on assets or on equity. It should be borne in
mind, however, that co-operative banks do not have, by construction, profit
maximization as their goal, although making some profit is essential also
to co-operative banks in order to keep their business stable and growing.
Exactly for this reason Ferri, Kalmi and Kerola (2012) extend the perform-
ance comparison to loan losses and cost efficiency.
The claim that co-operative banks are unsophisticated with respect to com-
mercial banks is probably true. Indeed, their lack of sophistication by and
large descends from the fact that the co-operatives are banks with a focus
on retail and relational banking business, where financial innovation is less
practiced and less needed. In addition, after having seen that the degree of
sophistication of the banking business was more often a problem than a
support for the individual banks during the recent crisis, one may judge that
abiding by the traditional retail/relational banking business model is rather
a boon for banking stability (Ayadi, Arbak and de Groen 2012).
In turn, also the accusations that co-operative banks are an anachronism
from an earlier period when financial markets were underdeveloped, and
their structure is no longer suitable, call for renewed scrutiny. With hind-
sight, after the 20072009 crisis we can say that allowing banks to be too
closely interconnected to financial markets caused a great part of the prob-
lem. Indeed, that was the case for one of the most profound changes in bank-
ing in recent history, namely the move from the traditional originate-to-hold
(OTH; grant the loan and keep it in your balance sheet till maturity) business
model to the new originate-to-distribute (OTD; grant the loan and sell it via
securitization) business model. While, earlier on, this move was seen as a
presumed evolution, it was, in fact, a degeneration of the banking business
model building excessive leverage, irresponsible lending and financial fragil-
ity. At the end, the fact that co-operative banks were weakly linked to the
financial markets proved to be a great advantage, preventing distress for indi-
vidual co-operative banks or even for those national banking systems where
the co-operatives played a more significant role (Leogrande 2012).
The final claim we will address in this chapter is that co-operative banks are
particularly inadequate at a time of financial stress because they are less able
than other banks to raise capital quickly. As exemplified in her discussion
about the ways to reform the co-operative banking sector in Italy, Gutirrez
(2008) argues that the governance framework of co-operative banks may
hamper raising capital, particularly at a time of distress, complicating the
bank resolution process especially for large banks and may not provide
adequate incentives to control banks management. Thus, she suggests that
reforms should preserve the positive characteristics that make co-operative
banks a valuable addition to the financial system, while providing enough
120 Giovanni Ferri and Panu Kalmi

flexibility and incentives for banks to adopt a suitable governance model,


especially moving beyond the one-person-one-vote principle (see below).
Some more recent research papers, taking into account the lessons of the
crisis, lead to questioning whether listed banks enjoy, in fact, an advantage
vis--vis (usually smaller-sized and unlisted) co-operative banks in a time of
financial turmoil. For instance, Berger and Bouwman (2012) find that higher
pre-event capitalization helps small banks to increase their probability of
survival at all times (during banking crises, market crises, and normal times),
whereas it enhances the probability of survival of medium and large banks
primarily during banking crises. This suggests that raising capital during
harsh times is de facto difficult also for large banks. An alternative possible
explanation is that large (listed) banks may be unwilling to raise capital dur-
ing banking crises when they are trading at a low market/book value ratio.
For example, Dudley (2009), the president of the Federal Reserve Bank of
New York, notes that bank executives told regulators repeatedly over the past
18 months that now is not a good time to raise capital. Then he argues:

This desire to postpone capital-raising stems in part from the fact that
bank executives often do not want to dilute existing shareholders, which
of course include themselves. ... The self-interested thing to do is avoid
the dilution and hope for a good state of the world.

The problems of relying solely on profit-maximizing providers


of financial services

During the period of deregulation, there was an excessive belief in the ben-
efits of profit maximization. It was forgotten that an industry consisting
solely of the profit-maximizing entities can be efficient only when there
are no intrinsic and insurmountable impediments to competition such as
the ones economists call market failures. Certainly, increased competitive-
ness was a goal of the whole deregulation agenda, but in banking there are
several reasons why competitiveness of markets must always remain limited
due to market failures. One of the reasons is asymmetric information; mar-
kets are necessarily imperfectly competitive when information is imperfect.
And, indeed, banking features imperfect information: the sole raison dtre
for banks existence is that they generate and hold information. Another
reason for less than perfect competition stems from the heavy regulations
of the industry, for instance establishing entry barriers, including minimum
capitalization and other prudential rules. While these regulations limiting
some market failures for example unduly exploiting the public good of
deposit insurance can be regarded as welfare enhancing, they also limit
competition, so introducing other types of market failures.
Under imperfect competition, profit maximization falls short of reaching
optimal allocation for several reasons. When banks have market power, they
Co- operative Banks 121

tend to set their prices above the (competitive) market- clearing ones, caus-
ing inefficient exclusion. For instance, this may result in reduced access to
loans for some enterprises (typically SMEs), or no access to banking services
for low income customers. Another danger is that banks try to take advan-
tage of their informational upper hand, for instance, opportunistically not
revealing all relevant information or selling consumers products that are
not in their best interests. While this kind of opportunism may take place
under any circumstances, profit-maximization encourages it, unlike not-for-
profit structures. This also creates negative externalities as it erodes trust
in the banking sector. Thirdly, profit-maximizing banks have a tendency
to take excessive risks, as the risk to shareholders is constrained by limited
liability. Under deposit insurance, this risk is really borne by the taxpay-
ers. All these examples indicate that profit-maximization imparts negative
externalities on society to a degree not found in co- operative and other
stakeholder value-focused banks.
We do not mean to understate the role of shareholder banks. They play
a crucial role in innovation of new products and operational practices. If
stakeholder banks are essential to maintain competition, so are shareholder
banks; the two are the opposite sides of a coin. Shareholder banks and stake-
holder banks also have different niches; shareholder banks are probably best
suited for situations in which significant accumulation of capital is required,
such as funding of large companies or investment banking activities; stake-
holder banks have their niche in consumer and SME banking.
The negative externalities related to profit-maximization mean that mar-
kets alone may not be able to provide optimal diversity in the financial
markets, but there might be scope for government intervention. However,
as we have seen, in dynamic market economies the existence of profit-
maximizing firms brings also very tangible benefits. For this reason, regula-
tors have been reluctant (and increasingly so during the past few decades) to
establish regulatory preferences in favour of specific ownership structures.
However, co- operative banks have certain competitive advantages that have
ensured that they remain in the market. From early on, being small and
local organizations, co- operatives have been able to limit ex-post opportun-
istic behaviour of borrowers as well as attract more trustworthy borrowers
(Guinnane 2001). Even though todays co- operative banks have evolved a
long way from their 19th- century infant stage, the abilities to limit moral
hazard and adverse selection still appear to be key sources of their competi-
tive advantage (Angelini, Di Salvo and Ferri 1998).

Co-operative banks in the financial crisis

The financial turmoil that originated as the subprime crisis in the United
States and quickly spread all over the globe through the multiple linkages of
financial institutions has obviously influenced co- operative banks as well,
122 Giovanni Ferri and Panu Kalmi

but as we will show, not to the same degree as many other types of insti-
tutions. Co- operative banks had limited exposure to the mortgage-related
structured finance instruments that featured prominently in the first stage
of the crisis, and they certainly had little role in originating them. In the
early stage of the crisis, co- operative banks in the main weathered the storm
relatively well: the strong role of retail deposits in their funding sheltered
them from the liquidity crunch, and their traditionally lower-risk appe-
tite protected them from the worst-risk exposures. In the initial stage, the
biggest losses to the co- operative banking sector came from investment-
banking activities, the worst case being Natixis (jointly owned by the
French co- operative groups Banque Populaires and Caisse dEpargne, at that
time still separate entities), and Austrian co- operative banks, especially in
the Volksbank group. A significant part of Volksbanks losses came from
its operations in Eastern Europe, and also from operations in real estate
investment. Volksbank was near bankruptcy in 2012 and appeared to be
the main casualty of the crisis in the co- operative sector. With this line of
reasoning, Leogrande (2012) consistently finds in his cross- country analysis
that the probability that a country would experience a systemic financial
crisis in 2008 was significantly decreasing with the extent of the presence
of co- operative banks, as proxied by the share of co- operative banks in the
total domestic economys banking assets.
The second stage of the crisis, involving the real economy, was expected
to affect co- operative banks more heavily, but so far the co- operative banks
are still doing relatively well. For instance, in the Fitch ratings (produced
in Figure 7.1), the tightly integrated co- operative banks started the crisis
having average ratings below other groups but, already in 2009, had the
highest average ratings, and the differences have since increased rather than
decreased as the ratings of other banks have gone down, while tightly inte-
grated co- operatives remained more or less at the same level.
In the end, tightly integrated co- operatives were also able to benefit from
their more- dispersed activities compared to, for instance, Spanish savings
banks that suffered because of their heavy concentration on mortgage
lending.

The future of co-operative banks in Europe

Diversity is essential for the functioning and stability of the financial sys-
tem, and co-operative banks are in the key position to maintain that diver-
sity. Throughout the history of banking, there have co-existed organizations
that have striven for the largest possible profit, and organizations that have
had more broadly defined goals. Even during the period when the belief in
the universality of the profit motive was the strongest the long deregula-
tion phase starting in the aftermath of the oil crises and perhaps ending as
a consequence of the financial crises of the 2000s co-operative banks were
Co- operative Banks 123

8.5 Federated co-operatives


Nonfederated co-operatives
8 Private savings
Public savings
7.5 Retail commercials

6.5

5.5

4.5
2007 2008 2009 2010 2011

Figure 7.1 The development of Fitch ratings between 20072011, across ownership
structures
Source: Calculations by the authors based on Fitch bank individual ratings measuring the ability
of banks or bank groups to survive without outside support. Factors taken into account to issue
these ratings include: financial fundamentals, branch names, risk positions, bank management
and overall operating environment. We converted Fitchs alphanumeric scale (from top to bottom:
A, A/B, B, B/C, C, C/D, D, D/E, E, F) into a numeric equivalent scale (10, 9, 8, 7, 6, 5, 4, 3, 2, 1).

able to increase their market share (Fonteyne 2007). In this chapter, we have
argued that diversity will be important in maintaining inclusive and high-
quality financial markets. Despite the fact that to us and other observers (for
example Ayadi et al. 2010; Michie 2011; Goodhart and Wagner 2012) the
benefits of diversity seem uncontroversial, there is significant institutional
bias against diversity, arising for instance from regulation and from the role
of credit-rating agencies.
In spite of the merits of co- operative banks, their mere presence is not
a guarantee that they are able to fulfil their role in the banking system.
There are powerful tendencies towards conformity in the banking sector.
Some of these tendencies are even internal to co- operatives: often, their
managers and owners may take the behaviour of celebrated shareholder
banks to represent the best practices within the financial sector, and the
special features of co- operative banks are insufficiently appreciated. Some
of these pressures are external: financial regulators treat all types of banks
as if they were the same, and the regulations are made from the point of
view of large multinational banks. Small financial co- operatives experience
124 Giovanni Ferri and Panu Kalmi

disproportionate compliance costs due to the heavy and increasing report-


ing requirements (Ferri and Pesce 2012); Basel risk weights increase lending
costs for SMEs, traditionally the main target of co- operative banks business
lending (Ferri 2012); and the proposed regulations have caused challenges to
the liquidity and capital management systems of co- operative banks when
their special features are not appropriately taken into account. Finally, the
increased role of credit ratings has prompted co- operatives to adjust their
operations so that they would be more consistent with the preferences and
the understanding of the rating agencies (for example Ory, De Serres and
Jaeger 2011).
Finally, we should mention three main challenges for co- operative banks.
As a first task, co- operative banks need to find ways, at both their network
and individual levels, to ensure they do not lose their essence. Those intrin-
sic values allowed the co- operative banks to survive and expand in the
unfriendly environment of the past. But adequate action has to be taken
to preserve those values while revitalizing them. Second, the co- operative
banks must find appropriate ways to shoulder the transition through the pro-
longed crisis. In general, co- operative banks were asked to step up support to
their clients and communities while the commercial banks were retrench-
ing. That has made the co- operative banks themselves more exposed to the
enlarged credit risks of the ongoing recession. Third, co- operative banks
should manage to raise awareness among the regulatory bodies and legis-
latures of the great perils of three main faults exemplified for example,
in Basel 3: damaging SMEs lending, the bulk of co- operative banks loans;
failing to recognize the pro-stability importance of a traditional/retail bank
business model, the typical model of co- operative banks; and disregarding
that the increasing cost of regulatory compliance may interfere with safe-
guarding diversity in banking.
Overall there seem to be a lot of challenges for co- operative banks (see
also the detailed and well- crafted book by Goglio and Alexopoulos 2012).
However, the long track record of survival and expansion of the co- operative
banking model suggests that these banks will likely be able to find their way
to keep supporting (especially) households and small businesses throughout
Europe and beyond.

References
Angelini, P., Di Salvo, R. and Ferri, G. (1998) Availability and Cost of Credit for Small
Businesses: Customer Relationships and Credit Cooperatives, Journal of Banking &
Finance, 22: 925954.
Ayadi, R., Arbak, E. and De Groen, W.P. (2012) Business Models in European Banking: A
Pre- and Post- crisis Screening. Brussels: Centre for European Policy Studies.
Ayadi, R., Llewellyn, D.T., Schmidt, R.H., Arbak, E. and De Groen, W.P. (2010)
Investigating Diversity in the Banking Sector in Europe: Key Developments, Performance
and Role of Cooperative Banks. Brussels: Centre for European Policy Studies.
Co- operative Banks 125

Berger, A.N. and Bouwman, C.H.S. (2012) How Does Capital Affect Bank Performance
During Financial Crises? Moore School of Business, University of South Carolina,
Mimeo.
Defourny, J. and Nyssens, M. (2012) Social Co- operatives: Where Social Enterprises
meet the Co- operative Tradition. Presented in: the ICA / Euricse conference,
March, Venice.
Dudley, W.C. (2009) Financial Market Turmoil: The Federal Reserve and the
Challenges Ahead. Remarks at: the Council on Foreign Relations Corporate
Conference, New York City. Available at: http://www.newyorkfed.org/newsevents/
speeches/2009/dud090306.html.
Ferri, G. and Pesce, G. (2012) Regulation and the Viability of Cooperative Banks.
Proceedings of the International Summit of Cooperatives 2012, 812 October,
Quebec City.
Ferri, G. (2012) Credit Cooperatives: Challenges and Opportunities in the New
Global Scenario, Euricseworking paper No. WP 31|12, April.
Ferri, G., Kalmi, P. and Kerola, E. (2012) Ownership Structure and Performance in
European Banks: A Reassessment. Manuscript, University of Vaasa.
Fonteyne, W. (2007) Co- operative banks in Europe Policy Issues. IMF Working
Paper No. 159/07.
Goglio, S. and Alexopoulos, Y. (eds) (2012) Financial Co- operatives and Local
Development. Abingdon: Routledge, in press.
Goodhart, C.A.E. and Wagner, W. (2012) Regulators should encourage more diversity
in the financial system. Available at: www.voxeu.org, (Accessed 12 April).
Gorton, G. and Schmid, F. (1999) Corporate Governance, Ownership Dispersion
and Efficiency: Empirical Evidence from Austrian Cooperative Banking, Journal of
Corporate Finance, 5: 119140.
Guinnane, T.W. (2001) Cooperatives as Information Machines: German Rural Credit
Cooperatives, 18831914, Journal of Economic History, 61(2): 366389.
Gutirrez, E. (2008) The Reform of Italian Co- operative Banks: Discussion of
Proposals. IMF working paper No. WP/08/74, March.
Leogrande, A. (2012) Co- operative banks vs. financial crisis: An application of the
STV vs. SHV debate. Unpublished doctoral thesis, University of Bari.
Michie, J. (2011) Promoting Corporate Diversity in the Financial Services Sector,
Policy Studies, 32(4): 309323.
OHara, M. (1981) Property Rights and the Financial Firm, Journal of Law and
Economics, 24: 317332.
Ory, J.-N., De Serres, A. and Jaeger, M. (2011) Have Cooperative Banks Lost their
Soul? Draft, University of Nancy II.
Rasmusen, E. (1988) Stock Banks and Mutual Banks, Journal of Law and Economics,
31: 395422.
WOCCU (2012) WI: World Council of Credit Unions. 2011 Statistical Report, Madison,
WI, 2011. Available at http://www.woccu.org/publications/statreport (Last accessed:
1 February 2013).
Wolff, H. (1896) Peoples Banks: A Record of Social and Economic Success. London: King
& Son.
8
Co-operatives Providing Welfare
Services: The Case of Italian
Social Co-operatives
Carlo Borzaga and Sara Depedri

Introduction

Over the past four decades, many countries have significantly transformed
government welfare policies. Starting in the 1970s, through a series of
concerted actions, governments have tried to address the increasing diffi-
culties faced in maintaining welfare systems, including decentralizing wel-
fare services (largely delegated to local authorities), limiting opportunistic
behaviours on the part of welfare recipients, and involving private actors in
providing social services (Defourny and Nyssens 2008).
These changes in public policy have been accompanied by a remarkable
growth in size, as well as in number, of private institutions that supply social
services and, more broadly, welfare services. Many new private initiatives
have emerged, and many private initiatives already operating in this space
progressively morphed from philanthropic institutions primarily financed
through donations to entrepreneurial organizations providing welfare serv-
ices. Because nonprofit organizations pursue social goals in an entrepre-
neurial way (that is, through continually supplying services to clients in
need), these organizations came to be defined as social enterprises.
Over the years, these organizations started adopting new legal forms that
were better suited to the organizations roles and characteristics. Although
the specifics of the new organizational structures vary significantly across
countries, historically the first and most widely used legal form was the
social co- operative, first developed in Italy in the late 1980s. Italian law
provided an example for many countries in Europe as well as elsewhere.1 On
the other side of the Atlantic, the development of solidarity co- operatives
in Qubec was highly inspired by the Italian law on social co- operatives,
although it also has distinctive features (see Vzina and Girard in this
volume).
An analysis of social co- operatives and their characteristics reveals that
these organizations are indeed a new type of institution that differs from tra-
ditional private firms (including conventional co- operatives) and nonprofit

126
Co- operatives Providing Welfare Services 127

organizations. Social co- operatives not only tend to combine the social aims
of traditional nonprofit organizations with the entrepreneurial characteris-
tics of corporations and co- operative firms, but also have a unique owner-
ship structure. While owners in conventional firms hold the right to control
the firm and to appropriate the firms profit, and owners in nonprofits do
not have rights to either element (Hansmann 1996), in social co- operatives
the owners (that is, the co- operatives members) have full control rights over
the firm, but not over its profits, since when the co- operatives are allowed to
distribute part of their profits, their assets are normally locked.2
Social co- operatives can thus be seen as a type of social enterprise, and
they continue to represent one of the most developed and successful models
of social enterprise. Since most emerged as bottom-up organizations, they
represent an interesting example for countries with a well- developed wel-
fare system and for countries that need to restructure their welfare system
and welfare services.
In light of these considerations, this chapter examines the case of Italian
social co- operatives in order to present the emergence and evolution of
social enterprises and to explain the possible role of co- operatives as effi-
cient and effective private actors in the welfare system. Section 1 describes
the emergence of social co- operatives in Italy; section 2 presents the main
characteristics of social co- operatives by comparing them with other
organizational forms; and section 3 summarizes the advantages and limita-
tions of social co- operatives. The data presented in this chapter come from
two main statistical sources: the social co- operative census, conducted by
the National Institute of Statistics (ISTAT), and a survey (called ICSI2007)
conducted in 2007 on a sample of 320 social co- operatives as representa-
tive of the Italian universe, investigated by administering questionnaires to
the directors or presidents of the co- operatives and asking them about the
main traits of their organizations.

The emergence and growth of social co-operatives in Italy

Italian social co- operatives find their roots in the changes the Italian wel-
fare system underwent, starting in the 1970s. In the years following the
economic downturn of the 1970s, public authorities were unable to cope
with the increasing needs of society, and families could not be expected to
pick up the slack. In addition, the existing traditional philanthropic organi-
zations (such as those that had provided social services as early as the 19th
century and were later transformed into quasi-public institutions) were not
equipped to meet the needs of Italys post-industrial society.
Consequently, new and different types of initiatives emerged. The main
innovation was the development of new, volunteer nonprofit organiza-
tions that progressively adopted entrepreneurial behaviours, provided new
social services, and organized the work integration of disadvantaged people.
128 Carlo Borzaga and Sara Depedri

However, the Italian legal system was ill equipped to accommodate these
new developments, as Italian law in those years made an explicit distinc-
tion between organizations devoted only to social aims (nonprofit organiza-
tions, such as associations and foundations) and commercial firms. Indeed,
the law did not allow associations and foundations to produce goods or
services of any kind as their main activity.
Co- operatives were in some ways an exception in the Italian legal system:
they were treated as fully entrepreneurial organizations but, at the same
time, were recognized to have a social aim. Moreover, co- operatives were
constrained in distributing profits and had a democratic governance struc-
ture. Thus, they were the legal enterprise form that most closely matched
the needs of the emerging entrepreneurial organizations devoted to pro-
viding social services. Therefore, most of these organizations decided to
adopt the co- operative form and, to distinguish themselves from traditional
co- operatives (serving mainly their members), took on the name social soli-
darity co- operatives.
Starting in the 1980s, the new co- operatives played an increasing role in
driving the growth of the entire Italian third sector. They bolstered the sup-
ply of social services by answering the needs of the youth, the elderly, the
disabled, drug addicts, and the homeless. These co- operatives also started
organizing activities to integrate disadvantaged workers into the labour
market.
Since the beginning, the emergence of the new co- operatives was supported
by local authorities that agreed to cover part of the co- operatives costs. The
process resulted in a separation of roles namely, between redistributing
resources, which remained a function of public authorities, and providing
services, which was increasingly taken over by social co- operatives.

The legal framework: the need for a new law for social co- operatives
Still, for more than ten years the development of Italys new co- operatives
was only partially supported by a specific legal framework. This new type
of co- operative was only recognized and legally instituted as a social
co- operative in 1991,3 with the approval of Law No. 381 of 1991. This law
did not simply recognize a new form of co- operative, but configured a new
type of enterprise with a distinctive purpose. According to the law, the goal
of social co- operatives is to pursue the general interest of the community
in promoting personal growth and in integrating people into society by
providing social, welfare and educational services and carrying out differ-
ent activities for the purposes of providing employment for disadvantaged
people.
The law recognizes two types of social co-operatives, according to whether
they manage social, health, or educational services (type A social co-operatives)
or whether they undertake other activities (be it agricultural, manufacturing,
or commercial) by integrating vulnerable persons into the workforce (type
Co- operatives Providing Welfare Services 129

B social co-operatives). Although type A social co-operatives have no require-


ments regarding the personnel they hire, type B social co-operatives have a
clear occupational focus on disadvantaged workers (identified according to a
specific definition provided by the law), who must be fully remunerated and
constitute at least 30 per cent of their employees.
Law 381/91 also states that volunteers may be full members of social
co- operatives, and that the ownership structure of social co- operatives may
simultaneously include several categories of members. In particular, a social
co- operative may have:

1. worker members, including practitioners and managers who are remuner-


ated;
2. user members, the recipients of the services supplied by the co- operative
or their family members;
3. volunteer members, who work in the co-operative freely, spontaneously
and personally, without receiving any form of compensation and who
may not constitute more than 50 per cent of the total workforce;
4. financing members, defined as suppliers of capital with limited rights to par-
ticipate in the decision making and governance of the organization; and
5. legal entities, since the law provides that eligible as members of social
co- operatives are public or private legal persons whose statutes provide
for the funding and development of co- operative activities.

In accordance with Law 381, type A and type B co- operatives may stipu-
late contracts with public bodies for delivering services or work-integration
activities. The law thus explicitly recognizes an affinity between the mis-
sion of social co- operatives and that of public agencies, and encourages col-
laboration between the two.
Therefore, the law came to formally recognize the key features of social
co- operatives as previously designed by their founders. First, it acknowl-
edges their social aim, which represents the pillar of social co- operatives.
The law also enables owners to modify the statute and aim of the organiza-
tion to adapt, to the emerging needs, the services it supplies and the ben-
eficiaries of this activity. Second, the law recognizes the nature of social
co- operatives as collective organizations, which closely involve the local
community and represent interests of diverse classes of stakeholders. This
enables social co- operatives to grasp the real local demand for social serv-
ices and ensures the prevalence of social aims in the entrepreneurial and
commercial dimensions. Third, the law limits the distribution of profits:
although social co- operatives are allowed to achieve profits, a predeter-
mined portion of those profits must be accumulated in locked assets. In
fact, although social co- operatives are allowed to distribute a part of their
profits, most do not distribute any, and thereby increase their corporate
assets. Finally, the law ensures the relevance of democratic participation
130 Carlo Borzaga and Sara Depedri

and control by members: social co- operatives have a well- defined member-
ship that usually involves different classes of stakeholders, and the decision
process is democratic.

The establishment of the phenomenon


The described traits of social co- operatives established or reinforced by law
have progressively strengthened the phenomenon of social co- operation
and its ability to address social needs. Social co- operatives have also facili-
tated the steady growth of the phenomenon, to the point that they are now
active all over Italy and play a prominent role in producing and deliver-
ing social services. Data from the ISTAT show how the number of social
co- operatives increased from slightly more than 2,000 before Law 381 was
introduced in 1991 to nearly 3,900 in 1996 and to 7,363 in 2005. In 2009,
the Italian Chamber of Commerce registered as many as 13,938 social
co- operatives, with more than 8,000 social co- operatives providing social
services and 5,000 social co- operatives for work integration, besides a small
number of consortia and mixed-type social co- operatives. About 20 per cent
of social co- operatives active today were created before the 1991 law on
social co- operatives, demonstrating their continuous growth.
According to the ISTAT census, in 2005 social co- operatives employed
more than 240,000 workers, while in 2009 the Chamber of Commerce regis-
tered 317,000 employees, with an average of 23 employees per co- operative.
According to the national investigation ICSI2007, most workers were female
(75 per cent), many of them part-time (45 per cent), and the percentage of
employees with a university degree was quite high (35 per cent in type A
social co- operatives). In addition to ordinary workers, social co- operatives
employ a large number of volunteers (more than 34,000 in 2005), and type
B social co- operatives employ about 30,140 disadvantaged workers, most of
whom were unemployable in ordinary firms. The ISTAT 2005 data revealed
3.3 million users, asking social co- operatives primarily to provide services
for disabled people (activities covered in total by 45 per cent of type A social
co- operatives), home-based services and residential services for elderly
people (services supplied by 37 per cent and 36 per cent of type A social
co- operatives, respectively), recreation and entertainment services (32 per
cent), preschool education (22 per cent), and healthcare services (23 per
cent). In the same year, the majority of the disadvantaged people employed
by type B social co- operatives were disabled (46.3 per cent), psychiatric
patients (15 per cent), and drug addicts (16 per cent).
In 2005, almost half of the public expenditure for social services in
medium and large Italian cities was managed by private nonprofit organiza-
tions, and approximately 80 per cent of the contracts were awarded by local
authorities to social co- operatives. Only 30 per cent of these contracts were
a result of public tenders, while 70 per cent were awarded through negoti-
ated agreements between local authorities and social co- operatives.
Co- operatives Providing Welfare Services 131

In terms of financial data, in 2009 the Chamber of Commerce registered the


total value of the production generated by Italian social co-operatives at about
9 billion euros, with 26.5 per cent of the social co-operatives with a value of
production no higher than 250,000 euros and only 15 per cent that could
be considered large enterprises (with the value of production over 1 million
euros). Most of the revenues came from supplying services to public bodies (74
per cent in type A social co-operatives and 53 per cent in type B), but private
revenues and the supply of goods and services to private firms increasingly
characterize social co-operatives, and work-integration social co-operatives, in
particular (43 per cent of their revenues, according to the ICSI2007 investiga-
tion). The total assets of the social co-operatives sector, defined as the overall
net amount that a business invests, was 7.2 billion euros in 2009, although
more than 65 per cent of social co-operatives invested less than 250,000
euros. Another important data point is supplied by the ICSI2007 investiga-
tion: The equity of social co-operatives amounted on average to 350,000 euros
per co-operative, most of it in locked assets (250,000 euros on average). If we
account for the presence of a few very large social co-operatives, which skew
the average data, we estimate the average equity at around 170,000 euros.
Given the history and size, the phenomenon of Italian social co- operatives
has drawn considerable attention, not only domestically but also interna-
tionally, and it has become a model increasingly studied and replicated by
other governments and civil organizations. The following sections analyse
some of the elements that make social co- operatives a viable and efficient
alternative to other ways of organizing the delivery of welfare services.

Behind the growth of social co-operatives: key drivers of success

Having described the emergence and growth of social co- operatives in Italy,
investigating the factors driving their success is important: How did this
type of organization take root, and why was it able to scale up and grow as
much as it did? The success of Italian social co- operatives can be tied to four
factors.

An alternative solution
The first factor was the welfare-system crisis. During the second half of the
20th century, the Italian welfare system consisted primarily of financial
transfers to families in need rather than service provision, and the few social
services available were managed by quasi-public and public agencies. When
this service provision progressively became deficient in quality and in the
ability to answer new and emerging social needs, civil society took matters
into its own hands. Due to the specific nature of the services to be provided
(including, in particular, the fact that they were targeted to customers who
could not pay), for-profit enterprises were not interested in supplying these
services and filling the gap left by the public sector. Whatever solutions
132 Carlo Borzaga and Sara Depedri

would arise, they could not be based purely on market mechanisms. This
explains why the private actors that emerged in this space were primarily
groups of volunteers, who later organized into co- operatives.

The social ground


The second factor was the fertile social environment in which social co-op-
eration took root. Italian local communities, especially in rural areas, were
characterized by a high level of social capital, in terms of trust and par-
ticipation in social and volunteer activities (Putnam 1993), and people were
already inclined towards collective solutions to social problems. These com-
munities were also characterized by the widespread presence of medium- and
small-size enterprises working together (the well-known Italian industrial
districts) and by a keen entrepreneurial spirit. Social co- operatives moved
in the same direction. They were driven by a social goal, while the intrinsic
motivations and social preferences of their members facilitated the involve-
ment of a participative and trusting community.
Indeed, the emergence of social co- operatives was an eminently bot-
tom-up phenomenon. Unlike the experiences in other countries, where
social co- operatives and social enterprises were mainly created by pub-
lic authorities, Italian social co- operatives developed, and continue to
develop, as voluntary responses to social needs promoted by groups of
citizens. According to the ICSI2007 data, this is true for 75.5 per cent
of social co- operatives created in the 1990s and for 66 per cent of social
co- operatives created after 2000, whose founders were groups of peo-
ple in need or with common aims. Only a very small percentage was
founded by the public sector, much smaller, for instance, than even the
percentage of social co- operatives whose main founders are other social
co- operatives or consortia (20 per cent).4 Due to their bottom-up nature,
social co- operatives enjoyed, and continue to enjoy, full or at least great,
autonomy in their management and decision-making processes, even if
many of the social services the co- operatives provide are contracted out
by public authorities and the co- operatives depend on public funding for
much of their financing.

The local economy


The third factor was the presence, all over Italy, of a strong co- operative
sector. The co- operative movement in Italy was particularly developed in
many sectors of the economy and in many co- operative forms (credit, agri-
culture, worker, retail, and wholesale co- operatives). Although the Italian
co- operative movement was not involved in producing social services,
once the first social co- operative emerged, the national co- operative fed-
erations5 decided (not without some resistance) to support the emerging
new initiatives by providing resources, knowledge transfer, and lobby-
ing efforts. The availability of these institutional and economic resources
Co- operatives Providing Welfare Services 133

made it easier for new social co- operatives to organize in just a few years
into a real national movement.

The supportive legal framework


The fourth factor was the development of a specific and supportive legal
framework, with the approval of Law 381/91. The approval of a specific law
(which in effect mirrored and codified the characteristics of the organi-
zations that society had already developed) made it much easier for new
groups of volunteers and social workers to found new co- operatives of the
same type. Moreover, the locked assets rule6 and the strict constraints on
demutualization imposed by the law (which states that social co- operatives
are not allowed to transform into other enterprise types, including tradi-
tional co- operatives) significantly contributed to ensuring the longevity
and resilience of these organizations.

The distinctive features of the social co-operation phenomenon


Due to the combined effect of these four factors, social co- operatives
emerged and succeeded as an entirely new form of enterprise, which differs
from all other public and private organizations. Social co- operatives differ
from public enterprises because co- operatives are owned and managed as
private entities according to an entrepreneurial logic. They differ from con-
ventional for-profit enterprises because co- operatives are characterized by
goals, constraints, and a governance system that exclude maximizing own-
ers monetary advantages. Social co- operatives also differ from traditional
co- operatives, which are enterprises owned by non-investors and princi-
pally promote their members interests, although social co- operatives are
similar to co- operative firms, in terms of asset ownership and democratic
governance structures.
Moreover, Italian social co- operatives developed a complementary role
compared to other organizational types and became an additional actor in
the economic and welfare system, rather than just being substitutes for the
public and for-profit provision: as the ICSI2007 investigation shows, only
15.7 per cent of Italian social co- operatives operate in areas in which public
agencies provide the same services. Since there is no guarantee that in the
absence of social co- operatives the local authorities would have supplied
such services, social co- operatives actually increase the supply of services
and generate new employment opportunities.
Social co- operatives also contribute to the continuous innovation of the
welfare system by applying entrepreneurial approaches to providing social
services. Social co- operatives have introduced new services to satisfy new
needs and innovated the production process, replacing bureaucratic and
hierarchical forms with participatory ones that involve volunteers, workers,
and users in governing the organization: the so- called multi-stakeholder
134 Carlo Borzaga and Sara Depedri

model was used for the first time to describe the governance experimented
by Italian social co- operatives. Moreover, they have challenged the conven-
tional conception of enterprise from profit-maximizing mechanism to col-
lective problem solver. Finally, social co- operatives have changed the idea of
social services from activities with mainly in kind redistributive purposes
to activities based on entrepreneurial principles and oriented to satisfying
specific and sometimes personalized needs.
A clear example of this innovative approach is represented by the way
in which social co-operatives have designed work-integration activities.
Differently from similar institutions in other countries, Italian work-integration
social co-operatives distinguish themselves by their entrepreneurial attitude
and management. They are clearly separated from social co-operatives pro-
viding social services, and are aimed at the full-work integration of disadvan-
taged workers, since the work-integration co-operatives pay workers regular
wages, use individual on-the-job training programs, and provide these work-
ers with the skills required to enter the open labour market.

Advantages and limitations of the social co-operative form

The characteristics described in the previous sections provide social


co- operatives competitive advantages that depend primarily on the organi-
zations ability to balance its entrepreneurial and social dimensions.

Beyond the economic relationship


First, more than other enterprises, social co- operatives rely on social rela-
tionships rather than resorting exclusively to market mechanisms. Although
for-profit firms typically relate to their stakeholders mainly through mar-
ket transactions (which are based on price exchanges), social co- operatives
rely more on personal transactions with all of their stakeholders, and trust,
relationships, knowledge, information, and involvement are the keywords
describing these transactions. Moreover, social co- operatives are by defi-
nition more closely embedded in the local community. For example, the
ICSI2007 data show that more than 70 per cent of social co- operatives col-
laborate with local institutions, citizens, and representatives of the com-
munity to coordinate activities, in addition to sharing the same needs and
values; 80 per cent also work with the local public authorities to plan new
services and to single out new policies. These traits are particularly influ-
ential in at least three ways: (a) in achieving the social goal; (b) in making
the organization efficient; and (c) in producing positive externalities that
contribute to community well-being.

The collective nature


Second, social goals are achieved by the collective nature and the multi-
stakeholder governance of social co-operatives. According to the ICSI2007
Co- operatives Providing Welfare Services 135

survey, although the law does not compel social co-operatives to have multi-
ple stakeholders, 69.7 per cent involve diverse classes of stakeholders, and one
third of social co-operatives include workers, volunteers, and other classes of
stakeholders on the organizations board of directors. Involving heterogene-
ous local stakeholders has various advantages. First, it facilitates the individu-
ation of local needs and the aggregation of the demand. Second, inclusive and
multi-stakeholder governance coordinates the various participants in solving
social issues, thanks to the proactive interaction of members motivations with
public benefit aims. Finally, multi-stakeholder membership supports transpar-
ency, involvement, and trustworthiness among members and the community,
increasing the organizations ability to collect different resources through
trust channels. The ICSI2007 investigation supports most of these statements,
since multi-stakeholder governance secures: (a) a higher level of autonomy in
social co-operatives (declared by 64 per cent versus 43.3 per cent of single-
stakeholders); (b) a higher involvement of volunteers (86.7 per cent have vol-
unteers, versus 27.1 per cent in single-stakeholders); (c) a higher propensity to
accumulate profits in locked assets (98 per cent accumulate the total amount
of profits in locked assets versus 85 per cent of single-stakeholders).

A distributive function
As a third advantage, social co- operatives implement additional alloca-
tive patterns relative to the classical patterns followed by conventional
enterprises and governments. Indeed, social co- operatives frequently pro-
vide services free or at below cost to people in need. By doing so, social
co- operatives ensure access to services and the satisfaction of basic needs for
people unable to pay the full price of the service, or to pay at all. These people
might not be recognized as in need by public welfare authorities and would
likely be rationed by conventional private-sector providers. Thus, social
co- operatives modify the income distribution and autonomously alleviate
the economic problems of the poor and the disadvantaged. However, to do
so, social co- operatives need to practice price discrimination and/or collect
resources without charge. As the data demonstrate, the distributive function
(which in the empirical analysis of Italian social co- operatives is regularly
covered by 38 per cent of the social co- operatives sampled in the ICSI2007
survey) can be ensured only by the possibility for social co- operatives to tap
into a mix of assets that includes free or low- cost resources, including dona-
tions, volunteers, and intrinsically motivated employees. This need explains
why multi-stakeholder social co- operatives are more likely to perform a dis-
tributive function than single-stakeholder social co- operatives (42 per cent
versus 18 per cent) (Bacchiega and Borzaga 2001).

Supporting other-regarding behaviours


As a fourth advantage, social co- operatives reduce inefficiencies and trans-
action costs with internal agents, from users to donors, and from volunteers
136 Carlo Borzaga and Sara Depedri

to workers (Depedri 2010). Not only are social co- operatives less bureau-
cratic and more flexible than public agencies, but social co- operatives also
develop a degree of trust that lowers the cost of collecting and transmit-
ting information. Moreover, social co- operatives support other-regarding
and co- operative behaviours by members (Valentinov 20072008), as well
as sharing of rules and sanctions, which are fundamental ingredients in the
ability to manage common resources in a self- organized way (Ostrom 1994).
The self-regarding preferences and opportunistic behaviours that usually
hamper organizational performance are reduced in social co- operatives
through self-managed organizational processes (Spear 2002). Common
goals are also particularly important in exchanges with clients. The direct
involvement of users improves trust in social co- operatives, with advan-
tages for the organization, which receives more complete information on
users preferences, and the users themselves, who will be more satisfied by
the services. Clients involvement does not always require users to be mem-
bers of the organization; as the ICSI2007 shows, only 8 per cent of social
co- operatives have users or their family as members, but nonetheless fre-
quently involve users in the organizations strategic decisions by promoting
formal and informal meetings, by inviting users to attend board meetings,
and by organizing discussion tables with all the social co- operatives stake-
holders and relevant reference actors.
Similar trust and relational dynamics also characterize exchanges with
donors and volunteers: The limitation of self-interested behaviours in social
co- operatives serves as a guarantee for people willing to donate time or
resources. This allows social co- operatives to gather additional resources
supporting services and provides an advantage in terms of inputs relative
to other types of organizations. Although the presence of donations is
not common in the Italian case (only 3 per cent of revenues comes from
donors according to the ICSI2007 data), almost 60 per cent of Italian social
co- operatives engage volunteers. Most importantly, the co- operative behav-
iours of all actors involved is recursive, in the sense that it emerges as a rule
of behaviour, is imitated by other actors in the organization, and allows
social norms to be transmitted to the community (specifically to agents
belonging to the community) in a virtuous circle.
The main advantage of non- opportunistic behaviours in social
co- operatives stems from the relationships with managers and employ-
ees. Several studies have shown that, as nonprofit organizations, social
co- operatives tend to select altruistic and intrinsically motivated manag-
ers and employees, to provide non- economic incentives, and to employ
socially oriented managers (Leete 2000). Social co- operatives thus incur
lower costs in controlling the performance of managers and employees and
use control mechanisms and incentives that are different from those used
in other organizational types. Data show that employees in Italian social
co- operatives are generally more satisfied with their jobs and are more likely
Co- operatives Providing Welfare Services 137

to be intrinsically motivated (Borzaga and Depedri 2009). This also leads to


higher client satisfaction, since employees exert more effort and ensure the
stability of production, increasing the service quality (Preston 1989).

Limitations of the social co- operative model


Although the advantages social co- operatives enjoy are significant (as evi-
denced by their success), these organizations also have limitations, com-
pared to public entities and for-profit firms.
From an institutional perspective and following Hansmanns theoreti-
cal approach (1980), social co-operatives and especially multi-stakeholder
organizations might face higher governance costs than for-profit enterprises.
In particular, social co-operatives participative governance could negatively
affect the decision-making process in two directions: the heterogeneity of
the involved stakeholders and their interests can increase the costs of the
decision-making process, and the voting system can leave some groups of
stakeholders dissatisfied and lead to failures in the decision-making proc-
ess. Moreover, the costs of delegating from members to managers might be
significant when the organizational aims and members preferences cannot
be clearly and homogeneously defined (as they are in for-profit enterprises)
and when monitoring managers performance is difficult. Although these
disadvantages are certainly plausible in theory, existing research and empiri-
cal investigations do not reveal a significant impact of these additional costs.
In fact, case studies and surveys tend to demonstrate that members of social
co-operatives do not pursue different and divergent goals: at least for the
moment, members pursue the same social aim and share the organizational
mission, resulting in a relatively simple and inexpensive decision-making
process (even when social co-operatives are quite large).
Financial limitations represent the most evident obstacle to the develop-
ment of social co- operatives, and this is the topic to which scientists and
policy makers are devoting most of their attention. However, the debate on
this subject is not well structured and can be quite confusing. To achieve
more clarity: first, distinguishing between two different types of social
co- operatives demand for financial resources is useful the demand for
resources needed to pay the inputs in day-to- day activities and the resources
invested in material and non-material assets.
The availability of financial resources for the organizations services is the
most important, since most social co-operatives provide services to non-
paying clients, vulnerable people, and people in need. For Italian social
co-operatives, the main solution to this financial constraint has been to
establish partnerships to gather resources. Traditionally, the main partners
have been local public authorities, which have provided support through
public tenders, contractual practices, and special grants. Collaborating with
the public sector also supports training programs for disadvantaged work-
ers and their integration into the labour market. Nonetheless, collaborating
138 Carlo Borzaga and Sara Depedri

with the public sector can also create strong dependence on public funding.
Therefore, partnering with other organizations has also emerged: partner-
ships with other social co-operatives and nonprofit organizations allow access
to additional resources, and the same goes for partnerships with for-profit
firms, as buyers of the goods and services supplied by social co-operatives.
More recently, an additional source of income has been the private demand
for services provided by social co-operatives by users who are able to pay the
full cost.
The demand for financial resources for investment in material and non-
material assets varies depending on the life cycle of the social co- operative.
During the start-up phase, social co- operatives can suffer from low equity
levels and therefore can find it difficult to collect financial resources and to
access loans. However, since the services that social co- operatives provide
are labour intensive and do not require high levels of start-up capital, the
lack of financial resources does not necessarily represent an insurmount-
able obstacle. The solution to the problem in this phase can be easily found
in the support provided by volunteers, consortia, and other organizations
(such as the mutual funds that are formed to develop new co- operatives
and are financed with the 3 per cent annual contribution of the net prof-
its of all Italian co- operatives). Consortia usually provide financial services
to their members co- operatives, and other co- operatives and supporting
organizations are frequently among the promoters and supporters of social
co- operatives.
In the growth phase, though, social co- operatives might need to make
investments to increase their size, theor number of clients, and the qual-
ity and quantity of services supplied. In these cases, social co- operatives
can either rely on the locked assets they have accumulated, or gather addi-
tional resources from banks and investing members. The economic lit-
erature has emphasized the difficulties that co- operatives in general face
in collecting financial resources and in accessing financing and loans.7
In theory, social co- operatives tend to under-invest and to be under-
capitalized because members tend to vote against investment; they lack
interest in achieving economic advantages and surpluses since the organi-
zation is limited in distributing profits. Similarly, members are not willing
to create new quotas and increase the corporate assets of the co- operatives
since they do not achieve profits and cannot sell their corporate asset
quotas. Therefore, no economic advantages can be put in place to moti-
vate members to increase the co- operatives investment and assets. At the
same time, co- operatives should be characterized by low corporate assets
and low stability, and should not be very attractive to external financiers.
As a solution, Italian law allows social co- operatives to involve financial
members in the co- operatives governance structures, but the recourse to
this mechanism has been close to nonexistent, since most co- operatives
Co- operatives Providing Welfare Services 139

found different solutions to increase their equity (such as the increase in


locked assets).
In this case as well, the experience of Italian social co- operatives paints
quite a different picture from that painted by the economic theory. As the
data presented above demonstrate, the problems of under-investment and
under- capitalization have been largely solved by the accumulation of profits
in locked assets, which also makes it easier to obtain ordinary loans from
banks. The realization of annual profits, the non- distribution constraint,
and the accumulation of these profits in locked assets have been the most
widespread solutions to the capitalization issue for social co- operatives.

Conclusions

This chapter focused on the emergence of co- operatives in a sector in which


they were not active until the end of the last century: the social, welfare,
healthcare, educational, and work integration services sectors. In Italy, the
emergence of social co- operatives was a spontaneous solution to the short-
age in social services, achieved through merging co- operative and non-
profit legal forms and stressing the social dimension of co- operatives. Social
co- operatives thus represent the evolution of the co- operative form from
organizations with purely mutual aims to organizations that incorporate a
greater concern for the community at large, and were born from the self-
organization of socially oriented people into democratic enterprises.
The Italian social co- operative model can be seen, from several perspec-
tives, as an efficient and replicable solution to providing social interest serv-
ices and for organizing the work integration of disadvantaged people. The
model is efficient because social co- operatives succeed in reducing the costs
and inefficiencies of other institutions and improve coordination between
the demand and supply of services. Specifically, social co- operatives can
often rely on resources not mobilized by other economic actors (for-profit
firms and the government), as in the case of volunteer work and donations;
social co- operatives produce innovative and more flexible services that bet-
ter meet the real local demand and whose quality is generally higher than
that of other private or public providers; they increase efficiency thanks
to innovative organizational strategies and lower labour costs (due to the
employment of motivated managers, workers, and volunteers); and they can
increase their private revenues by establishing innovative partnerships with
for-profit firms, in addition to public subsidies and public contracts.
Most importantly, this model is not a fluke; rather, it is a replicable solu-
tion that could be adopted (and has been adopted) in other countries and
regions (see Vzina and Girard in, this volume).8 The context and the wel-
fare system in which the model developed were favourable, but were not the
main drivers of its emergence. Although the Italian government has played
a significant role in developing social co- operatives through regulation, the
140 Carlo Borzaga and Sara Depedri

government never actively took part in creating social co- operatives. At the
same time, although public financing contributes to a high percentage of
the social co- operatives revenues, social co- operatives remain autonomous
organizations, and their future is open to partnerships with for-profit and
other co- operative firms as well as with paying clients.
In sum, the social co- operative model can represent an interesting institu-
tion for countries in which the government is the main provider of social
services and for countries lacking a well- developed welfare system. In the
former, where processes of contracting out and externalization to private
actors have already been developed, social co- operatives represent an inter-
esting way to increase the welfare mix and to enrich the supply of social
services. Indeed, the diverse welfare service provision better ensures the sat-
isfaction of differentiated needs coming from different groups of clients,
which might differ in terms of: their incomes: their position in the market
(as ordinary or disadvantaged groups): the quality and the quantity of serv-
ices they require: the attention that they pay to the relational component:
and so on. For the latter, although the supply of social services is still mainly
dispensed to households, social co- operatives represent an opportunity for
designing a modern and efficient welfare system and engaging private actors
in addressing social problems.

Notes
1. The adoption of the co-operative model represents a repositioning of co-operatives
from purely mutualistic organizations to more socially oriented institutions also
engaged in pursuing general-interest goals. This change was introduced by the
International Co-operative Alliance (ICA) at its 1980 conference, when the secre-
tary general (Laidlaw 1980) suggested that co-operatives should pay more attention
to the new needs emerging in society, including in particular needs arising from
the challenges faced by welfare systems worldwide.
2. In Italy, for example, social co-operatives must move part of their profit to indivis-
ible reserves (defined as locked assets) and distribute a portion up to a maximum
established by law.
3. The title social co-operatives established by the law clearly derived from the noun that
the new organizations had adopted in previous years: social solidarity co-operatives.
4. Not few are the cases in which social co-operatives founded new social co-operatives.
The reasons for this process of creating new social co-operatives vary: the social
co-operatives need to choose only social services production or work integration
and, therefore, to externalize roles and activities by creating a new co-operative
when not allowed by the law to implement the activity; support for start-up
projects proposed by members or employees of the original social co-operative;
the will to enlarge to new client typologies or to other regions without increasing
their dimension; the following of some policies centralized at the second-tier, or
umbrella organizations, level, and so on.
5. National Italian co-operative federations are private and completely autonomous
institutions.
Co- operatives Providing Welfare Services 141

6. The rule does not only mandate the accumulation of part of the profit to locked
assets, but it also stipulates that these reserves cannot be distributed to members,
even in case of liquidation of the co-operative.
7. On the contrary, for-profit firms should have easier access to financing and loans
thanks to their higher corporate assets, guarantees supplied to the financiers,
differentiated channels of financing (for example investor members), and the prof-
itability of their investments.
8. The replicability of the Italian model of social co-operatives has been confirmed
by several laws that in the last 20 years have emerged in different countries, with
common aims, but with different traits (Borzaga and Galera 2009). Some countries
have promoted laws approximating the Italian law with the goal of strengthening
the social commitment of co-operatives and their engagement in providing social
and general interest services, as in the case of Qubec with the legislation on
coopratives de solidarit (1997) as explained in Vezina & Girard in this volume.
Also, in Portugal, with legislative decree No. 7 in 1998; in Spain by the national law
No. 27 in 1999; in France, in 2001, with the law of 17 July on the socit coopra-
tive dintrt collectif; and, most recently in 2011, with Law 4,019 in Greece,
where legal forms for co-operatives providing social and general interest services
have been established. Other countries laws broadly regulate social enterprises
without speaking about the specific legal form they have to assume. Moreover,
some laws allow only some social enterprises (specifically, non-profit organiza-
tions, public benefit foundations, and social purpose companies) to produce social
services, as is the case in Belgium, with the Law of April 1995; the United Kingdom
in 2005, with the institutionalization of the community interest company; and
Slovenia, with the 2011 law on social enterprises. A further distinction needs to
be made for countries that admit and regulate only work integration social enter-
prises or social co- operatives, as in Finland, with Law No. 1,351 in 2003, and in
Poland in 2006.

References
Bacchiega, A. and Borzaga, C. (2001) Social Enterprises as Incentive Structures: An
Economic Analysis, in: C. Borzaga, and J. Defourny (eds) The Emergence of Social
Enterprise. London and New York: Routledge, pp. 273295.
Borzaga, C. and Depedri, S. (2009) Working for Social Enterprises: Does it Make a
Difference? in: A. Amin (a cura di), Social Economy. International Perspectives on
Economic Solidarity. London: Zed Press, pp. 82114.
Borzaga, C. and Galera, G. (2009) Social Enterprise: An International Overview of
its Conceptual Evolution and Legal Implementation, Social Enterprise Journal, 5(3):
210228.
Defourny, J. and Nyssens, M. (2008) Social Enterprise in Europe: Recent Trends and
Developments, Social Enterprise Journal, 4(3): 202228.
Depedri, S. (2010) The Competitive Advantages of Social Enterprises, in: L. Becchetti
and C. Borzaga (eds) The Economics of Social Responsibility. The World of Social
Enterprises. London: Routledge, pp. 272291.
Hansmann, H. (1980) The Role of Nonprofit Enterprises, The Yale Law Journal, 89(5):
835901.
Hansmann, H. (1996) The Ownership of Enterprise. Cambridge, MA: Harvard University
Press.
142 Carlo Borzaga and Sara Depedri

Laidlaw, A. (1992), La cooperazionenellanno 2000. Report presented at: XXVII ICA


Congres, Mosca, October 1980. Milano: Edizioni CGM.
Leete, L. (2000) Wage Equity and Employee Motivation in Nonprofit and for-profit
Organizations, Journal of Economic Behaviour and Organization, 43(4): 423446.
Ostrom, E. (1994) Institutional Analysis, Design Principles and Threats to Sustainable
Community Governance and Management of Commons, in: R.S. Pomeroy (ed.)
Community Management and Common Property of Coastal Fisheries in Asia and the
Pacific: Concepts, Methods and Experiences. Manila: International Center for Living
Aquatic Resources Management, pp. 3450.
Preston, A.E. (1989) The Nonprofit Worker in a For-Profit World, Journal of Labor
Economics, 7(4): 438463.
Putnam, R.D. (1993) Making Democracy Work: Civic Traditions in Modern Italy. Princeton:
Princeton University Press.
Spear, R. (2002) The Co- operative Advantage, Annals of Public and Cooperative
Economics, 71(4): 507523.
Valentinov, V. (2007) The Property Rights Approach to Nonprofit Organizations:
The Role of Intrinsic Motivation, Public Organization Review, 7(1): 4155.
Valentinov, V. (2008) The Economics of the Non-Distribution Constraint: A Critical
Reappraisal, Annals of Public and Cooperative Economics, 79(1): 3552.
9
Understanding FLOSS as a Commons
Dongbin Wang

The aim of this chapter is to study Free/Libre/Open Source Software (FLOSS)


from the perspective of the theory of the commons and conceive it as an
emerging co-operative practice in the software industry to overcome the
tragedy of the commons (Hardin 1968) by means of mass co-operation and
institution innovation. FLOSS, a socio-economic movement in the software
development world, has received increasing public attention in the past dec-
ade. The experiences worthy of attention in the FLOSS-model include how
to adopt more flexible property-rights arrangements inducing co-operation,
and how to form a vitalized commons enjoyed by the public through digital
technology.
Unlike proprietary software, FLOSS follows a distinctive philosophy
encouraging peer co-operation and knowledge sharing through opening
source code accompanied by distinctive property rights arrangements.
Moreover, FLOSS takes a co-operative organizational form rather than
an IOF model adopted by proprietary software (Lindberg 2008: 155158).
However, the co-operative model of organization in the FLOSS com-
munity is rather different from traditional co-operative organizations.
Traditional co-operatives are formal organizations, enterprises, whereas
FLOSS is an informal organization in the virtual community which can
be an incubator of a business enterprise. We argue that the organizational
form of FLOSS is better understood from the perspective of commons
theory, thereby challenging traditional co-operative forms. The difference
between FLOSS and traditional co-operative forms is worthy of studying,
since Information and communication technology (ICT) is of course vital
to co-operatives as to any other organization, and the co-operative model
is also developing in the ICT sector. But it may also be inspiring with
respect to the governance of other commons (such as sustainable energy,
water, ... ). Co-operatives in these fields can learn from the FLOSS model,
as well as the other way round.
The structure of this chapter is as follows. The first section introduces the
definitions and scope of FLOSS, made by the Free Software Foundation (FSF)

143
144 Dongbin Wang

and Open Source Initiative (OSI), the two main organizations promoting the
FLOSS movement. The notion of FLOSS reveals its central philosophy and
chief difference from proprietary software. In the second section, the intel-
lectual property-rights arrangements of FLOSS will be discussed. Generally
speaking, it is a complicated system including the intellectual property-
rights regime and licensing system. Through this, pluralistic property types
of FLOSS codes and products are formed containing public ownership, col-
lective ownership and private ownership. The fundamental characteristic
of FLOSS is that its intellectual property rights focus on distribution rights
instead of the exclusive right, which promote to resemble public domain in
information, or the commons.
In the third section, FLOSS as a code commons is analyzed. The section
shows the property arrangements of FLOSS as a way to solve the property
problems of a commons (that is, the problem of who owns a commons).
Even so, a commons in dominant discourse easily becomes tragedy (Hardin
1968) because of the failure of collective action, or, the Prisoners Dilemma.
However, the section further demonstrates that FLOSS, instead of leading to
a tragedy of the commons, could efficiently lead to harmony. Following
this point, the fourth section exemplifies the success of FLOSS, elaborating
how large global-scale co-operation is possible even in the absence of direct
monetary reward.
Therefore, FLOSS can be regarded as an emerging co-operative approach
to solving the commons problem in the information technology domain.
In this respect, the chapter concludes in the fifth section, proposing that
understanding FLOSS as a dynamic creation and a co-operative provision
of commons would help to promote better understanding the wider co-
operative movement in the information society.

FLOSS: its definition and scope

In 1983, the free software movement was formally launched by Richard


Stallman, the founder of the Free Software Foundation (FSF). In essence,
free software is a matter of liberty, not price,1 however, misconceptions hin-
dered the free software movement. People usually think of free software as
no charge, no cost, but not freedom. In order to counter the misconceptions
emerging from the ambiguous term free software, the term open source
software was proposed. In late February 1998, the Open Source Initiative
(OSI) was founded by Eric S. Raymond and Bruce Perens. FSF and OSI are the
most influential FLOSS-promoting organizations today.
Table 9.1 presents two definitions of FLOSS from these two promoting
organizations (FSF and OSI). Although different in terminology, these two
definitions share fundamental similarities. Indeed, nearly all free software
is open source and nearly all open source software is free (Stallman 2010:
78). FLOSS is usually used an acronym for Free/Libre/Open Source Software,
Understanding FLOSS as a Commons 145

so that it is a combination of the terms free software and open source


software. It is easy to find out that FLOSS does not deny or reject profits. To
the contrary, it encourages and emphasizes successful commercialization.
In this regard, the composite term FLOSS is chosen in this chapter.
According to the first definition proposed by the FSF, a program is free soft-
ware if the programs users have four essential freedoms (as listed in Table 9.1).2
Generally speaking, free software means software that respects users free-
dom and community.3 In principle, FLOSS is a matter of the users freedom to
run, copy, distribute, study, change and improve the software (Stallman 2010:
3). With these freedoms, the users (both individually and collectively) control
the program and what it does for them.4
According to the definitions mentioned above, there are two necessary
conditions to being FLOSS: the first condition is that software should be
offered to users with open access to the source code; and the second condi-
tion is that end-users should be freely able to modify, copy or redistribute
the software under open source business models (Dixon 2004: 6). The first
condition concerns technical aspects, that is, opening its source code to
the end-users. Access to source code (that is human-readable code) is the
basic characteristic of FLOSS, which is remarkably distinct from proprietary
software. This is also the precondition of FLOSS. Open Source Code and
relevant documentation (for example Read me, User Guide, Manual Book,
and so on) provide to the public the technical possibilities to modify and
redistribute the derived version. Otherwise, FLOSS would become a hol-
low term without any practical meaning. In this light, If its not source,

Table 9.1 FLOSS definition

Open Source Initiative (OSI)


Free Software Foundation (FSF) definition definition

Freedom 0: the freedom to run the Free redistribution


program for any purpose Source code
Freedom 1: the freedom to study how the Derived works
program works and change it so it does Integrity of the authors source code
your computing as you wish No discrimination against persons or
Freedom 2: the freedom to redistribute groups
copies so you can help your neighbour No discrimination against fields of
Freedom 3: the freedom to distribute copies endeavour
of your modified versions to others Distribution of license
(Source: http://www.gnu.org/philosophy/ License must not be specific to a
free-sw.html (Accessed: 20 March 2013) product
License must not restrict other
software
License must be technology-neutral
(Source: http://www.opensource.org/
docs/osd (Accessed: 20 March 2013)
146 Dongbin Wang

its not software (Stallman 2010: 7778). So, compared to the traditional
way of developing proprietary software, FLOSS development has provided
researchers with an unprecedented abundance of easily accessible data for
research and analysis, just like the Internet archaeology (Antoniades et al.
2008: 24). In this light, FLOSS has been continually providing a knowledge
commons, including code and coding knowledge, to the whole world.
The second condition is related to the entitlement system closely related
with the intellectual property rights regime. FLOSS employs multiple intel-
lectual property rights arrangements to empower users to realize the essen-
tial four freedoms it claims in its definition. Generally speaking, this defines
the scope of FLOSS, which includes two main parts: public domain software
(with source code) and licensed software (seen in Figure 9.1).
As far as public domain software is concerned, software will be put into the
public domain and accessible to the public as soon as its copyright expires
according to the formal legal regime. But only the software with available
source code is regarded as FLOSS. The other source of public-domain soft-
ware is the copyright holders donation, if they disclaim their rights. In some
sense, public-domain software is the heritage of the copyright regime, which
would help, complement and reinforce the FLOSS movement but does not
make up the main promoting force of FLOSS.
Licensed software is FLOSS in a narrow sense. It consists of copylefted
software and software under lax license. Copyleft is a general method
for making a program (or other work) free and requiring all modified and
extended versions of the program to be free as well (Stallman 2010: 127).

Free software

Public domain software


(with source)

Software under
lax permissive license

Copylefted software
Software under GPL

Open source software

Figure 9.1 Categories of FLOSS (by FSF)


Source: Adapted from http://www.gnu.org/philosophy/category.svg.
Understanding FLOSS as a Commons 147

Apparently, although the property rights system of FLOSS is comprehen-


sive and intricate, it does not exclusively deny traditional copyright. As far
as proprietary software is concerned, the role of a license is to guarantee
all rights reserved and charge a royalty fee from the consumer. As far as
FLOSS is concerned, the role of a license is to guarantee software freedom
by means of some rights reserved. In general, the main right reserved by a
FLOSS developer is to prevent those who intend to exclude others to share
and enjoy free software.

Property rights system of FLOSS

To stimulate innovation, the society gives the inventor a period of protec-


tion. After the protection period, the work should be ceded to the public
domain and become the common wealth of the society. As mentioned
above, public-domain software is formed either by way of the withdrawal
rights by the society (that is, the protection expires), or if the holders dis-
claim their property rights. Public domain software is the knowledge asset
owned by no one (that is without copyright) but belonging to the public,
regardless of the way it became available.
Software licensing is the most popular entitlement tool of the FLOSS soci-
ety and is the core of its rights system. The key difference between a copyleft
license and a lax permissive license is the viral clause: Under a copyleft
license, FLOSS and its derivative work must remain free. This is the strict-
est clause in the FLOSS license family, so lax licenses do not contain this
clause.
In the FLOSS society the license system forms a practical entitlement sys-
tem to protect the freedoms it claims. The license is an agreement that for-
mulates rights and responsibilities for FLOSS. FLOSS gives up its main rights
(which are limitations to users) derived from intellectual property through
licensing so as to fulfil its four freedoms for users.
The strictest license is the General Public License (GPL), formulated by
Richard Stallman as the legal tool to realize the copyleft spirit. The cen-
tral idea of the GPL is to make use of copyright law to extend the four
freedoms, by preventing any users from adding restrictions that could deny
these rights to others, so it efficiently reverses the logic of keeping soft-
ware source code secret (Weber 2004: 48). On the other hand, the Apache
License is regarded to be one of the most lax licenses. This is because the
users, according to the Apache license, can do anything they want with the
Apache codes for any legal purpose, except using the Apache Logo (that is
the trademark right).
Essentially speaking, copyleft does not deny copyright but intends to
redress the over-protection trend in the copyright regime. FLOSS does have
its copyright (except public-domain software), but it gives up nearly all
the rights derived from copyright through licensing. The only purpose of
148 Dongbin Wang

obtaining copyright is to empower FLOSS to prevent (not exclude)5 those


who intend to deny other people the central freedoms when redistributing
the FLOSS programs. At this point, copyright is the legal authority source
of copyleft. As a matter of fact, together with copyright, the role of licens-
ing is to construct the legal framework to protect users four freedoms. In
this regard, copyleft could not develop further without copyright, at least
in the foreseeable long term. At the same time, copyright could move in the
right direction with the help of copyleft. To some extent, this mechanism
shows the dependence of copyleft on copyright, as a pragmatic approach
to obtaining legal support. Meanwhile, there is another vital trend in prac-
tice: FLOSS licensing may independently obtain its legal power as a type of
social agreement. FLOSS can be regarded as social agreements because, as
indicated above, it gives up most rights derived from copyright, especially
the right to exclude, which is considered the fundamental right in the bun-
dle of rights in property. One of the most famous cases in the FLOSS com-
munity, namely the lawsuit between Robert Jacobsen and Matthew Katzer,
represents a start for FLOSS licenses to secure independent legal authority
as social agreements.
In this case, Jacobsen developed a software program and released it under
the artistic license (one FLOSS license). Later, Katzer and his company down-
loaded the source code and combined with its own codes to develop soft-
ware in proprietary model. Then he alleged that Jacobsen was in violation of
copyright, requiring him to stop distributing the source code and requiring
$200,000 dollars for patent royalties. Consequently, Jacobsen sued Katzer
and his company for copyright infringement with the help of legal experts
from the FLOSS community.
During the lawsuit, Jacobsen claimed his copyright of the source code
he developed. In the first round, the district court held that Jacobsen had
already given up his copyright of the codes by intentional broad license
and thus denied his motion of injunctive relief and refused to recognize
Katzers behaviour as a copyright infringement. In the second round, the
United States Court of Appeals for the Federal Circuit adopted the appeal
from Jacobsen and recognized that FLOSS licenses, known as a public
license similar to a social agreement, are legally enforceable as copyright
license. In the end, Jacobsen won the suit. Bruce Perens, the promoter of
the OSS definition and a cofounder of the OSI, spoke highly of the outcome
of the case as a historic victory, the biggest win for Open Source ... , as it
solidified the legal foundation of all Open Source licenses by setting an
important precedent (Perens 2010). The case has successfully made the
FLOSS license system an independent freedom-protection mechanism.
In all, FLOSS is configured around the right to distribute, not the right
to exclude (Weber 2004: 1). In economic terms, open source displays the
characteristic of being non-excludable, which helps to create public or
common goods.
Understanding FLOSS as a Commons 149

FLOSS as the code commons

Besides being non-excludable, FLOSS also has the characteristic of being


non-rivalrous. This is because, in the technical sense, without considering
proprietary arrangements, the cost of copying software is near zero, which
means infinite copying is possible in the digital world. One additional user
does not reduce the codes availability to other users. If a product has both
non-excludable and non-rivalrous nature, in this regard FLOSS belongs to
the public good. Furthermore, FLOSS stands for a model of socially optimal
provision of complex public goods (Johnson 2002; Bessen 2005).
However, unlike natural public goods, FLOSS is an artificial product
demanding regular maintenance, improvements and updates to fix bugs
and solve new problems. In view of its technical superiority, the FLOSS
code repository calls for qualified and excellent code contributions so as
to achieve sustainable development. The rights to distribute and redistrib-
ute software contributed to the formation of creative commons, new com-
mons and social commons (Heller 1998; Benkler 2002; Schweik 2007; Hess
2008).
With public goods as well as with commonly owned goods, motivation
is a vital factor affecting the provision of goods/services and governance
issues. According to conventional wisdom and dominant discourses, public
goods will not be provided efficiently by self-interested individuals because
of the lack of incentives. Meanwhile, common goods will unavoidably be
overexploited and end as a tragedy of the commons.
FLOSS, at least on the surface, diametrically opposes these theories and
shows the comedy outcome of the commons. The ideas of FLOSS stand
well-accepted notions concerning copyright on their head and demon-
strate that our long-held understanding about the nature of human moti-
vation may be fundamentally misguided (Dixon 2004: 2). The motivations
to participate in the FLOSS community are diverse. Linus Torvalds, the
inventor of the Linux system, concludes there are three stages of moti-
vation in ones life: survival, social life and entertainment. Just for
fun is the highest stage of motivation, in his opinion, and is the creed of
Torvalds himself (Torvalds and Diamond 2002). In this respect, he gen-
uinely reverses rational options in prisoners game theory to introduce
treating others in the way that he would like others to treat him instead of
non-co-operation forever.6 This philosophy has become the mainstream
co-operative strategy in FLOSS community which in game theory was
called tit-for-tat strategy.
Richard Stallman, who advocates the classical hacker spirit, which adheres
to free software rather than proprietary software, insists on sharing as the
central ideology of the software tradition. In the free software community,
contributors take themselves not as owners of something but as custodi-
ans of the work on behalf of the public (Dixon 2004: 30).
150 Dongbin Wang

Tim Berners-Lee, the inventor of the World Wide Web (WWW or W3, the
most popular application framework of the Internet), pays continuous atten-
tion to How can I make sure the Web is yours instead of mine? (Lee and
Fischetti 2000, Foreword by Michael L. Dertouzos: viii). He prefers that the
Web be an infinite, universal knowledge commons. This is the reason why,
today, once we enter the Web, we become like medieval peasants enter-
ing their village commons; almost everything is shared (Sullivan 2000). In
order to ensure the Web is used as a commons, he chose FLOSS and public
domain as the development model for the keystone protocol of the Web. By
doing so, it becomes impossible for one person or one company to control
the whole Web: If someone tries to monopolize the Web by, for example,
pushing a proprietary variation of network protocols theyre in for a fight
(Lee and Fischetti 2000: 108). In this respect, the motivation of creating the
Web as a commons by making the fundamental protocol as public domain
and FLOSS is evidence of altruism, to a great extent.
The designers of the Internet protocol suite (Transmission Control
Protocol/Internet Protocol, or TCP/IP), Vincent G. Cerf and Robert Kahn,
gave up applying for patents for the sake of taking the TCP/IP as private
property. The reason is more or less derived from the pragmatic view. Just as
Cerf said himself, in the forming stage of the Internet, to apply for a patent,
if the new technology is not free of charge, then people will be away from
us (Cerf 2004). Consequently, the pragmatic strategy that the software was
available for free, we didnt patent it or license it or constrain it in any way
(Morrow and Cerf 2001: 39) in fact reveals that sometimes it is a rational
choice not to claim private property but keep it as a commons reversely. In
technology practice, taking something as a commons or public property
may promote both the individual and collective welfare.
Highlighting the motivations of the key figures in the FLOSS community
and Internet history, I intended to illustrate the diversity of motivations and
show the possibilities when software ownership is treated as public goods
and commons. Quite remarkably, the nature of human motivations tends to
be much more complicated than assumed by rational choice theorists.
Theoretically speaking, in the FLOSS communities motivations of par-
ticipants are multiple, including both egoism and altruism (Benkler 2002).
Benkler constructed an incentive model, including three aspects, namely:
monetary rewards, intrinsic hedonic rewards and social-psychologi-
cal rewards. He argued that the behaviour of a rational individual would
depend on the sum of all the three types of rewards rather than on the
monetary rewards alone.
Indeed, FLOSS does not deny monetary rewards. We note that even if one
assumes that all of the unknown contributors were working on their own
time, over 70 per cent of all [Linux] kernel development is demonstrably
done by developers who are being paid for their work (Hartman, Corbet
and McPherson 2009: 10). FLOSS does not obliterate profit, capitalism, or
Understanding FLOSS as a Commons 151

intellectual property rights (Weber 2004: 3); however, FLOSS is opposed


to profit centralism, especially to the ways of maximizing profit by taking
advantage of intellectual property rights and keeping source code secret as
proprietary assets. Moreover, FLOSS can incorporate different motivations
into its community and lead to large-scale co-operation. Given a suffi-
ciently large number of contributions, direct monetary incentives necessary
to bring about contributions are trivial (Benkler 2002). With regard to mass
co-operation without a need for direct monetary incentives, FLOSS can
serve as an ideal approach to turn around the tragedy of the commons.
Although the word commons can be traced back to Aristotle, the term
tragedy of the commons was famously introduced by Garrett Hardin (1968)
and has become a dominant discourse. [M]uch that has been written about
common-pool resources, ... has uncritically accepted the earlier models [the
tragedy of the commons, among others] and the presumption of a remorse-
less tragedy (Nebel 1987; see Ostrom 1990: 7). Consequently, the ways
described as Leviathan and privatization have been regarded as two main-
stream approaches to solving the commons dilemmas. From this point on,
Ostrom (1990) has proposed theoretical and empirical alternatives in order
to illustrate diversified solutions which go beyond states and markets. As she
stated, institutions are rarely either private or public the market or the
state. Many successful CPR [common-pool resources] institutions are rich
mixtures of private-like and public-like institutions defying classifica-
tion in a sterile dichotomy (Ostrom 1990: 14). Generally speaking, there are
two fundamental problems inherently inevitable in the commons theory.
The first obstacle is the question, Who owns the commons?. In case of
good governance, it does not matter who owns the commons. However,
conventional wisdom suggests that well-defined ownership is supposed to
be a precondition for efficient use of resources. Good governance of a com-
mons does not define ownership structure to identify who owns it and how
to apply exclusive rights when conflicts happen. Even if public ownership
is introduced to represent the property rights status of a commons tradi-
tionally, unfortunately it is still a long way before the problem is solved. To
some extent, public ownership means no property in Coases and Demsetzs
theory (Benkler 2002: 401403). The reason is mainly that, to a great extent,
public property means without exclusive right, which is the fundamental
right in the traditional property-right ideas. Furthermore, even if public or
common ownership were recognized, there is still at least one problem left,
namely: [I]t has always been problematic to find someone that would repre-
sent it in court, by suing those who tried to seize them (Mattei 2011). When
someone intends to claim private property rights of a commons, with the
exclusive rights (which also means shutting off open access to the resource),
it turns out to be particularly hard, if not impossible, to find an authority
standing for the community to stop the seizer. FLOSS intends to resolve
this problem by holding intellectual property rights while giving up control
152 Dongbin Wang

of the source code. If someone tries to control the source code exclusively
released under the FLOSS license, the FLOSS community can stop him by
tracking the original owner of the source code and represent the owner to
deal with copyright issues.
As mentioned in section 2, the cornerstone of FLOSS is to realize the cen-
tral four freedoms through both the standard copyright regime and the
licensing method, by relinquishing exclusive rights but reserving property
rights for itself. By doing so, it helps to construct a defensive mechanism to
prevent the potential seizers who wish to claim the exclusive rights given
up by its owners. In the FLOSS community, the purpose of retaining nomi-
nal ownership is to make sure that a commons would not be seized by new
users. This is the basic principle of how FLOSS solves the who owns prob-
lem of a commons.
Even if the first problem could be solved, there is still the second problem
left in commons theory, namely, the problem of collective action and the
free-rider issue. As most people tend to act as free riders, members in a com-
munity can easily fall into the prisoners dilemma, thus making it difficult
to generate collective action. Therefore, as emphasized by Olson: unless
the number of individuals is quite small, or unless there is coercion or some
other special device to make individuals act in their common interest,
rational, self-interested individuals will not act to achieve their common or group
interests (Olson 1965: 2). As far as commons are concerned, it would be hard
to say that the community is usually small in scale (particularly when there
are thousands of members), or that there is coercion. Clearly, constructing
some other special device, or institutional capacity, or self governance,
is the pragmatic way to go beyond the commons dilemma (Blomquist and
Ostrom 1985; Ostrom, Walker and Gardner 1992).
Known as the knowledge commons (Hess and Ostrom 2007), FLOSS
attaches great importance to project communities. Therefore, the success
of FLOSS would definitely rely on the community and mass collaboration.
Just as a slogan of the Apache Software Foundation shows, [W]e consider
ourselves not simply a group of projects sharing a server, but rather a com-
munity of developers and users.7 Among those FLOSS projects, many large
communities have been formed involving millions of computer experts and
users, who have contributed to an innovative productive collaboration. It
illustrates the idea that groups of individuals, driven by various motivations
rather than profit maximization, can collaborate successfully. A concrete
example can be the Linux kernel development project. In this case, over
7,800 individual developers from almost 800 different companies have con-
tributed to the kernel development from 2005 to 2012, and this number is
expected to continue to increase (Corbet, Hartman and McPherson 2012).
Except for a large number of experienced developers in the FLOSS commu-
nity, there is also a much larger number of freshmen and users who do not
have development skills but who contribute more to the debugging process.
Understanding FLOSS as a Commons 153

This has also been pointed out directly by the Free Software Community,
whose strength rests on commitment to freedom and co-operation
(Stallman 2010: 73). According to Ostrom, successful CPR institutions are
those that enable individuals to achieve productive outcomes in situations
where temptations to free-ride and shirk are ever present. (Ostrom 1990:
15). FLOSS, as an emerging social commons, efficiently solves the problem
of collective action, generates mass collaboration and turns the tragedy of
the commons into a productive collaboration, similar to numerous other
successful cases examined in Ostrom (1990) and Hess and Ostrom (2007).

FLOSS: the efficiency of the commons

This section will further illustrate the success of FLOSS in terms of effi-
cient mass co-operation, technical superiority and the achievement of its
commercialization.
Mass co-operation. In 1991, Linus Torvalds, a university student at the
time, wrote a very simple program with only 10,000 lines of code and released
it under GPL (the earliest and most influential license in FLOSS community).
This program later was called Linux, the most famous FLOSS system up to
now. The kernel of the Linux system is one of the largest and most successful
open source projects that has ever come about and is the result of one of the
largest co-operative software projects ever attempted (Corbet, Hartman and
McPherson 2010, 2012).
Version 2.6.11 was released in March 2005 and Version 3.2 was released
in January 2012. Version 2.6.11 includes 17,090 files and 6.6 million lines
of code, whereas Version 3.2 contains 37,626 files and 15 million lines of
code. Obviously, both indices have more than doubled in the past few years.
The frequency of updated versions is really high. The updated version of
the Linux kernel is released regularly, at average intervals of 23 months (or
812 weeks), thanks to contributions by over 1,000 developers represent-
ing nearly 200 corporations (Hartman, Corbet and McPherson 2008, 2009;
Corbet, Hartman and McPherson 2010, 2012). In this regard, the Linux com-
munity has formed one of the largest code commons, shared and enjoyed in
the virtual world by people all over the world.
According to an estimation report, the value of the Linux ecosystem was
25 billion U.S. dollars by 2008, and it would cost more than 10.8 billion U.S.
dollars to develop the Fedora Linux 9 (McPherson, Proffitt and Hale-Evans,
2009). Obviously the key achievement is the outcome of mass co-operation
of the FLOSS community and the common wealth of human beings.
Technical superiority. For a long time, Linux was not considered to per-
form as well as Windows. In the previous users surveys, the first reason for
choosing Linux or FLOSS was cost savings, followed by its feature of open-
ness or security. However, in the 2011 survey from the Linux Foundation, it
turns out that for enterprise end users, the first factor for choosing Linux was
154 Dongbin Wang

its technical superiority, although low cost and security were still important
factors. Figure 9.2 displays the survey results.
Commercialization success. Several examples can illustrate the successful
commercialization process of FLOSS. In general, FLOSS hit a turning point
in 2010 and became a mainstream model in the software industry (Wurster
2011). The first example is Apache server. Apache is an open-source Internet
server project at first developed by IBM. In the mid-1990s, IBM decided to
release it as Open Source Project and to continue supporting its development
at the cost of millions of dollars, out of the consideration that Open Source
might become the potential power to balance the threat from proprietary
software companies like Microsoft. So far, Apache has been one of the most
successful FLOSS projects. As Figure 9.3 shows, the market share of Apache is
twice as large as the market share of the second contender, Microsoft.
The second example is the operating system of supercomputers, where
FLOSS dominates. Supercomputers are pivotal to Cloud Computing which
is supposed to be the future of the ICT Industry. As illustrated in Figure 9.4,
in 2011, Linux took 91 per cent of the total operating system market share
for supercomputers, the UNIX system another 4.6 per cent, whereas the
Windows system had only 1.2 per cent of market share.
The third example is the development of the operating systems for devel-
opers, where the market share of Windows has been declining year by year,
from 73.8 per cent in 2007 to 58.3 per cent in 2010 (in Figure 9.5). At the
same time, the share of Linux has increased from 20.0 per cent in 2007 to
32.7 per cent in 2010.
The success of FLOSS displays its competitiveness and survival capability
in a free market economy. These examples have also identified the possibili-
ties for FLOSS to turn its philosophy and ideas into practice. For the public,
FLOSS is proof of the efficient use of a new common property resource.

Choice of hardware 36.10%


Choice of software 37.70%
Long-term viability of platform 45.80%
Openness, ability to modify code 49.70%
No vendor lock-in 49.70%
In-house talent experience with Linux 51.80%
Security 64.10%
Lower total cost of ownership (TCO) 65.40%
Features/technical superiority 67.50%
Figure 9.2 Drivers of Linux adoption
Source: Linux Foundation (2011).
Understanding FLOSS as a Commons 155

80%

40%

0%
Aug1995
Feb1996
Aug1996
Feb1997
Aug1997
Feb1998
Aug1998
Feb1999
Aug1999
Feb2000
Aug2000
Feb2001
Aug2001
Feb2002
Aug2002
Feb2003
Aug2003
Feb2004
Aug2004
Feb2005
Aug2005
Feb2006
Aug2006
Feb2007
Aug2007
Feb2008
Aug2008
Feb2009
Aug2009
Feb2010
Aug2010
Feb2011
Aug2011
Nov2011
Apache Mircosoft Sun Nginx
Google NCSA Other

Figure 9.3 Market share for top servers across all domains (August 1995November
2011)
Source: Netcraft (www.netcraft.com, accessed 10 January 2012).

Windows
1.2% BSD based
0.2%
Mixed
Unix 3.0%
4.6%

Linux
91.0%
Figure 9.4 Operating system family market share for supercomputer (TOP500,
06/2011)
Source: http://www.top500.org/drilldown, accessed 15 November 2011.
156 Dongbin Wang

2007 2009 2010


80.00% 73.80
70.00% 64.30
58.30
60.00%
50.00%
40.00% 32.70
30.00% 26.90
20.00
20.00%
10.00% 6.90 7.90
3.50 2.70 1.90 1.10
0.00%
Windows Linux Mac OSX Other OS

Figure 9.5 Primary operating systems for software development (20072010)


Source: The Eclipse Foundation (2010).

Conclusion

Based on the analysis in this chapter, we can draw some preliminary conclu-
sions. Owing to the fact that there is a high rate of updating and continuous
releasing of new versions, it would be reasonable to understand FLOSS as a
commons. To understand FLOSS well, however, it is desirable to overcome
the dominant assumption of economic behaviour, namely, the homo eco-
nomicus postulate. By taking into consideration the diversity of behavioural
motivations, we may be more successful in understanding and the provision
and maintenance of public and common property goods such as FLOSS.
Secondly, FLOSS has developed an entitlement regime which has greatly
promoted the idea of sharing through a licensing system together with a
formal intellectual property rights regime. In this sense, it helps to con-
struct not only an incentive compatibility mechanism, but also a defensive
mechanism, that is, the judicial capacity to prevent the potential seizer. By
doing so, FLOSS has solved the who owns problem in commons theory and
put the theory into practice by way of fulfilling its philosophy concerning
its four core freedoms.
Thirdly, FLOSS has broken the bottleneck of collective action and over-
come the prisoners dilemma problem. Through some other special device
(institutional capacity, or self governance), FLOSS can start many large
software projects with mass collaboration and form many huge commons.
The success of FLOSS has revealed how mass collaboration is possible, and
how the efficiency of the commons has become practical idealism rather
than an utopia.
And last but not least, the co-operative movement would benefit from the
success of the FLOSS practices by examining the experiences in sustaining
them. More precisely, it would be beneficial to learn how to achieve general
Understanding FLOSS as a Commons 157

interests and welfare rather than mutual interests and personal wealth and
how the essence of the Co-operative Principles can be fulfilled through
institutional innovations similar to those applied in the FLOSS community
in the forthcoming digital era. For example, the membership of FLOSS is
totally free and open and this will promote the expansion of FLOSS activity.
As an informal organization or imaginary community, there is no formal
authority approved top-down but rather charismatic authority down-top
according to contributions provided to the community. Therefore, partici-
pation in the FLOSS community is voluntary and democratic, and the com-
munity is supposed to be composed of autonomous, self-help organizations
controlled by the participants. Furthermore, FLOSS endeavorus to spread
the spirit of free software and the knowledge of open-source programming
via training and education. As a result, concern for community is the life-
line for the growth of FLOSS. As the Apache Foundation claims, we con-
sider ourselves not simply a group of projects sharing a server, but rather a
community of developers and users. Nearly every FLOSS project expends
considerable effort to foster its community. In this light, at least on the face
of it, FLOSS can be considered as a quasi-co-operative model, according to
the fundamental principles followed by co-operatives.
It is necessary to point out that the effort in this chapter is not arbi-
trary, nor is it careless to make a linkage between FLOSS and co-operatives,
although the mechanism in details still demands more empirical study and
theoretical development. For the co-operative movement all over the world,
this linkage is worthy of serious consideration and theoretical construction
to explore the possibility of identifying FLOSS as a new member of the co-
operative family.

Notes
1. From the Free Software Directory: http://directory.fsf.org/wiki/Main_Page
(Accessed: 20 March 2013).
2. Note that the numbering begins with zero. This is because many computer systems
use zero-based numbering. From: http://en.wikipedia.org/wiki/Free_software
(Accessed: 24 March 2013).
3. From the Free Software Directory: http://directory.fsf.org/wiki/Main_Page
(Accessed: 24 March 2012).
4. ibid. Note that if users do not control the program, the program controls the users.
The developer controls the program, and through it controls the users. This nonfree
or proprietary program is therefore an instrument of unjust power (ibid.).
5. It reveals that the FLOSS license is a defence mechanism, but not an exclusive
mechanism. Just as Stallman said, We are not excluding them from our commu-
nity; they are choosing not to enter (Stallman 2010: 130).
6. In an interview with Linus, he described his ethics as follows, My basic rule of
life is, Do unto others as you would [have others] do unto you. Its not Christian,
its global. Its a simple rule, and in most situations it tells you what you should
do. If you ever wonder, What should I do?, and you ask yourself that question,
158 Dongbin Wang

What would I want somebody else to do? suddenly you know the right answer.
Jonathan Littman, The Man Behind Linux, 10 August 1999.
7. See the website of the Apache Software Foundation: http://www.apache.org/
(Accessed 28 December 2012).

Reference
Antoniades, I., Samoladas, I., Sowe, S.K. et al. (2008) Free/Libre Open Source Software
Metrics: Study of Available Tools (D1.1). Available at: http://www.flossmetrics.org/
(home page).
Bessen, J. (2005) Open Source Software: Free Provision of Complex Public Goods.
Available at: http://www.osepa.eu/site_pages/News/43/Free_Provision_Of_
Complex_Public_Goods_Bessen_2005.pdf (Accessed: 25 November 2012).
Benkler, Y. (2002) Coases Penguin, or Linux and the Nature of the Firm, Yale Law
Journal, 112(3): 369446.
Berners-Lee, T. and Fischetti, M. (2000) Weaving the Web. New York: Harper Business.
Blomquist, W. and Ostrom, E. (1985) Institutional Capacity and the Resolution of a
Commons Dilemma, Policy Studies Review, 5(2): 383393.
Cerf, G.V. (2004) TCP / IP Protocol Inventor G-Cerf: Why Do I Give Up Patents?
Available at:
http://www.qqread.net/os/linux/g266321.html (Accessed: 25 March 2013).
Corbet, J., Kroah-Hartman, G. and McPherson, A. (2010, 2012) Linux Kernel
Development: How Fast it is Going, Who is Doing It, What They are Doing,
and Who is Sponsoring It. Available at: www.linuxfoundation.org (home page)
(Accessed: 20 November 2012).
Dixon, R. (2004) Open Source Software Law. Boston and London: Artech House.
Hardin, G. (1968) The Tragedy of the Commons, Science, 162: 12431248.
Heller, M. (1998) The Tragedy of the Anticommons: Property in the Transition from
Marx to Markets, Harvard Law Review, 111(3): 621688.
Hess, C. (2008) Mapping the New Common. Available at: http://ssrn.com/
abstract=1356835 (Accessed: 20 November 2012).
Johnson, J.P. (2002) Open Source Software: Private Provision of a Public Good,
Journal of Economics & Management Strategy, 11(4): 637662.
Kroah-Hartman, G. Corbet, J. and McPherson, A. (2008, 2009, 2011) Linux Kernel
Development: How Fast it is Going, Who is Doing It, What They are Doing and Who
is Sponsoring It. Available at: www.linuxfoundation.org (home page) (Accessed: 20
November 2012).
Linux Foundation (2011) Linux Adoption Trends: A Survey of Enterprise End Users.
Available at: www.linuxfoundation.org.
Mattei, U. (2011) Providing Direct Access to Social Justice by Renewing Common
sense: The State, the Market and Some Preliminary Question about the Commons.
Available at: http://www.uninomade.org/preliminary-question-about-the-com-
mons/ (Accessed: 26 November 2012).
McPherson, A., Proffitt, B. and Hale-Evans, R. (2009) Estimating the Total
Development Cost of a Linux Distribution. Available at: http://www.linuxfoun-
dation.org/sites/main/files/publications/estimatinglinux.html (Accessed: 20
November 2012).
Morrow, D.S. and Cerf, V.G. (2001) Vinton G. Cerf Oral History. Available at: http://
www.cwhonors.org/search/oral_history_archive/vinton_g_cerf/oralhistor.pdf
(Accessed: 20 March 2013).
Understanding FLOSS as a Commons 159

Olson, M. (1965) The Logic of Collective Action: Public Goods and the Theory of Groups.
Cambridge: Harvard University Press.
Ostrom, E. (1990) Governing the Commons: The Evolution of Institutions for Collective
Action. Cambridge: Cambridge University Press.
Ostrom, E., Walker, J. and Gardner, R. (1992) Covenants With and Without a Sword:
Self Governance is Possible, American Political Science Review, 86(2): 404417.
Perens, B. (2010) Inside Open Sources Historic Victory. Available at: http://www.
linuxtoday.com/news_story.php3?ltsn=2010022201535-NW-LL (Accessed: 20
November 2012).
Schweik, C.M. (2007) Free/Open-Source Software as a Framework for Establishing
Commons in Science, in: C. Hess and E. Ostrom (eds) Understanding Knowledge as a
Commons. Cambridge: The MIT Press.
Stallman, R.M. (2010) Free Software, Free Society: Selected Essays of Richard M. Stallman,
2nd edition. Boston: Free Software Foundation, Inc.
Sullivan, A. Dot-communist Manifesto, New York Times, 11 June 2000.
The Eclipse Foundation (2010) The Open Source Developer Report: 2010 Eclipse
Community Survey. Available at: http://www.eclipse.org/ (home page) (Accessed 26
November 2012).
Torvalds, L. and Diamond, D. (2002) Just for Fun: The Story of an Accidental Revolutionary.
London: Harper Collins Publishers.
Lindberg, V. (2008) Intellectual Property and Open Source. Sebastopol: OReilly Media.
Weber, S. (2004) The Success of Open Source. Cambridge: Harvard University Press.
Wurster, L. (2011) Open Source Software Hits a Strategic Tipping Point. Available at:
http://blogs.hbr.org/cs/2011/03/open_source_software_hits_a_st.html?goback= per
cent2Egde_2963446_member_46643855 (Accessed: 20 March 2012).
Part III
Trends and Evolutions in
Chinese Co-operatives
10
The Development of Chinese
Co-operatives in Rural Areas
Xuchu Xu and Bin Wu

Introduction

Eradicating poverty is one of the biggest social challenges societies face


today, including China. In the last few decades, the Chinese government
and society have invested enormous resources in alleviating poverty.
Despite major efforts, the number of poor people in China is still large,
and the poverty-alleviation task is still arduous. According to international
standards, China still has 150 million people living in poverty.1
Worldwide, the co- operative advantages in achieving poverty allevia-
tion through self-help and mutual help have been acknowledged (Birchall
2003, see also the chapter by Zachernuk and Liu in this volume). As put
forward by Mnkner (2002: 45), the question is not how co- operatives
can help the poor and disadvantaged, but how the poor and disadvan-
taged can help themselves by forming or joining co- operatives. In China,
farmer co- operatives have arisen quietly and mushroomed since the 1980s.
Specifically, after the establishment of the household contract responsi-
bility system, a large number of specialized households emerged in rural
areas. This has promoted the specialization of agricultural production and
the diversification of economic co-operation, inducing a whole series of
farmers spontaneous joint actions. Afterwards, the central government
including the central committee of the Communist Party of China (CPC)
and the State Council issued a package of polices to encourage and guide
the development of farmer co- operatives. For example, the Number One
document of the Central Government of 1983 pointed out that a wide
range of co- operatives should be explored in order to adapt to the needs
of commodity production. 2 The Number One document of 1984 specified
that farmers can go beyond the regional restriction, freely participate in,
or establish the different forms of specialized co- operative organizations of
different sizes.3 In 1998, the Third Plenary Session of the Fifteenth Central
Committee of the CPC adopted the document CPC Central Committee on
the decision of several major issues in agriculture and rural areas, which

163
164 Xuchu Xu and Bin Wu

re- emphasized that the development of various trans-regional coopera-


tion and alliances with cross- ownership should be encouraged to adjust
agricultural production and market demands.4
Stepping into the 21st century, the market environment for agricultural
production has significantly changed, including transforming from a sell-
ers market into a buyers market, the gradual globalization of markets and
industrial and commercial capital entering into agriculture. These changes
have brought farmers into a very disadvantageous position in the environ-
ment of market competition. In view of this, The opinions of the CPC
Central Committee and the State Council on agriculture and rural work in
2001 indicated that for all types of business organizations concerning agri-
cultural industrialization, such as leading agricultural enterprises, wholesale
markets and farmers co- operative organizations, as long as cost- effective
and able to increase farmers income, they should be treated equally and
supported.5 Moreover, according to the Number Three document, in 2003,
China should accelerate the related legislative progress, to guide farmers to
set up a variety of new rural specialized co- operative organizations based on
the principles of user- owner, user- control and user-benefits.6 The Number
One document of 2005 also required that governments at all levels should
support the development of rural specialized co- operatives by reducing
taxes for these organizations and the processing entities operated by them.7
Finally, by the end of 2006, the Farmers Specialized Co- operative Law was
approved,8 and implemented on 1 July 2007. The Number One documents of
2007, 2008, 2009 and 2010 required governments at all levels to conscien-
tiously implement the law and to provide support for co- operatives to accel-
erate development (see also chapters by Zhao and by Yuan, in this volume).
In what follows, we present a co- operative typology in China and exam-
ine the effects different co- operative models can generate in reality. Our
typology of Chinese rural co- operatives is mainly based on our own obser-
vations and surveys. Since 2003, we have been involved in research on
farmer co- operatives. Through participation in different research projects
and the training activities as experts, we have visited more than a thousand
farmer co- operatives in mainland China, with nearly nationwide coverage.
Furthermore, Xu has been involved as a legislative expert in co- drafting the
first local legislation on farmers co- operatives since the founding of New
China (the Farmer Co- operatives Statute in Zhejiang Province, adopted on
11 November 2004) and the Farmers Specialized Co- operative Law.

Classification of farmers specialized co-operatives in China

In this section, we present a classification of farmers specialized co- operatives


in rural areas of China. Based on this classification, we further propose to
divide those organizations into two types: those with objective pro-poor
characteristics and those with subjective pro-poor characteristics. This
The Development of Chinese Co- operatives in Rural Areas 165

division helps in understanding the effects different types of co- operatives


can generate on the ground.

Classification
At present, there are mainly two types of farmers specialized organizations
in China: farmers specialized co-operatives and farmers specialized asso-
ciations. From the perspective of ownership rights, Chaddad and Cook pro-
posed a typology of discrete co-operative models in which the traditional
co-operative structure and the investor-oriented firm are characterized as
polar forms (Chaddad and Cook 2003: 2). Taking as reference their typology
and, at the same time, taking into account the actual situation, we propose
the basic types of farmers co-operatives in China as follows (see Table 10.1):

Type I traditional/classical co- operatives


This type mainly refers to the co- operatives which operate in line with the
international co- operative principles and maintain close contact with their
members. They have the following organizational characteristics:

the rule voluntary entry and free exit is used;


co- operatives ownership is limited to members (as patrons);
members generally contribute roughly equal shares;
the rule one person, one vote is followed;
the distributable profits are mainly based on members patronage. Only
limited dividends are based on capital contribution (usually lower than
the bank call rates during the same period);
shares are not allowed to be transferred or traded, they are nominal;
there is a certain amount of accumulation of funds that are non-divisible.

At present, few such co- operatives exist. According to our estimation, tra-
ditional co- operatives account for approximately 10 per cent of the total
number of farmers co- operatives in China.

Type II shareholding co- operatives


This type mainly refers to the co- operatives that blend the shareholding
system with the co- operative form. Their organizational characteristics are
complicated, usually including:

they are commonly established by rural elites, such as large farmers, agri-
food processing companies, grassroots agricultural service sectors, grass-
roots supply and marketing co- operatives;
they set some limitations on members entry and exit, in order to enrol
the specialized farmers reaching a certain scale of production;
they adopt diverse voting methods, combining one person, one vote and
voting by patronage amount or by share ownership;
166 Xuchu Xu and Bin Wu

Table 10.1 A typology of farmers co- operatives in China

Share
Profit of total Pro-poor
Type Ownership Decision distribution co-ops characteristics

Traditional/ Limited to members One person, Mainly based 10% Subjective pro-
classical co- (as patrons); one vote on members poor
operatives members patronage;
contribution a certain
roughly equal amount of
non-divisible
accumulation
funds
Shareholding Having certain Diverse Diverse 40% Objective pro-
co-operatives property methods, methods, poor
relationship with combining mainly based
some partner one person, on capital
enterprises, one vote contribution,
who may own and one but can also
investor-owned person, combine with
companies as multiple patronage
co-operatives votes, refunds;
subsidiaries a certain
amount of
non-divisible
accumulation
funds
Modern co- Requiring a Diverse Mainly based on 10% Objective pro-
operatives minimum combining patronages; poor
amount of one person, a certain
investment shares one vote amount of
and advanced and one non-divisible
payment. The person, accumulation
amount of multiple funds
investment shares votes, one
is equivalent to person, one
the amount of vote is the
patronage mainstream
method
Farmers Loosely defined One person, Neither 30% Subjective pro-
associations membership, only one vote distribute poor
a small amount of profits, nor
fees is OK accumulate
common
reserve funds
Co-operative Most of them simply 5% Objective pro-
federations consolidate poor
the financial
statements of
member co-
operatives and
merely play a
coordinating role

Source: The authors.


The Development of Chinese Co- operatives in Rural Areas 167

they adopt diverse profit- distribution methods. The dividends are mainly
based on capital contribution, but sometimes are also in combination
with patronage refunds. Shares are allowed to be transferred, albeit with
certain restrictions;
they accumulate a certain amount of non- divisible funds, but some
co- operatives allocate these funds to individual members;
they have certain property relationship with some partner enter-
prises. Some of them own investor- owned companies as co- operatives
subsidiaries.

According to our estimation, these co- operatives account for approximately


40 per cent of the total number of co- operatives nationwide and are concen-
trated on the eastern coast of China.

Type III modern co- operatives


This type refers to co- operatives that transformed some traditional
co- operative concepts and mechanisms (that is open membership and
decentralization of decision making) in order to adapt to environmental
changes. It is similar to the New Generation Co- operatives in North America
(Nilsson 1997). Modern co- operatives position themselves as the core enter-
prise in the supply chain. Their organizational characteristics include the
following aspects:

they have specific membership policy (that is, limited ownership, belong-
ing only to members/patrons);
they require a minimum amount of investment shares and advanced pay-
ment. The amount of investment shares is equivalent to the amount of
patronage of each member;
they set delivery contract or agreement, binding together members and
co- operatives;
they adopt diverse voting methods, combining one person, one vote and
one person, multiple votes (in accordance with the amount of patronage
or shares). But the rule of one person, one vote is still the mainstream
voting method;
profit distribution is mainly based on patronages;
shares are allowed to be transferred, traded and revaluated;
they accumulate a certain amount of non- divisible funds, but some of
them assign these funds to individual members.

The main differences between the modern co- operative model and the
traditional one lie in the fact that, in the former type, the limitation of
residual claims has become loosened and there is a possibility of capital
mobility and of capital evaluation through the market. Meanwhile, the
difference between this model and the shareholding co- operative one is
168 Xuchu Xu and Bin Wu

that, in this type, ownership is restricted to members/patrons only and


the principle of democratic decision making is respected.
According to our estimation, the co- operatives of this type account for
approximately 10 per cent of the total number of co- operatives nationwide
and are also concentrated on the eastern coast.

Type IV farmers associations


This type of farmers organizations refers to those co- operative organiza-
tions that have relatively loose contact with their members. They focus on
coordinating members behaviour and providing membership services. In
China, this type of organization is sometimes called farmer professional
associations.
Although it is arguable whether this type belongs to the family of farmers
specialized co- operatives, we include it in our typology, considering that
this is a special type of co- operative enterprise with a strong community
orientation.
Among them, some are marketing and agri-food processing associa-
tions, similar to auctions and bargaining associations in Western socie-
ties. Others only exist for the sake of exchanging information and for skill
development, conducting research and development-related activities and
other non-business activities. In order to adjust to the exigencies of the
market, these associations would most likely convert into farmers spe-
cialized co- operatives, industry associations, stock companies or private
enterprises.
Their organizational characteristics include the following aspects:

their membership is loosely defined; as long as farmers pay a small amount


in fees, they can become members, and sometimes a member is even not
required to pay any sum;
they follow the rule of one person, one vote;
they are strong in providing services but weak in conducting business-
oriented activities;
they are nonprofits. They neither distribute profits, nor accumulate com-
mon reserve funds;
according to our estimation, this type of co- operative accounts for approx-
imately 30 per cent of the national total.

Type V co- operative federations


Federations are second- or third-tier organizations, jointly set up by simi-
lar farmers co- operatives in order to meet new needs concerning business
development. We regard co- operative federations as independent business
entities. However, most of the Chinese federations simply consolidate the
financial statements of member co- operatives and merely play a coordinat-
ing role.
The Development of Chinese Co- operatives in Rural Areas 169

According to our estimation, this type accounts for less than 5 per cent of
the total number of Chinese farmers co-operatives. Although marginal at
present, this type is expected to expand in the next few years.

Discussion
To understand the classification of Chinese co- operatives as discussed
above, we consider it necessary to create the concept of organizations with
objective pro-poor characteristics and those with subjective pro-poor
characteristics, referring to pro-poor growth. According to Ravallion
(2004), there are two definitions of pro-poor growth. Based on the first
definition, pro-poor growth means poverty falls more than it would
have if all incomes had grown at the same rate (Baulch and McCullock
2000; Kakwani and Pernia 2000; quoted from Ravallion 2004: 2). In other
words, pro-poor growth ... requires that the incomes of the poor grow at
a higher rate than those of the non-poor (Ravallion 2004: 2). The second
definition treats a growth process as pro-poor if and only if poor people
benefit in absolute terms, as reflected in an appropriate measure of pov-
erty (Ravallion and Chen 2003; quoted from Ravallion 2004: 2). Both
definitions concern whether or not poverty is effectively alleviated. In
this study, we borrow this concept to discuss the effects on poverty gener-
ated by different types of co- operatives.
Correspondingly, we refer to organizations with objective pro-poor
characteristics as those having no defined subjective pro-poor goals, but
which benefit poor people in reality. Actually, this is regarded as a posi-
tive spillover effect created by these organizations. On the other hand,
we regard organizations with subjective pro-poor characteristics as those
with obvious pro-poor objectives but possibly not benefiting poor people
in an effective way. Apparently, the latter type may not have ideal pro-
poor effects, and the former may not be driven by significant pro-poor
motivations. Type I and type IV co- operatives mentioned in section 2.1
are closer to Webers (1949) ideal typical co- operatives, reflecting the
features of voluntary and open membership, members equal economic
contribution, one member, one vote and benefiting members in pro-
portion to patronage. These co- operatives are more likely to support poor
people out of subjective pro-poor motivations, but at the same time, tend
to have a poor performance of reducing poverty in reality. On the con-
trary, we consider the type II, type III and type V co- operatives to have
a relatively good performance of benefiting poor people (owing to their
large business scale and strong marketing capabilities). But they are more
likely to be driven by instrumental and pragmatic motivations instead of
subject pro-poor ones.
The co- operative division in this study is closely related to the co- operative
potential in poverty reduction. As examined by Johnston Birchall in dis-
cussing the co- operative advantage:
170 Xuchu Xu and Bin Wu

Co- operatives began by enabling people to raise themselves above pov-


erty, but later they became a means by which low and middle-income
people continued to accumulate economic advantages. They raised
whole classes of people out of poverty and prevented them from slipping
back into it, which is in its own terms an achievement. Sometimes this
meant that poorer people were unable to benefit. At other times the open
membership principle meant that the poor did benefit, but not as part
of a planned design. Co- operatives were not designed as tools of pov-
erty reduction, but were a means by which groups of people could gain
economic advantages that individually they could not achieve. (Birchall
2003: 7).

Typology of other Chinese farmer co-operatives


in rual areas

Besides the farmers specialized co- operatives discussed so far, in this section
we further provide an examination of other types of co- operatives currently
in operation in poor rural areas of China. They include rural mutual-aid
financial organizations, water-user associations, tobacco co- operatives, pas-
toral co- operatives and womens co- operatives.

Rural mutual-aid financial organizations


Rural mutual-aid financial organizations are agencies that can be situated in
between standard financial organizations and non- conventional financial
organizations (World Bank 2008).
Since 2004, some areas of China have used domestic fiscal funds or funds
from international organizations to develop pilot projects on community-
loan funds and mutual funds including, for example, Village Development
Mutual Funds in poor regions, and Rural Community Development Funds
Rolling Model supported by the World Banks China Economic Reform
Implementation Project (TCC5). All these pilot projects have established
mutual organizations to provide financial services within the framework of
poverty-alleviation in rural areas. Among them, the Village Development
Mutual Funds project initiated by the State Council Poverty Alleviation
Leading Group Office and the Ministry of Finance of China in 2006, is cur-
rently regarded as the most extensive and influential pilot project (see also
the chapter by He, in this volume).
Based on whether they have a financial license from the China Banking
Regulatory Commission (CBRC), the rural mutual-aid financial organiza-
tions can be divided into standard types and alternative types (He 2007).
Depending on funding sources, they can be divided into funds based on
fiscal resources, funds based on external donations and funds purely pro-
vided by members (Wang Li and Ma 2008). Besides, Zhang and Zhang
(2008) make a similar distinction between endogenous funds, externally
The Development of Chinese Co- operatives in Rural Areas 171

driven funds and charitable funds. Some funds are available to members
only, while others are open to the wider community (Wang and Li 2009).
Regardless of what kind of rural mutual aid financial organizations they
are, they generally share similar mechanisms and advantages (Lin and Xu
2008): (a) having explicit property rights of mutual funds; (b) being more
effective in targeting poverty; (c) having basic democratic management and
(d) being relatively successful in controlling financial risks.
However, they experience similar problems as well (Lin and Xu 2008):
(a) in most cases, their relationship with farmers specialized co- operatives
is not close; (b) the effects of poverty reduction are often unsatisfying; (c)
there is a lack of a native third party; (d) they suffer from a small amount of
funding and an uncertain future impeding their sustainability.

Water-user associations
In recent years, water-user associations have become increasingly popular in
rural China as a form of public participation in water management (World
Bank 2009: 56). They are social organizations established and democratically
controlled by water users in agricultural irrigation areas. They are nonprofit
mutual associations. Currently, there are several organizations promoting
the establishment of water-user associations in China, including the World
Bank, the United Kingdom Department for International Development and
other international agencies, as well as the Ministry of Water Resources
(MWR) of China and local governments. At the same time many farmers
have also explored this model spontaneously. By mid 2007 there were more
than 20,000 such organizations in 30 provinces/municipalities across China,
involving more than 60 million farmers participating in water management
(World Bank 2009: 56).
In general, water-user associations adhere to the following four principles
defined by the World Bank (1994):

they are organizations owned and controlled by farmers;


they are established in accordance with present/non-historical water
boundaries;
the measurement and charge of water are based on the amount of water
use in cubic metres;
the charge for water use should be paid to the water supplier for channel
maintenance.

These principles ensure that water user-associations are autonomous organi-


zations controlled by water users, thus realizing their full participation in
irrigation management. The promotion of water-user associations by the
MWR and the gradual improvement of farmers self-awareness and their
organizational capability have become beneficial conditions for the devel-
opment of this type of organizations. Their operational principles and
172 Xuchu Xu and Bin Wu

participatory decision-making character would generate significant positive


effects on the poor. However, there are some practical problems that need to
be addressed. On the one hand, since most water user associations are driven
by external forces, they have never broken off relations with governmen-
tal departments promoting their development from the beginning (Tong
2005). On the other hand, most of them are set up within the boundaries
of administrative villages, so there is considerable overlap between village
leadership and association leadership. This may result in the association
being controlled and managed by village leaders. Currently, their function
is limited to irrigation management, but they have the potential to become
an instrument to improve local governance in a much broader sense. In
short, the practical value of water user associations needs to be explored
further.

Tobacco co- operatives


In China, most of the tobacco production regions are located in poor areas.
According to the Rural Poverty Alleviation and Development Program
of China (20012010), among the 592 national poverty counties identi-
fied, 185 (or one third) were located in regions with tobacco production. In
recent years, under the modernization process of tobacco cultivation and
processing, tobacco co- operatives have developed rapidly and contributed
to the increase of farmer household revenues. Up until 2011, the number of
tobacco co- operatives registered under the Administration for Industry and
Commerce had reached 2,904, involving 610,000 farmer members.9 Since the
tobacco industry (mostly large-scale for-profit companies) lacks experience
to govern and manage tobacco co- operatives, many problems have arisen,
such as excessive intervention of tobacco companies, high dependence upon
subsidies, a lack of co- operative consciousness of self- development; elite con-
trol and opportunists seeking of personal gain; fuzzy boundaries among
village, tobacco station and co- operatives; farmer members low participa-
tion; poor democratic management; irrational organizational structure with
much too high management costs; a scale too big to run efficiently; a lack
of operation standardization with low service quality; facing large business
risks and weak profitability and development capability.
If we consider service to members (member benefit) and democratic man-
agement (member control) as the intrinsic characteristics of co- operatives,
we can see that tobacco co- operatives perform well in benefiting members,
but not so well in democratic management. The development paradox of
tobacco co- operatives is that, on the one hand, it seems difficult for tobacco
co- operatives to emerge spontaneously without support from the tobacco
industry; while, on the other hand, the tobacco industry often interferes
in the management and decision-making of tobacco co- operatives. In any
case, the tobacco industry should respect the co- operatives intrinsic features
(that is, member benefit and member control) and transfer its functions of
The Development of Chinese Co- operatives in Rural Areas 173

management and service to tobacco co- operatives to ensure their sustain-


ability. Currently, a series of national tobacco policies have enabled tobacco
co- operatives to protect farmers interests and help them reduce the risk in
production. But, in the meantime, due to the price monopoly of the tobacco
industry, it is difficult for tobacco co- operatives to realize an income increase
for member households. So farmers still have difficulties in gaining decent
incomes from tobacco planting, and the tobacco industry also finds it dif-
ficult to respect and support the autonomy and independence of tobacco
co- operatives.

Pastoral co- operatives


The introduction of the household-responsibility system in grassland areas
has sometimes generated serious negative effects in grassland ecosystems (Ao
2001). Compared with agricultural areas, grassland areas face high costs of
exclusive property rights. As a result, the tragedy of the commons (Hardin
1968) has increasingly become the social dilemma for the herders in China.
On this point, pastoral co-operatives can reduce the cost and achieve econo-
mies of scale in livestock production. In this type of co-operative, a joint
management mechanism can be established based on a clear distinction of
responsibilities, rights and interests among households. This joint manage-
ment business model means that a number (more than two) of adjacent herds-
men merge their personal grasslands and jointly manage them. Empirical
work has found strong support for the joint management businesses model
in different regions, and under different conditions co-operatives prove to be
a sound organizational model for sustainable development of pastoral areas
(Ao 2001).
However, the number of pastoral co-operatives is still too small at the
moment, and their business activities are extremely limited. A considerable
portion of herdsmen believe that farmers specialized co-operatives are govern-
ment organizations which have nothing to do with them and, therefore, they
have not been enthusiastic about the idea of starting or joining co-operatives.
Actively motivating the herdsmen, brokers and agriculture-related enterprises
to set up joint-management businesses and pastoral co-operatives will be impor-
tant for their further development (see the analysis on resource management
by Zachernuk and Liu in this volume).

Womens co- operatives


The womens co- operative is a very vague concept, referring generally to
three situations: (a) the director is a woman; (b) the vast majority of mem-
bers are women; (c) women participate in the governance of co- operatives
and lead in their development (see also Zachernuk and Liu in this volume).
It is generally believed that womens participation in co-operative govern-
ance has great significance both for women and for co-operatives. First of all,
through direct participation in co-operative elections, women can express
174 Xuchu Xu and Bin Wu

their views. This can help enhance their sense of participation, self-confidence
and social status. Second, by joining co-operatives, women can gain an inde-
pendent income and thus an independent personality, potentially changing
the dependent status of women in the family. Finally, through participation
in co-operative activities, women can improve their ideas, skills, personal
qualities and mental outlook. In addition, participation of women has special
meaning to co-operatives: that is, the respect of co-operative principles and
practices, because the principle of open membership can be fulfilled without
gender discrimination, which is very important for a co-operatives successful
development.
The most fundamental features of womens co- operatives are the follow-
ing: First, they can improve aid effectiveness. According to Li (1998), in
a poor community, the poor people of different gender categories showed
a considerable degree of heterogeneity of preferences when solving the
problems concerning basic needs. It can often be found that womens ideas
are much easier to be implemented in reality. This point is conducive to
the effectiveness of poverty alleviation. Second, women have gradually
become the major force of agricultural production and marketing activities.
For example, the study by Ye and Wu (2008) has shown that among the
remaining rural population, 54.2 percent are women. The feminization of
agriculture has further increased the willingness for mutual assistance and
joint action in order to avoid market risks. Therefore, joining a co- operative
can improve womens enthusiasm and motivation. Thirdly, when taking
into account their special status and role at home (that is being a mother),
womens participation in co- operatives can also contribute to the moderni-
zation of the whole family, including the children (Li 1998).

The future development of Chinese co-operatives in poor, rural


China

In this chapter, we have provided a typology of farmers specialized


co- operatives and other co- operative organizations in rural areas of China
and discussed the pro-poor effects different co- operative models can gener-
ate in reality. For the future of Chinese co- operatives in rural areas, particu-
larly in poor areas, we believe their development needs to comply with some
basic principles such as being independent, market- oriented and inclusive.
Specifically, it should rely on a combination of pursuing economic interests
and social interests, of agricultural co- operation and financial co-operation,
of endogenous development and exogenous propulsion, as well as of new
and traditional organizations.
As consultants for the International Fund for Agricultural Development
(IFAD) in the Asia and the Pacific region, we have conducted a series of
surveys in three national poverty-alleviation pilots, including Yilong
County of Sichuan Province, Huoshan County of Ahhui Province (April
The Development of Chinese Co- operatives in Rural Areas 175

to June 2008) and Youyang County of Chongqing Municipalities (June


2010). In collaboration with the local governments, we selected as sur-
vey samples three townships in each county and two villages in each
township. In each village, two villager groups participating in farmer
co- operatives and mutual-aid funds were randomly selected. For each vil-
lage group, we conducted semi-structured interviews with both managers
and three to five members of the organization.
In Youyang County we visited Weishi in Tianguan township where, fol-
lowing discussions with ten interviewees (one director of villages commit-
tee, one CPC secretary of a village branch who is also part-time chairman
of the local mutual-aid financial co- operative,10 five chairmen of farmers
professional co- operatives and three ordinary members), we developed the
1 + N model.

1 + N model: a co- operative innovation


Weishi is a poor village. In 2009, the per capita annual income was mere
2,684 yuan (less than 400 U.S. dollars). At the entrance of the village,
there is a ten-kilometre long canyon. But ever since more and more villag-
ers have gradually migrated into cities to work, lots of good farmland in
the canyon has been abandoned. At the end of 2009, with the support of
the county government, the villages decided to open up the barren can-
yon. Subsequently, many villagers brought farming techniques, learned
outside, back to their hometown. Soon, seven animal husbandry farm-
ers co- operatives emerged. However, the most pressing problem was not
the shortage of entrepreneurs, but the shortage of startup capital. A turn-
ing point came in 2010, when the Number One document was issued. It
was clearly stated in the document that governments at all levels should
actively guide the capital in the society to invest in the establishment of
new types of rural financial organizations, to adapt to farmers needs.
Taking this opportunity, Weishi quickly set up a mutual-aid financial
co- operative. After the first meeting to mobilize local villagers, 179 farmer
households applied to join the co- operative, accounting for 90 per cent of
the village households.
In sum, the 1 + N model represents a development model of farmer
co- operatives, driven both endogenously and exogenously. There are several
steps in the model:

1. build a mutual-aid financial co- operative in a poor village;


2. focus on promoting the development of farmers specialized co- operatives
based on industrial conditions;
3. establish a farmers co-operative union (or association) at the village level;
4. when the time is ripe, a farmers co- operative union (or association) and
mutual aid financial co- operative union (or association) at the township
level (or even at the county level) can be established;
176 Xuchu Xu and Bin Wu

5. at certain point, the union (or association) at the township level can be
removed, and an alliance of farmers co- operative organizations at the
county level (or village level) can be established.

Discussion
During our fieldwork, we found this 1 + N model of co- operative develop-
ment very innovative. We propose that this method has the potential to
generate the pro-poor effects and can represent a new way for the future
development of Chinese co- operatives in rural areas. It can break down the
silos of government departments, build a new network structure of mutual
finance for poor populations and promote the reconstruction of rural grass-
roots governance.
However, to ensure its success, we regard the following points as impor-
tant. First, different departments resources at the county level should
be effectively coordinated. At the moment, it seems very challenging for
county leaders of various departments to make joint efforts in support of
pro-poor development, owing to their different interests and responsibili-
ties. Second, at the village level, the mechanism of checks and balances
needs to be established among the village Party branch, village adminis-
tration, village collective economic organizations, mutual-aid financial
co- operatives and specialized co- operatives. Third, if the vertical network
of specialized co- operative union and credit union cannot be established at
the county level, the leadership at the township level is essential to provide
guidance and support.
Based on our analysis in this study, we conclude by highlighting two key
aspects concerning the future development of Chinese co- operatives in gen-
eral. On the one side, it is important to find and cultivate co- operative entre-
preneurs with the capability and enough prestige to lead farmer members
and to raise them out of poverty, and with the dedication to co- operative
principles and aims. On the other side, we need to ensure that farmer mem-
bers hold a dominant position in co- operatives, maintain their democratic
management rights and strive to build organizational cohesion.

Notes
1. The authors would like to thank, for financial support: International Fund for
Agricultural Development (IFAD), UN and Ministry of Education of the PRC
(10-JJD-790017).Xinhua News Website, Chinese Premiers Address at Copenhagen
Climate Change Summit: http://news.xinhuanet.com/english/200912/18/
content_12668022.htm (Accessed: 10 May 2012).
2. For detailed information, see: http://cpc.people.com.cn/GB/64162/135439/8134114.
html (Accessed:10 May 2012).
3. For detailed information, see: http://cpc.people.com.cn/GB/64162/64165/76621/7
6622/5229964.html (Accessed: 10 May 2012).
The Development of Chinese Co- operatives in Rural Areas 177

4. For detailed information, see: http://cpc.people.com.cn/GB/64162/71380/71382/


71386/4837835.html (Accessed: 10 May 2012).
5. For detailed information, see: http://www.people.com.cn/GB/
paper1172/2667/388284.html (Accessed: 10 May 2012).
6. For detailed information, see: http://www.cfc.agri.gov.cn/cfc/jsp/text.jsp?Colum
nID=134&TID=20081012202309404843313 (Accessed: 10 May 2012).
7. For detailed information, see: http://www.gov.cn/gongbao/content/2005/
content_63347.htm (Accessed: 10 May 2012).
8. See: http://www.gov.cn/flfg/200610/31/content_429392.htm (Accessed: 10 May
2012).
9. Miao Wei, Report at the 2012 National Tobacco Conference, see: http://news.xin-
huanet.com/fortune/201201/12/c_111426895.htm (Accessed: 10 May 2012).
10. In rural China, the nominal management agency of village is the self-governing
Villagers Committee, however, the actual rules agency is the Communist Party of
China (CPC) branch of the village.

References
Ao, Q. (2001) Re- cognition of the Inner Mongolia Grassland Husbandry, Journal of
Inner Mongolia Finance and Economics College, (3): 8388.
Baulch, R. and McCulloch, N. (2000) Tracking Pro-poor Growth, ID21 Insights No.
31, Sussex: Institute of Development Studies.
Birchall, J. (2003) Rediscovering the Cooperative Advantage. Poverty Reduction through
Self-help. Geneva: International Labour Office.
Chaddad, F.R. and Cook, M.L. (2003) The Emergence of Non-Traditional Cooperative
Structures. Public and Private Policy Issues. Paper presented at the NCR-194
Research on Co- operatives Annual Meeting, October, Kansas City, MO.
Hardin, G. (1968) The Tragedy of the Commons, Science, 162(3859): 12431248.
He, G. (2007) An Explanation for Rural Mutual Financial Cooperatives: Mechanism
and Its Performance, Financial Theory and Practice, 4: 38. Available at: http://2012.
coop/en/what- co- op/co- operative-identity-values-principles (Accessed: 10 February
2010).
Kakwani, N. and Pernia, E. (2000) What is Pro-Poor Growth?, Asian Development
Review, 18(1): 116.
Li, X. (1998) Institutional Innovation of Anti-poverty: Participation Issue of Poor
Communities and Groups, Chinas Underdeveloped Regions, 6: 5459.
Lin, W. and Xu, X. (2008) The Mutual-aid Financial Organizations and Anti-poverty
in Rural China, National Pro-poor Policy Analysis, Formulation and Implementation,
Program Report: IFAD-FAO.
Miao, W. (2012) Report on the 2012 National Tobacco Conference. Available at: http://news.
xinhuanet.com/fortune/201201/12/c_111426895.htm (Accessed: 10 May 2012).
Mnkner, H.-H. (2002) The Supportive Environment for Co- operatives in the
Context of the Current Political, Economic, Social, Demographic and Ecological
Environments. Paper presented at Expert Group Meeting on Supportive Environment
for Co- operatives: A Stakeholder Dialogue on Definitions, Prerequisites and Process of
Creation, 1517 May 2002, Ulaanbaatar, Mongolia.
NBSC (National Bureau of Statistics of China) (2011) 2011 Chinas Household Survey
Yearbook. Beijing: Statistics Press.
Nilsson, J. (1997) New Generation Farmer Coops, Review of International Co- operation,
90(1): 3238.
178 Xuchu Xu and Bin Wu

Ravallion, M. and Chen, S. (2003) Measuring Pro-Poor Growth, Economics Letters,


78(1): 9399.
Tong, Z. (2005) Rural NGO and Rural Development in China: Case Studies. Beijing: Social
Sciences Academic Press.
UNDP (2006) Human Development Report 2005, International Cooperation at a Crossroads:
Aid, Trade and Security in an Unequal World. New York: United Nations Development
Programme (UNDP).
Wang, C., Li, X. and Ma, X. (2008) Practice and Thinking of Rural Mutual Financial
Co- operatives in Anhui Province, China Finance, 2: 6567.
Wang, J. and Li, L. (2009) Survey and Thinking of Rural Mutual Financial
Co- operative Organizations in Jiangsu and Zhejiang Provinces, China Collective
Economy, 11: 1416.
Weber, M. (1949) Objectivity in Social Science and Social Policy, in: E.A. Shils and
H.A. Finch (eds) The Methodology of the Social Sciences. New York: The Free Press of
Glencoe.
World Bank (1994) A Review of World Bank Experience in Irrigation, Operations Evaluation
Department. Washington D.C.: Report No. 13676.
World Bank (2008) World Development Report 2008: Agriculture for Development.
Beijing: Tsinghua University Press.
World Bank (2009) Addressing Chinas Water Scarcity: Recommendations for Selected
Water Resource Management Issues. Available at: http://water.worldbank.org/publica-
tions/addressing- chinas-water-scarcity-recommendations-selected-water-resource-
management-is-0 (Accessed: 10 May 2012).
Ye, J. and Wu, H. (2008) Dancing Solo: Women Left Behind in Rural China. Beijing:
Social Sciences Academic Press.
Zhang, D. and Zhang, Y. (2008) Thinking and Analysis of Farmer Mutual Financial
Co- operative Organization, Economist, 1: 4047.
11
Co-operatives and Poverty Reduction
in China
Tim Zachernuk and Guozhong Liu

Co-operatives and poverty alleviation:


some international experience

Co- operatives are frequently highlighted as holding great potential for


effective poverty alleviation. Indeed it has even been suggested that organi-
zations with a poverty alleviation mandate such as the World Bank can-
not do without engaging with co- operatives, if it is serious about involving
organisations of the poor in the Poverty Reduction Strategy Process (PRSP)
(Simmons and Birchall 2008). By virtue of their nature as economic
organizations, co- operatives aim to increase the incomes of members and
improve their living standards. At the same time, by virtue of their nature as
community-based organizations, they serve to strengthen the capacity and
resilience of their members and communities and improve their capacity to
control and manage their own development process.
If poverty is seen in a broader context as more than simply a lack of
income, the potential of co- operatives for effective poverty alleviation is
even more obvious. Poverty is characterized not just by inadequate income,
but also a lack of other fundamentals of life such as health, education,
security, opportunity and freedom. From a livelihood point of view, pov-
erty can be understood as not just a lack of financial capital, but also a
lack of physical, natural, human and social capital (Wanyama, Develtere
and Pollet 2008). Poverty can also be understood as vulnerability, and
poverty-alleviation efforts must enable poor people to enhance their secu-
rity and reduce their exposure to risk. Effective poverty reduction requires
the empowerment of communities and particularly the poorer members of
communities.
While co- operatives appear to offer much promise for poverty allevia-
tion, international experience has been that co- operatives frequently fail
to live up to these expectations and fail to achieve their potential to help
the poor (Simmons and Birchall 2008). Nevertheless there are examples of
co- operatives achieving success as vehicles for poverty alleviation. A number

179
180 Tim Zachernuk and Guozhong Liu

of key factors can be identified which enable co- operatives to play a role in
lifting people out of poverty. These include:

operating as successful business enterprises, which in turn requires:


having competent management staff; operating on an adequate scale to
be commercially viable; the ability to compete successfully in markets;
being responsive to the needs of their members rather than driven
by the objectives of government, external funding agencies or local
elites;
having access to effective support structures, including training and advi-
sory support;
having access to adequate financial resources, both for the operations of
the co- operative and for its members;
participating in secondary and higher levels of co- operative organizations
and business associations (Birchall and Simmons 2009).

At the same time, a number of factors have been identified which lead to
the failure of co- operatives to realize their potential for poverty alleviation.
Some of these include (Simmons and Birchall 2008):

using a top- down approach to develop co- operatives;


pursuing co- operative promotion efforts on a large scale, leading to the
creation of vested interests;
existing elites at the local level capturing resources intended for co-operative
development, benefiting the wealthy and middle income rather than the
poor;
operating on a small scale, which makes them commercially unviable;
being driven by a government or donor-sponsored agenda rather than the
needs of members, including co- operative formation simply as a way to
get access to financial support.

Research into the poverty impact of co- operatives particularly highlights the
importance of apex organizations which can take advantage of economies
of scale to provide support services such as marketing information, train-
ing and technical advice. The availability of management training through
apex organizations, government supported co- operative colleges and other
agencies is also a common feature of successful co- operatives.
Another important role of co- operatives is to provide a voice for their
members in policy discussions. Apex organizations, or federations of
co- operatives, provide input into discussions on agriculture, rural develop-
ment and poverty alleviation policies from the perspective of their mem-
bers and ensure that there is a voice representing producers and the poor. In
Senegal and Burkina Faso, for example, this consultative process is formally
institutionalized (Resnick and Birner 2008).
Co- operatives and Poverty Reduction in China 181

Examples of successful poverty alleviation can be found as a result of col-


laboration between producer co- operatives and Fairtrade organizations. This
avenue is particularly effective because it is based on long-term commercial
linkages and therefore has a high potential for growth and sustainability.
The Rooibos tea co- operative in South Africa and the Kuapa Kokoo cocoa
growers co- operative in Ghana both provide good examples of the achieve-
ments of successful collaboration. The former was established in 2001 and,
although small (only 58 members), has greatly increased the incomes of
members by processing their own organically grown tea, exporting directly
to Europe with Fairtrade certification and has recently expanded into eco-
tourism ventures (Heiveld 2013). The latter, established in 1994, now has
45,000 members, and is part owner of a UK-based chocolate company, help-
ing its members capture a larger part of the value chain (Kuapa Kokoo 2013).
In 20092010, 641,000 people in Africa benefited from dealing through
Fairtrade organizations, with total sales through Fairtrade of 134.2 million
euros (209 euros/person) and a Fairtrade premium of 13.8 million euros
(21.5 euros/person) returned to the communities where the products origi-
nated (Fairtrade 2011).
The potential of co- operative organizations to address poverty is becom-
ing increasingly recognized. Many countries now explicitly include support
for agricultural co- operatives and savings and credit co- operatives as part
of their national poverty-reduction strategies (Birchall and Simmons 2009).
However, the effectiveness of co- operatives for alleviating poverty will only
be realized if appropriate strategies and support measures are used.

Chinese poverty-alleviation experience

Chinas poverty alleviation achievements since the start of the economic


reform programme three decades ago are unprecedented. In terms of the
World Banks poverty line of 8.88 RMB/day (equivalent to the international
dollar-a-day standard), the poverty rate fell from 65 per cent of the popula-
tion in 1981 to 10 per cent of the population in 2004. The number of poor
people fell from 652 million in 1981 to 135 million in 2004, a decline of
over half a billion people. According to the World Bank, over that period
the absolute number of poor people in the developing world declined from
1.5 to 1.1 billion. In other words, but for China, there would have been no
decline in the global number of poor (World Bank 2009).
Most of the decline in poverty can be attributed to Chinas phenomenal
economic growth, with per capita GDP increasing by a factor of 5.8 between
1981 and 2004 (World Bank 2009). While Chinas growth strategy has been
pro-poor, some of the success for the countrys poverty-alleviation achieve-
ments can also be attributed to the large government poverty-alleviation
efforts. It is estimated that poverty-reduction programs contributed more
than one percentage point annually to the income growth of farmers
182 Tim Zachernuk and Guozhong Liu

(World Bank 2009). However, in recent years the responsiveness of poverty


to growth has slowed, indicating that the characteristics of the remaining
poor are of a different and more complex nature, and that economic growth
of itself will not solve the poverty problem. New strategies to combat pov-
erty are therefore required.
Until 2001 Chinas poverty alleviation strategy was primarily focused
on a geographic basis, targeting 591 designated poverty counties where
the county-wide average per capita income fell below the poverty line. The
main planks of the poverty-alleviation strategy involved infrastructure
construction programmes (mostly road, water supply and irrigation), often
implemented in the form of cash for work and subsidized loan programmes
(mostly used to subsidize rural enterprises but also with some loans for
households). This approach brought rapid results, but over time the short-
comings became apparent, as not all poor people were living in poverty
counties and within poor counties the poverty-alleviation resources were
not always found to be benefiting the poor. In 2001, therefore, the strategy
was modified to target 148,000 designated poverty villages.
Since 2001 the three main pillars of the poverty alleviation strategy have
involved: integrated village development planning in poor villages to iden-
tify priorities for infrastructure investments; a training programme for
workers primarily aimed at improving skills for non-agricultural employ-
ment opportunities and migration; and a subsidized credit programme for
agri-business to encourage the establishment of dragon-head enterprises
processing agriculture products.
The integrated village development planning approach was intended to
give all villagers, but particularly the poor, a voice in determining develop-
ment priorities and use of investment funds to improve the targeting of
poverty-alleviation funds. However, it was a top- down attempt to impose
participatory techniques rather than a genuine bottom-up process of
empowerment. Evaluation of the programme showed that it fell prey to cap-
ture by local elites and remained very much a process in the control of local
government officials (World Bank 2009).
Despite the success of the past three decades, poverty remains a serious
problem in China and a national priority. The number of poor people in
China is still the second highest in the world, behind only India. While
there has been remarkable growth in incomes across the board, the urban/
rural income gap has grown, as has the income gap within rural areas.
Poverty is still predominantly a rural phenomenon, with between 90 and
99 per cent of the poor coming from rural areas.1
The highest incidence of poverty continues to exist in the western parts
of the country.2 These are also areas where overall economic growth has
lagged behind the rest of the country. While western China accounts for
only 28.7 per cent of the population, it is home to 58.2 per cent of the poor
(World Bank 2009). In the western parts of the country the natural resource
Co- operatives and Poverty Reduction in China 183

base is poor, the climate is harsh and there are long distances to the main
markets and processing industries. Analysis shows that poor families are
characterized by low productivity of land, long distances from markets and
living in mountainous terrain (World Bank 2009). Moreover, in these places
local governments, which provide many of the support services needed by
farmers, themselves lack financial resources.
While poverty-alleviation policy continues to focus on the income aspects
of poverty, some commentators on Chinas poverty problem recognize the
multi-dimensional nature of poverty. Guo Xibao and Song Jianming of
Wuhan University note that, in addition to income poverty, it is important
to recognize capacity poverty and rights poverty. Moreover, they suggest
that the three types of poverty are inseparable and mutually reinforcing
(Guo 2006). Li Lailai of the Beijing Environment and Development Research
Institute notes that poverty stems from a series of relationships, including
peoples access to resources, knowledge and information, to their social rela-
tions (social capital) and institutional resources. He describes poverty as a
self-reinforcing cycle, and escaping from the cycle can only be done through
institutional innovations enabling people to better use the resources avail-
able, or through capacity building to enable poor people to access and
utilize resources to satisfy their needs (Li 2006). However, government
poverty-alleviation policies remain primarily focused on income and the
physical manifestations of poverty.3 Questions of building social capital and
enhancing institutional relations have yet to enter into the official poverty-
alleviation agenda.

Chinese experience with co-operatives

Co- operatives, in the commonly understood international sense of the


term (ICA 1995), are a relatively new type of organization in China. In
the 1950s, after the land reform movement and prior to the programme
of collectivization which led to the creation of peoples communes, village
co- operative organizations were established in the form of supply and mar-
keting co- operatives and rural credit co- operatives. But through the proc-
ess of collectivization in the late 1950s and subsequent decollectivization
in the 1980s, these organizations lost any resemblance they once had to
co- operatives and are now more similar in structure and function to state
enterprises or government agencies.
In 2007 the Law on Specialized Farmers Co- operatives was enacted, dem-
onstrating the high priority placed by the central government on accelerat-
ing the pace of rural development and addressing the urban/rural imbalance.
By creating the law the government acknowledged the significant role
played internationally by agricultural co- operatives. The intention behind
the law was to adapt international co- operative experience and co- operative
theory to the practical realities of Chinas circumstances (Liu et al. 2007).
184 Tim Zachernuk and Guozhong Liu

It was recognized that a period of experimentation and adaptation would


be needed to develop a co- operative model appropriate to Chinas circum-
stances. Therefore the law is reasonably open in its requirements and it calls
for only limited regulation of co- operative enterprises.
The law has many aims, one of which is to improve the incomes of farm-
ers. In addition, the law aims to increase the commercialization of agri-
culture, to encourage agricultural production through economies of scale,
to promote the modernization of agriculture, promote food security and
improve food-safety standards.
Acknowledging international co- operative experience, the law reflects
the first four of the seven co- operative principles of the International
Co- operative Alliance (ICA): voluntary membership; democratic mem-
ber control; economic participation and autonomy; and independence.
Recognizing that Chinese farmers have difficulty getting access to invest-
ment capital and that they cannot use their land as collateral for loans,
the co- operative law creates some latitude for outside investors to become
members of co- operatives. Nevertheless the law, if strictly adhered to, would
ensure farmers exercise control of the organizations and receive a fair return
from the profits of the organizations.4
The law has no clauses reflecting the final 5th, 6th and 7th ICA principles
(education and training; co-operation among co- operatives; and concern
for community). As a result most of the efforts encouraging co- operative
development also neglect these principles, with the exception of education
and training on technical production skills.
With reference to the 6th principle it is worth noting that the law makes
no reference to federations of co- operatives or apex organizations, nei-
ther encouraging nor disallowing them. This omission has meant that the
creation of second-tier co- operative organizations is largely dependent on
how provincial or lower-level authorities interpret the law and put it into
practice. As a result, there are few second-tier organizations representing
co- operatives at higher levels.
Another notable omission from the law is any reference to financial serv-
ices and, as a result, credit co- operatives have not been promoted. This
omission is particularly noteworthy in that international experience dem-
onstrates the importance of financial co- operatives in supporting their
members. However, the regulation of financial institutions comes under
the purview of the China Banking Regulatory Commission, which to date
has been very circumspect in allowing co- operatives to become involved in
providing financial services.
Some village-based rural credit organizations and financial mutual-aid
groups do exist, although so far they have been limited to accepting depos-
its and granting credit to co- operative members only. However they tend to
be small: most have only a few tens of thousands of RMB for capital. Those
with over one million RMB have been colourfully described as being as
Co- operatives and Poverty Reduction in China 185

rare as a phoenix feather or unicorn horn (Anhui Co- operative Network


2011).
Following the promulgation of the co-operative law there have been major
efforts at both the national and provincial level promoting the development
of co-operatives. This has been done by providing financial incentives, public
awareness campaigns and through administrative measures such as setting tar-
gets for county and township level officials to register new co-operatives. Since
2007 there has been a spectacular growth in the number of co-operatives. As
of the end of 2012 it was reported that 680,000 co-operatives have been offi-
cially registered nationwide, representing an increase of 30 per cent from the
previous year. However as there are no requirements for regular reporting, it is
difficult to come by reliable data on the operation of these co-operatives.
It is also difficult to gather accurate membership numbers, and differ-
ent data have been provided by the Ministry of Industry and Commerce
and the Ministry of Agriculture. But using either source, it is clear that
co- operatives tend to be small, with an average size of somewhere between
20 and 80 households. It can also safely be assumed that co- operatives in
the eastern provinces, where they have been developing for longer and
enjoy more substantial support from local governments, tend to be larger
than co- operatives in the western parts of the country.
Promotion of co- operative development continues to be a key plank in the
national agricultural development strategy. As it has over most of the past
decade, the Number One document for 2013, which sets the national policy
priorities for rural development each year, stresses the importance of farmer
co- operatives as a key to addressing urban and rural imbalances, mod-
ernization of agriculture and improving rural living standards. However,
co- operatives are only one of several strategies promoted and the document
also encourages the establishment of dragon head enterprises and increas-
ing commercial investment in rural areas.
The 2013 Number One document encourages the provision of financial
support for co- operatives identified as model co- operatives. Those organi-
zations identified as models for emulation and for preferential support are
generally ones which meet government policy priorities (such as achieving
large scale, modernization or mechanization of agriculture, certification for
green food or organic food production, integration into supermarket supply
chains and so on) rather than co- operatives, which are models in terms of
internal governance practices.
The flexibility inherent in the co-operative law has created space for inno-
vation at local levels and opportunity to adapt the framework to different
conditions in different parts of the country. With the rapid growth in the
number of co- operatives and the varieties of organizations created, it is clear
that this space for innovation has been extensively used.
One of the common models, which has found wide support among
government agencies and enterprises, is the company + co- operative +
186 Tim Zachernuk and Guozhong Liu

household model. Given this wide support, it is worth describing briefly


an example of this model. A fairly typical example is that from Longgang
village in Xiaogang municipality, Hubei Province, initiated by the Chunhui
Corporation (Farmers Daily 2007). The farmers from four villages and 685
farming families, together with the Hubei Weiye Chunhui Rice Co. Ltd. were
brought together to establish the Hubei Longgan Land-share Co- operative
(Weiye Chunhui Rice Co. is a subsidiary of the Chunhui Corporation). The
capitalized value of the farmers land-use rights for 6,000 mu (400 hectares)
of land constituted a 51 per cent share of the co- operative assets, while the
Weiye Chunhui Co. provided 100 pieces of new farm equipment to make up
49 per cent of the shareholdings. The company then contracted land from
the co- operative, with the annual rental price fixed at the cash equivalent
of 180 kg of standard white rice per mu of land.
The company completely took over the management and production activ-
ities, starting with consolidating and levelling the land to make it suitable
for mechanized cultivation. With the land consolidated, the earth mounds
demarcating individual fields were eliminated and the irrigation system
rationalized to expand the useable area. The company invested in a research
facility, a digitally controlled seedling production facility, automated grain
driers, remote sensing equipment, storage facilities and processing equip-
ment with a capacity of four million tons per year. Production has been
fully mechanized, using planting machines which plant one mu of land in
20 minutes; the same area that required a full day to plant by hand. A small
number of farmers (20 farmers, or 3 per cent of co-operative members) are
employed full time in the enterprise and others get part time work during
peak labour periods. The company calculates that by mechanizing opera-
tions net costs per mu can be reduced by 110 RMB and yields increased 5 to 6
per cent. The company now produces an organically grown black rice variety
with a market value 50 times that of the ordinary white rice traditionally
grown. The company has 23 sales outlets in major cities across the country. A
fully integrated supply chain has been established, from the research facility
and seedling nursery, through to processing and final sales outlets.
Many variations of this company + co- operative + household model can
be found in the country. The approach is much favoured by government
agencies and enterprises. From the government perspective it achieves the
policy objectives of modernizing agriculture, promoting food safety and
achieving economies of scale. For local government this approach increases
their income from corporate taxes. For the enterprise it provides access to
land which would otherwise be hard to come by and gives them a guaran-
teed source of raw material. It is also relatively simple to implement and
quick to start up, as the management of the land is taken over by a well-
resourced company.
Another co- operative model which frequently gets attention is the party
branch + co- operative model. Under this approach the local party branch
Co- operatives and Poverty Reduction in China 187

(usually at a village or township level) takes the initiative to organize farm-


ers into co- operatives and assists the co- operatives in gaining access to
financial support and establishing relations with enterprises or markets.
An example of this model is the Bayantuohai Specialized Co-operative in
the Hulanbeer region of Inner Mongolia, where in 2001 the party branch
organized herders into a milk producers association (Anhui Online 2009).
It was re-registered as a co- operative when the Co- operative Law came into
effect. As start-up funding, financial support from the central government of
150,000 RMB was provided, plus 100,000 RMB from the local government,
while association members contributed 50,000 RMB. In 2005 a mutton-
raising association was also registered, and in 2006 a Beijing company
invested 17 million RMB in a meat-processing plant, with the association
having a 10 per cent shareholding in the plant. In 2009 a milking parlour
of 240 m2 was built. During this time investments were made, not only in
productive assets such as wells and silage pits, but also in education facili-
ties, housing and a day- care centre for the community. It is reported that
incomes of herding families increased from a per capita average of 1,200
RMB in 1995 to 8,600 RMB in 2009, while the township collective enter-
prise went from operating in the red in 1995 to a gross income of 1.35 mil-
lion RMB in 2009.
The Bayantuohai party + co- operative experience has been widely recog-
nized. In 2006 the villages were selected to be examples of a model village
for Inner Mongolia, and the party branch received awards as an advanced
grass-roots unit and one of the ten leading grass-roots units nationwide.

Poverty and co-operatives in China, the general experience

Given the relatively recent promulgation of the Co- operative Law, it is no


surprise that co- operatives have not to date had a significant role in the gov-
ernments poverty-alleviation efforts. However, there is recognition of the
poverty-alleviation potential for co- operatives. Article 50 of the Co- operative
Law states that when providing support to co- operatives: Priority shall be
given to the specialized farmers co- operatives in ethnic areas, outlying areas
and poverty-stricken areas. ...
National poverty-alleviation policy also identifies co- operatives as a tar-
get for poverty-alleviation efforts. However, the policy documents identify
both co- operatives and dragon-head enterprises as vehicles for promoting
the commercialization and modernization of agriculture, developing agro-
processing industries and integrating poor rural producers into marketing
channels. This suggests that the social dimension of the co- operative model
of organization have not been appreciated by the agencies responsible for
poverty-alleviation policy. The support often consists of providing subsi-
dized credit. One result is that by putting co-operatives and enterprises on
the same footing it puts co- operatives in the position of competing with
188 Tim Zachernuk and Guozhong Liu

enterprises for subsidized credit. The poverty-alleviation credit programme


is managed by the Agriculture Bank of China, which is becoming more com-
mercialized in its operations and therefore increasingly assesses the credit
risk of its loan portfolio (World Bank 2009). As most dragon-head processing
enterprises are established by large companies with solid financial backing
and a high degree of technical and management expertise, co- operatives are
at a distinct disadvantage when applying for such credit.
Policy support for co- operatives is provided by both the Ministry of
Agriculture and the Poverty Alleviation Bureau, with some poverty-
alleviation funds allocated to support co- operative development, sometimes
with mixed results. One example was seen in a poverty village in Minhe
County of Qinghai Province, visited in June 2012, which provides a not-
untypical example of how policy support is used at a local level.
The Poverty Alleviation Bureau provided grants of 5,000 RMB per
household to poor families in three villages. Five local entrepreneurs
then established a beef co- operative with these households as members,
using the 5,000 RMB from each household as the households share in
the co- operative. In return, the entrepreneurs agreed to pay a 12 per cent
dividend on the money for five years and repay the capital at the end of
five years. The entrepreneurs added investment of their own to establish a
feed lot with a capacity of 3,000 head of cattle per year. Using other gov-
ernment resources targeted for co- operative support they were also able
to build silage pits and other facilities. The management and operation
of the feedlot is the responsibility of the five main investors, while the
co- operative members neither participate in the operations of the feedlot
nor do they receive any financial benefit other than the dividend paid on
their shares.
International experience shows that working with Fairtrade organizations
can improve the incomes of co- operative members and contribute to the
development of their communities. To date Fairtrade activities in China have
been very limited, mostly confined to tea production. As of 2011 only seven
Chinese organizations have been accredited by Fairtrade International, rep-
resenting 5,700 farmers and earning a total of 257,000 euros in Fairtrade
premiums (Fairtrade 2011). This compares with India where, in the same
period, 94,400 farmers and workers were involved in Fairtrade certified
organizations and received 1,804,000 euros in Fairtrade premiums.
There is potential for expansion of Fairtrade activities in China, but there
are also a number of constraints. In the first instance, certification of farmer
organizations by Fairtrade involves a rigorous auditing procedure, part of
which involves ensuring that the organizations comply with international
standards for co- operatives.5 So far, few co- operatives in China comply
sufficiently with these requirements to qualify. Secondly, the application
procedures are complicated and require a significant amount of documenta-
tion on environmental impact, production practices, and the participation
Co- operatives and Poverty Reduction in China 189

of women, disadvantaged and minority groups in the organization. With


the small size of Chinese co- operatives, few have the necessary resources to
complete the documentation requirements.
There may be opportunities for the development of an indigenous
Fairtrade type of certification in China. Chinese consumers are showing an
increasing level of social awareness and support for civil society organiza-
tions which could lead to support for farmer co- operatives which demon-
strably assist producers in poor areas. Growing concern about food safety
could also encourage such a trend. Somewhat ironically, the very remote-
ness and poverty of producers in western China could be turned into an
advantage in acquiring food-safety certification, as their fields are far from
polluting industries and, traditionally, they have been too poor to rely on
agro- chemicals and pesticides.

Representational impact
Co- operative organizations in many countries play an important role in
providing a voice for their members in policy discussions and negotiations,
and international experience shows that this role can be quite important
in shaping relevant policies. However, Chinese co- operatives have yet to
achieve the level of organizational development to be able to play such
a role. The All China Federation of Supply and Marketing Co- operatives
aspires to the role of representing a national co- operative network and, in
fact, is Chinas representative to the ICA, but it has no relationship with
the farmer co- operatives established under the 2007 law. The co- operative
law does not explicitly allow for the creation of apex organizations, and the
development of such organizations is unlikely to happen on a significant
scale until there is some clarification or modification of the law.

Resource management
One sector with high potential impact for co- operative organizations is the
management of natural resources and rural infrastructure, such as water
resources, irrigation infrastructure, forest or grasslands. This sector is par-
ticularly relevant for addressing poverty, as the areas where poverty persists
most stubbornly are frequently characterized by a poor or degraded natural
resource base and poor infrastructure.
Prior to decollectivization management of local resources was the respon-
sibility of the commune, which had the financial and personnel resources
available for managing their use. However, following decollectivization
responsibilities, these resources either fell between administrative chairs or,
in the case of grassland and forests, were allocated to individual families.
Irrigation infrastructure fell into disrepair, as there were no resources availa-
ble and no organization with clear responsibility for maintenance and oper-
ation. When grassland and forests were allocated to households, the result
frequently was over- exploitation for immediate benefit, as many households
190 Tim Zachernuk and Guozhong Liu

were not convinced that the contract responsibility system would remain in
place for an extended period of time.
As noted by Xu and Wu in the previous chapter, farmer organizations for
regulating the use of natural resources, such as pastoral co- operatives and
water-user associations can be found in increasing numbers. However, the
general experience in resource management has not been particularly posi-
tive, as these organizations are often promoted using administrative, top-
down measures rather than participatory techniques which fully involve
the farmers or herders.

Observations
Reviewing the above experience, it would appear that, rather than view-
ing co-operatives as a means of empowering individuals, a perspective
frequently encountered in China is that co-operatives should be consid-
ered effective if they bring some material benefit to their members (see
also the observation described by Yuan in this volume). When compared
with international co-operative experience, this seems to neglect the
potential of co-operatives for achieving social change.
Under the popular company + co- operative + household model, farmers
do gain some benefit: it gives them a guaranteed rental income for their land,
eliminates risk due to crop failure and provides employment for some while
allowing others to pursue alternative employment opportunities. Farmers
may be better off compared with their traditional production and market-
ing methods. However, under this model the farmers are passive actors who
simply sell their land-use rights and the benefits they receive have a ceil-
ing, which is quickly reached. It does not contribute towards increasing the
capacity or abilities of farmers, nor does it offer opportunities for ongoing
advancement.
Moreover, this model is not appropriate to all parts of the country, as
profit- driven enterprises will only invest in areas which are already favour-
ably endowed by virtue of geography, climate, access to markets and so on.
The model is less likely to be adopted in remote regions of the country,
where costs are higher and returns lower, and where poverty tends to be
more prevalent.
There is a clear logic behind the Party branch + co-operative model. Party
members have a strong network of contacts through which they can mediate
relations for a co-operative, helping it access financial and technical support
as well as commercial contracts. Such a model is a significant deviation from
the ICA concept of independent, self-managed co-operatives. Experience in
other parts of the country also shows that grass-roots Party members are
not necessarily disinterested individuals who can be expected to support the
poor, as the case of Wukan village in Guangzhou vividly illustrates.6
In the case cited above of the beef co-operative supported by Poverty
Alleviation Office funds, members of the co- operative do receive some
Co- operatives and Poverty Reduction in China 191

benefit: they are getting a higher return on their capital than they would in
a savings account at a bank. But their membership in the co- operative is not
contributing to developing their production skills or building a strong basis
for their future development.

Our experience with co-operatives

The authors of this chapter have been involved in supporting co-operative


development efforts in rural China for many years, pre- dating even the 2007
Co-operative Law.7 Much of our work has been supported through interna-
tional programmes and has been based on supporting ICA-style co-operative
organizations. Some of the key characteristics of the approach include:

applying bottom-up, participatory techniques: mobilizing farmers to


organize themselves;
supporting co- operatives as a way to solve problems and constraints as
well as to grasp opportunities identified by farmers, rather than imposing
an external agenda;
supporting co- operatives only where it is determined that they represent a
viable option for action, rather than organizing for the sake of registering
co- operatives;
emphasizing training and capacity building of co- operative members and
leaders;
taking ICA principles and international experience as a point of refer-
ence, including ensuring equitable gender participation and strengthen-
ing democratic practices;
helping co- operatives improve both their governance practices as well as
their management and business skills.

Our experience has largely been in the western parts of the country8 and
has frequently been in the context of poverty-alleviation projects. It is sig-
nificant that, with the exception of one project in Anhui province, all our
other activities have involved providing only training and study opportu-
nities; none of the projects involved providing direct financial support. As
a result, a common feature in the co- operatives with which we have been
associated is that they have been established by people, for the most part
ordinary farmers, who saw collaborative action as a solution to their prob-
lems, not as an attempt to access financial resources.
Due to the project-related nature of much of our work, it has not always
been possible to keep contact with some of the organizations beyond the
end of project support. However, in some cases there have been opportuni-
ties to follow up with organizations and people after project support has
ended. As a consequence, much of our information is of an anecdotal nature
rather than rigorously researched or documented. However, on the basis of
192 Tim Zachernuk and Guozhong Liu

broad experience, exchanges with others working with co- operatives and
the general literature, we believe valid generalizations can be made from
our experience.
Shandan County in Gansu province in northwestern China has been
the main focus of many of our activities, where the Shandan Co- operative
Federation, established in 1989, has served as a focal point for much of this
work. Focal points outside of Shandan have included Huoshan County in
Anhui Province, Wuchuan County in Inner Mongolia Autonomous Region
and Renshou County in Sichuan Province. We have been able to maintain
sporadic contact with farmer organizations with which we have worked
in these areas and followed their course of development over a number
of years. Several of the co- operatives with which we have worked in
Gansu, Inner Mongolia and Sichuan have been identified as provincial-
level model co- operatives.
Some of the co-operatives have been very successful at improving the
incomes of members. By supporting members to shift from grain cultiva-
tion to growing vegetables and melons, the Ludadi co-operative in Shandan
has helped farmers increase their net profit from 600800 RMB/mu to as
much as 1,200 RMB/mu. The co-operative has signed contracts with process-
ing enterprises as far away as Shandong. The Dalingcun Bamboo Handicraft
Co-operative, which exports handicrafts to Japan, paid its members on a
piecework basis for making handicrafts. Some members were earning the
equivalent of what they might earn by migrating to the eastern provinces
and working in construction or factory jobs. Almost two-thirds of the mem-
bers in the Qingjian Co-operative in Sichuan now enjoy incomes above
30,000 RMB/yr from their orchards.
Some of the features evidenced in the co- operatives with which we have
worked:

Attention has been paid to strengthening womens participation; some


co- operatives, such as the Renshou Qingjian Co- operative, have by-laws
that require there to be at least one woman on the management board,
and the co- operative has a womens section specifically addressing issues
of concern to women members;
co- operatives respond to the needs of their members in areas beyond
just economic activities; in Lishu County, Jilin Province, a co- operative
established a day- care centre to take care of the children when most of
the men in the village had migrated for employment and the women
were taking care of both agricultural production and raising fami-
lies; in Shilipu village of Shandan County, based on their experience
with co- operatives, villagers organized a cultural and performance
co- operative to enrich the life of local communities;
co- operatives do support their communities: most of the co- operative
organizations supported in Huoshan County, Anhui province, had a clause
Co- operatives and Poverty Reduction in China 193

in their constitution stating that 5 per cent of their profits would be used
for projects benefiting the community. In practice this sometimes meant
repairing bridges or roads, or supporting school fees for poor families; the
Qingjian co- operative in Sichuan and the Shilipu Barley Co- operative in
Shandan both encourage their members to improve their environments,
with very obvious improvements in their villages;
co- operatives adopt practices to ensure the transparency of finances; the
Ludadi co- operative in Shandan provides members with monthly finan-
cial reports; the Dalingcun Bamboo Handicraft Co- operative in Huoshan
publicly posts the incomes of all members, including managers and board
members, on a quarterly basis;
co- operatives play a role in strengthening their communities: the charter
for the Qingjian co- operative has a clause forbidding people who gamble
from joining.

From 2006 to 2009 several of the co- operatives were involved in a project
supported by the Canadian Co- operative Association to use and localize
a method of assessing co- operative performance from the dimensions of
co- operative vision, business capacity, governance and member engagement
and financial management. The purpose of the assessment was to help the
co- operatives prepare strategic development plans to strengthen areas in
which they were weak and help them develop in accordance with interna-
tional co- operative standards. The co- operatives were enthusiastic partici-
pants in the project, and one of them went on to win a national award as a
leading co- operative.
In summary, we believe there are two important lessons to be drawn from
our experience which are very relevant to the role of co- operatives in pov-
erty alleviation. First is that, given appropriate training and support, ordi-
nary farmers are able to establish and run successful co- operatives which
help solve the problems and constraints faced by their members. Secondly,
international co- operative experience and co- operative principles are rel-
evant to the development of effective co- operatives and the process of local-
izing co- operative practices and developing co- operatives with Chinese
characteristics should not lightly ignore the experience.

Conclusions and recommendations

International experience shows that co-operatives can be an effective instru-


ment for poverty alleviation. To date, the development of co-operatives in
China has played only a very minor role in poverty-alleviation efforts, largely
because co-operatives are relatively new in China. However, as the poverty-
alleviation programme is modified taking into account the changing nature
of poverty in the country, the value of co-operatives to improve rural incomes
has been recognized, and support for co-operatives is being targeted as part of
194 Tim Zachernuk and Guozhong Liu

the poverty-alleviation effort. In fact, where the process of Integrated Village


Development Planning largely failed to live up to the expectations of giving
poor people more say in determining local development priorities, it could be
argued that carefully programmed support for co-operatives in targeted areas
could make up for the shortcomings of the earlier approach.
However, there are many issues which require more study and attention
if co- operatives are to achieve their full potential in addressing poverty. A
study of poverty alleviation and co- operatives in Tanzania sounds this very
relevant caution:

The heavy government involvement and manipulation has system-


atically eroded and diminished the poverty reduction potential of
co- operatives. Promotion of genuine member participation and member con-
trol in co- operatives is the major means that will resurrect the co- operative
capacity to contribute to poverty reduction. (Sizya 2001; emphasis ours)

A study of co- operative development in Nigeria summarizes experience


which is familiar to observers of Chinese co- operative development:

Many co- operative societies have been formed through government


directives to certain categories of government officials to form a given
number of co- operatives in their villages of origin. In some other cases,
co- operatives spring up in response to government promises of providing
subsidized services to members. These two categories could be referred to
as political co- operatives, which usually do not stand the test of time.
(Develtere, Pollet and Wanyama 2008)

Some of the pitfalls identified through international experience are already


evident in Chinas co- operative development, notably the capture by local
elites and the issuing of mixed signals to co- operatives as government tries
to use co- operatives for a variety of policy objectives.
One of Chinas foremost experts on rural affairs, Wen Tiejun of Peoples
University, noted the importance of co- operatives for rural development
while at the same time expressing his reservations about the prospects for
co- operatives:

To achieve good governance and ensure food security and environmen-


tal protection in rural areas would require a breakthrough in the develop-
ment of rural co- operatives. But the reality is that various interest groups
have such a strong hold over rural society that it is now very difficult to
change. (China Weekly 2011)

Other lessons which are very relevant are, first and foremost: for co- operatives
to contribute successfully to poverty alleviation, they must be successful
Co- operatives and Poverty Reduction in China 195

enterprises in themselves. This means that they must be profitable and com-
petitive in the market. They must have qualified and competent managers.
This underscores the need for training and advisory support for co- operatives,
particularly in commercial operations and business management.
International experience also suggests that the most effective poverty-
alleviation results are achieved when co- operatives adhere to the co- operative
principles of democratic management, education, concern for community
and co-operation among co- operatives. Personal experience in China has
shown that international co- operative approaches can be applied with suc-
cess and promising results achieved.
However, Chinas experience with co- operatives is only in its initial stages,
and the process of localization is still underway. It will be important to care-
fully monitor and research developments if pitfalls and detours are to be
avoided. Two important issues are worth watching closely during this proc-
ess and objectively assessing them: the importance of democratic control in
co- operatives and the relationship between co- operatives and government.
International experience suggests that democratic control by co- operative
members and independence and autonomy of co- operative organizations
are critical to ensuring effective co- operative performance.
In this regard, Martin Jacques, in his thought-provoking book, When China
Rules the World, notes that we should guard against the tendency to consider
modernization as being synonymous with Westernization. He points out
that, with Chinas unique cultural and historical development, it is a fal-
lacy to assume that Chinas modernization process will lead the country to
become increasingly Westernized.
In particular, he notes that democracy, and especially democracy as it has
developed in the West, is not necessarily appropriate in a Chinese setting.
It is common for commentators from the West to espouse democracy as an
abstract ideal to be pursued for its own sake. Many Chinese commentators,
on the other hand, insist that Western-style democracy is not appropriate
in China and that China will develop democracy with Chinese characteris-
tics in its own due course. While these discussions and Jacquess comments
generally refer to democracy as a national system of governance and not
democracy on a micro-scale, such as is practiced in co- operatives, the point
is nevertheless relevant for co- operatives.
A second point for focus is the relationship between co- operatives and
government. International experience suggests that successful co- operatives
should be autonomous and independent, and that excessive interference by
government agencies or excessive reliance on government support, tends to
weaken co- operatives and results in a deviation from their primary function
of serving their members. Jacques points out that Chinas long tradition of
governance involves the concentration of power and authority in a single
body, and governance in accordance with Confucian ethics. He contrasts
this to the Western tradition of dispersion of power, competition (including
196 Tim Zachernuk and Guozhong Liu

conflict) between different stakeholders or social classes and government


playing a role as a mediating force between different sectors.
Without presupposing a conclusion to these questions, it is important to
follow closely the path of co- operative development in China as the process
of localization continues, and to determine whether and to what extent the
international experience holds valid in Chinas circumstances.

Notes
1. The difference depends on whether migrant workers are treated as rural or urban
residents (World Bank 2009).
2. Provinces considered southwest China include: Guangxi, Chongqing, Sichuan,
Guizhou, Yunnan and Tibet. North-western provinces include: Shaanxi, Gansu,
Qinghai, Ningxia and Xinjiang.
3. In 2001 poor villages were selected according to an index based on eight indica-
tors: grain production per capita, cash income per capita, percentage of low-quality
houses, percentage of households with poor access to potable water, percentage
of natural villages with reliable access to electricity, percentage of natural villages
with all-weather road access, percentage of women with long-term health prob-
lems and percentage of eligible children not attending school.
4. The law states that at least 80 per cent of co-operative members must be farmers,
that 60 per cent of the surplus must be returned to members in proportion to their
transactions with the co-operative and that in the co-operative general assembly
supplementary votes based on investment cannot exceed 20 per cent of the total
votes.
5. The document specifically cites ILO Recommendation R193 as criteria for assessing
the eligibility of producer organizations for Fairtrade certification. ILO R193 in
turn applies the ICA definition and co-operative principles as criteria for defining
co-operatives (Fairtrade May 2011, ICA 1995).
6. Wukan village received international media attention in 2011 and 2012 when
villagers, protesting corruption and seizure of village assets by local officials and
party members, evicted village officials and provoked a stand-off with local author-
ities (Reuters 2013).
7. Tim Zachernuk first started working with farmer organizations in 1999 in a multi-
sectoral poverty-alleviation project in Huoshan County, Anhui Province. Liu
Guozhongs first work with co-operatives involved establishing a teacher/student
co-operative at the Bailie school in 1997 and since 2003 he has been involved in
co-operative projects with international support.
8. Provinces where we have worked include Gansu, Xinjiang, Inner Mongolia, Hunan,
Hubei, Sichuan, Guizhou, Yunnan, Shaanxi and Anhui.

References
Anhui Co- operative Network (2011) Hezuoshe Kaizhan Xinyong Hezuo Dayou
Zuowei. (Co- operatives Developing Financial Cooperation Have Much To Offer).
Available at: http://www.ahhzs.com/news/dt/201107/2127651.html (Accessed: 21
July 2011)
Co- operatives and Poverty Reduction in China 197

Anhui Online (2009) Ewenke qi Bayantuohai Zhuanye Hezuoshe Dailing Mumin


Ben Xiaokang. (Ewenke Banner Bayantuohai Specialized Co- operative Leads
Herders Towards Prosperity), 28 December.
Birchall, J. and Simmons, R. (2009) Co- operatives and poverty reduction: Evidence
from Sri Lanka and Tanzania. Co- operative College Paper 13.
China Weekly (2011) Why Privatized Farmland Is Not the Solution, 1 May 2011, p. 16.
Develtere, P., Pollet, I. and Wanyama, F. (eds.) (2008) Cooperating Out of Poverty: The
renaissance of the African cooperative movement. Geneva: ILO.
Fairtrade (2011) Monitoring the Scope and Benefits of Fairtrade. 3rd edition. Bonn:
Fairtrade Labelling Organizations International.
Fairtrade (May 2011) Fairtrade Standard for Small Producer Organizations. Bonn:
Fairtrade Labelling Organizations International.
Farmers Daily (2011) Xiang Yindao Nongye Disanci Feiyue Mubiao Fenjin
(Endeavouring to Lead Agriculture to the Goal of its Third Leap), 29 December.
Guo, X. and Song, J. (2006) Dui Pinkun Gainian he Xianzai Fupin Zhengce de Fansi
(Reflections on Concepts of Poverty and Current Poverty Alleviation Policy),
Guangming Daily, 21 February.
Heiveld (2013) Heiveld Co- operative. Available at: http://www.heiveld.co.za.
ICA (1995) Statement of Co- operative Identity. Available at: http://www.ica.coop.
Jacques, Martin (2012) When China Rules the World, 2nd Edition. London: Penguin
Books Ltd.
Kuapa Kokoo (2013) Available at: http://www.kuapakokoo.com.
Li, L. (2006) Pinkun shi yige Ziwo Jiaqiang de Xunhuan. Fupin Zhongdian Dang
Tiaochu Xunhuan (Poverty is a Self-reinforcing Cycle, The Key to Poverty
Alleviation is Escaping From the Cycle). Finance Magazine, January.
Liu, M., Li, C., An, J. and Wei, C. (eds.) (2007) Nongming Zhuanye Hezuoshe Fa Daodu
(Guide to Farmer Specialized Co- operative Law). Beijing: Minzhu Fazhi Publishing
House, 2007.
Ministry of Water Resources (2007) Gansu Sheng, Zhangye: Yongshuizhe Xiehui
Tuijin Nongye Jieshui (Gansu Province Zhangye: Water-User Association Promotes
Water- Saving Agriculture), 27 February 2007. Available at: http://www.mwr.gov.
cn/ztpd/2007ztbd/2006ndslhxw/jszgxxwzpj/200702/t20070227_104153.html.
Qinghai Ecotourism (2012) Available at: http://qinghaiecotourism.com/en/
community-ventures/kegawa.html.
Resnick, D. and Birner, R. (2008) Agricultural strategy development in West Africa,
International Food Policy Research Institute, Discussion Paper 00844.
Reuters (2013) Freedom fizzles out in Chinas rebel town of Wukan. 28 February
2013.
Simmons, R. and Birchall, J. (2008) The Role of Co- operatives in Poverty Reduction:
Network Perspectives. Non- Governmental Public Action Programme, Working
Paper Series 10.
Sizya, M.J. (2001) The Role Co- Operatives Play in Poverty Reduction in Tanzania.
Paper presented at the United Nations in observance of the International Day for
the Eradication of Poverty, 17 October 2001.
Wanyama, F.O., Develtere, P. and Pollet, I. (2008) Encountering the Evidence:
Co- operatives and Poverty Reduction in Africa. Working Papers on Social and
Co- operative Entrepreneurship, WP- SCE 0802.
World Bank (2009) From Poor Areas to Poor People: Chinas evolving poverty reduction
agenda. An Assessment of Poverty and Inequality in China, March.
12
Stakeholder Participation in
Co-operative Capital in Chinese
Agricultural Co-operatives
Li Zhao

The problem of co-operative capital acquisition has long been cited in the
literature (Helmberger 1966; Iliopoulos 2002). As member-driven business
organizations, traditional co-operatives primarily rely on member contribu-
tions in the form of shares, fees and/or business transactions. But in todays
competitive market, capitalization is one of the most prominent challenges
they face (Harris, Stefanson and Fulton 1996; Von Pischke 1993). This dif-
ficulty is receiving increasing attention as co-operatives diversify their oper-
ations to include processing activities (Cook and Iliopoulos 2000; Harris,
Stefanson and Fulton 1996). According to Cook (1995); the under-capitali-
zation problem is due to the structure of traditional co-operative property
rights. In order to mobilize members to invest in their co-operatives, vari-
ous innovative financial instruments have been developed, such as those
adopted by the U.S. new generation co-operatives and European co-operative
holding systems (Cook 1995; Iliopoulos 2002; Lang, Castanias and Cook
2001; Van Dijk 1997).
In China, there has been a great variety within the co-operative sector.
For example, Huang, Xu and Song (2006) have classified farmer co-opera-
tives in China into three types: specialized associations, classical co-oper-
atives, and shareholding co-operatives (also see the typology presented by
Xu and Wu, this volume). Shareholding co-operatives (SHCs) are among the
best examples of newly emerging multi-stakeholder co-operatives (MSCs),
being vehicles to mobilize additional resources. Chinese SHCs are typically
either farmers specialized co-operatives (FSCs), or land-based co-operatives,
where the latter have emerged with rapid urbanization and industrialization
in some of the most developed coastal areas as well as in peri-urban rural
areas in China (Zhao and Develtere 2010). Furthermore, empirical evidence
shows that new co-operatives in China rely on mixed resources combin-
ing members contributions, retained capital, government funding, market
income, and other sources of income, such as voluntary work and private
donations (Zhao 2011; Zhao and Gijselinckx 2011). In this chapter, I discuss
how different patterns of income portfolio are shaped through stakeholder

198
Stakeholder Participation in Co-operative Capitals 199

participation in co-operative capital formation in Chinese new co-opera-


tives. In previous fieldwork conducted from 2009 to 2011, I observed that
different sources of capital formation appeared to be related to organiza-
tions provision of benefits and services, organizational mission and value,
and founders motivations and leadership styles. An explanation for this
phenomenon may be found in the benefits theory framework proposed by
Dennis Young (2007).
Ever since Edward Freemans (1984) seminal book, stakeholder theory has
become one of the most influential trends in organizational theory. But, as
noted by Phillips (2003), less attention has been paid to stakeholder the-
ory in the context of co-operative organizations until recently. This may
be largely due to the hybrid nature of co-operatives (Bonus 1986; Chaddad
2009), whose organizational typology is almost a class of its own (Mnard
2011). Drawing upon prior research, in the current study I define stakeholder
participation in capital formation as a process whereby those having a stake
in a given organization actively contribute to its long-term growth and oper-
ations. During this process, all stakeholders, not only those having a capi-
tal share, can make financial contributions. Moreover, in a member-based
organization, multi-stakeholder character may be particularly represented
by a heterogeneous membership. Stakeholders in Chinese co-operatives
can be classified into two types: member and non-member stakeholders.
Member stakeholders include investor-members and patron-members,1 and
non-member stakeholders refer to non-member investors and non-member
donors/grant-givers.
The chapter will proceed as follows. The next section looks at the public
policies and empirical results concerning stakeholder participation in co-
operative capital formation in China. Afterwards, the chapter proposes a
framework of co-operative finance, and discusses how different patterns of
capital formation are shaped from the perspective of benefit-based theo-
ries. Based on the findings, the last section concludes by putting forward
a number of challenges faced by Chinese co-operatives concerning capital
acquisition.

Evidence from China

In China, under the transition from a centrally planned to a socialist market


economy, new co-operatives are evolving at a fast pace together with the
economic reform. This rapid development, while benefiting from the con-
tinuing exchange with the international society, has been further fuelled
by the promulgation in 2007 of the first national co-operative law.2 Against
this background, stakeholder participation in capitalization of Chinese co-
operatives has undergone significant changes in the last decade. In what
follows, I introduce public policies and empirical findings from China con-
cerning co-operative capital formation.
200 Li Zhao

Public policies3
The research setting was agricultural producer co-operatives in rural China.
My previous fieldwork has been mainly conducted in Zhejiang province.
Zhejiang established its local co-operative regulations in 20042005 as the
first province in China, even before the appearance of the national law. Since
local organizations are affected by both the national law and local regula-
tions, I discuss both legal institutions in this section.

Member stakeholder financial participation


According to the Administrative Regulation on the Registration of FSCs (State
Council No. 498), members may make financial contributions, either in
cash or non-monetary yet transferable property that can be converted into
cash, like physical objects and intellectual property. But according to the
provincial regulation, every member shall subscribe shares. Shares sub-
scribed by members engaged in production should be more than 50 per
cent of the total share capital (Article 13). However, in order to encour-
age co-operative entry in economically less-developed areas in China, the
national law established two years later does not contain such a require-
ment on share subscription. Moreover, in order to avoid control by a group
of shareholders, the provincial regulation also sets a limit on the number
of shares every member or a coalition of members may own to be no more
than 20 per cent of the total number of shares. The provincial regulation
specifies the total amount of registered capital to a minimum of 50,000
Yuan in order to register a co-operative (Article 6). There is no such require-
ment in the national law.4
Concerning patronage refunds to members, the national law stipulates
that the total amount shall be no less than 60 per cent of the distributable
profits (Article 37). This may create more incentives for a co-operative to
accumulate members equity capital. Another incentive in the national law
is the allowance of additional votes, besides the one member, one vote prin-
ciple. However, the total number of additional votes shall not exceed 20 per
cent of the total number of the basic votes (Article 17, see also Yuan, this
volume).
According to the national law, every co-operative may draw common
reserve funds from the annual profits (emphasis added). They shall be
quantified as shares of each member according to the stipulations of
each co-operative charter (Article 35). This quantification method is
suggested to be in proportion to the patronage (Ministry of Agriculture,
2008: 78). It is nevertheless not specified in the law. Finally, at the ter-
mination of membership, a member is entitled to the amount of capi-
tal contribution as well as personal shares of the common reserve fund
recorded in his or her account in the co-operative (Article 21, see also
Yuan, this volume).
Stakeholder Participation in Co-operative Capitals 201

Non-member stakeholder capital participation


Non-members who contribute to co-operative capital may include finan-
cial agencies providing loans, public institutions providing subsidies and
grants, and donors and volunteers involved in co-operatives. The law makes
it clear that the state shall promote the development of FSCs through fiscal
support, preferential tax treatments, support in finance, science, technol-
ogy and talents, as well as through industrial policies (Article 8). More sup-
portive policies are also formulated in chapter 7 of the Law. For example,
Article 50 states that the central and local governments shall allocate funds
to support the FSCs. Moreover, FSCs also enjoy some preferential treatment
in taxation prescribed by the Notice Concerning the Relevant Tax Policies for the
FSCs (No. 81). According to Article 51, the state also encourages commercial
financial institutions to provide financial services to the FSCs by diversi-
fied means. The Number One document of 20095 encourages FSCs to carry
out mutual-aid activities by providing credit and savings services to mem-
bers. In the same year, an Opinion Concerning Supporting Financial Services to
FSCs (No. 13) has been issued, fostering pilot programs establishing credit
mutual-aid co-operatives based upon FSCs with financing from commercial
banks (see also He, this volume). Furthermore, the Number One document of
2010 encourages establishment of village banks and loan companies along
with credit mutual-aid co-operatives.

Empirical findings
In the stakeholder theory literature, employees and the community are con-
sidered important stakeholders of an organization. However, most co-oper-
atives in my study (Zhao 2012) had very few full-time employees (Yuan, this
volume). Many of them were operated by the founding leader(s) and other
board members on a voluntary basis. The leaders mostly received no salary
from the co-operative, but earned income from farming or other outside
activities or investments. In many cases, part-time seasonal workers were
employed by the co-operative. These seasonal workers were mostly members
of the marginalized groups, such as women or the elderly. In organizations
with the most full-time employees, more than 50 per cent of those employ-
ees were people with disabilities. Since most employees were either enlisted
as new members or concurrently served as board members, this stakeholder
group overlapped with the member stakeholder group.
With respect to the local community, in many cases the community rep-
resentatives (or local village leaders) became involved in organizations by
serving as co-operative board members, or co-operative managers, so they
also overlap with member stakeholders (see Yuan in this volume). To make
the situation more complex, the presence of the Party branch in the local
community also permeated the organizations. Many co-operative direc-
tors were enlisted as Party members, encouraged by local governments to
202 Li Zhao

organize a Party branch inside the co-operative. Members belonging to a


village Party branch, who were also co-operative members, could join the
co-operative Party branch committee.
In sum, the findings indicate that three types of stakeholders are criti-
cal to a co-operative: investor members; patron members; and non-member
grant-givers. Investor members include board members and managing
directors, as well as management leaders, and other core members who pur-
chase investment shares but who do not sit on the board. Patron mem-
bers are user members providing membership fees. Besides these, some key
external stakeholders such as local NGOs, local peer organizations and
local governments have played a role in co-operative capital acquisition
(as non-member grant-givers). Consequently, many co-operatives started
to attach great importance to external stakeholders and the social contexts
around them.
In this section, I summarize the findings to set the stage for different
patterns of capital formation in Chinas new agricultural co-operatives.
Data analysis showed, first of all, that financing of these co-operatives
came from three main sources: members contributions; direct and indirect
financial support from the government; and retained earnings as institu-
tional capital. External market revenues, voluntary work and private dona-
tions were also used as resources. Voluntary work and private donations, as
third party intervention, have been mobilized to a great extent by public
policies. Sometimes they were regarded as indirect government support to
co-operatives.
Secondly, four types of member-financing were recognized: existing
members provided additional capital as shares (type A); existing members
offered more funds as loans (type B); new members contributed additional
capital as shares (type C); new members provided capital only as member-
ship fees (type D).

although regulative institutions allow financial contributions either in


cash or other property, in reality it was always taking the form of cash in
FSCs. This appeared not only beneficial to co-operative capital acquisi-
tion, but also conducive to member participation, since members feel a
greater sense of ownership through contributing capital;
all co-operatives chose to draw common reserve funds, although it was
not a requirement but only a recommendation by the law. This is ben-
eficial for their long-term operations, since they tend to be consciously
aware of setting aside funds for future investment (for example expanding
production and operations) or emergency purposes (for instance, com-
pensating losses);
a specific limit on patronage refunds is set as no less than 60 per cent
of the total distributable profit. In reality, many co-operatives chose to
increase this percentage in order to motivate small-scale patron members
Stakeholder Participation in Co-operative Capitals 203

with limited capital assets to join the co-operative. This has led some co-
operatives to draw attention to their membership policy and classify their
members into different categories;
the law has displayed strong preferential government policy towards co-
operative development and, in reality, also through direct and indirect
financial support. Cases indicated that the main capital contribution came
from member stakeholders, especially for newly established co-operatives,
helping them to remain member-controlled, self-managed organizations,
a feature that is conducive to co-operative sustainability;
although regulations set a limit on the number of shares each member
may own (20 per cent), in practice this was not always achieved, par-
ticularly in the early stages. As a result, many co-operatives experienced
organizational change in the process of enlarging membership, from clas-
sic mutual help organizations to a new model, typified in their multiple
stakeholdership, multi-purpose character, and community orientation.

Factors influencing different patterns of capital formation

The findings indicated that an organizational change process occurred to


varying degrees among different organizations. In order to understand this
organizational diversity, it seems important to explore the underlying con-
ditions of this behaviour change. The results point to the type C and D
organizations (funded by new members) as more likely to be structured with
a resource mix, whereas type A and B co-operatives tend to show a smaller
degree of income diversification. As mentioned in the introduction, there
seems to be a correspondence between a resource mix structure of capi-
tal acquisition found in Chinese new co-operatives and the benefits theory
framework.
In general, there are two basic reasons to look to this particular theoretical
framework in analysing co-operatives in China. The first one, the practical
reason, lies in how co-operatives are perceived by their members. During
my previous fieldwork, I raised each time the question to co-operative lead-
ers and common members (n = 62 interviewees):
According to you, is your organization

1. an enterprise;
2. an NPO;
3. a social enterprise/special enterprise with social aims; or
4. a not-for-profit organization?

The most frequent answer I received was: A special enterprise with social
aims (50 per cent), followed by a not-for-profit and NPO (24 per cent,
respectively), while an enterprise trailed last with only 2 per cent.6 Clearly,
the informants in my study have regarded a co-operative as distinct from
204 Li Zhao

investor-owned firms. Different from most agricultural co-operatives in the


West, Chinese agricultural co-operatives were generally considered in my
study as not-for-profit organizations. Unaware of the academic concept of
social enterprise that emerged in the West, my informants regarded their
co-operatives as special enterprises which target disadvantaged people,
or solve the three rural problems,7 or help farmers to have a better life.
Their answers reflected the essence of co-operative organizations as hybrids
having both an economic and a social dimension. Therefore, although
seemingly a strange choice, the benefit theory of finance makes sense in
analysing co-operatives, since nonprofits and co-operatives share a number
of commonalities in reality.
The second reason, the theoretical perspective, is that although the lit-
erature on nonprofit enterprises regards the nondistribution constraint to
be the key to understanding nonprofits (Hansmann 1980), such a principle
is based on U.S. tax legislation and is not justifiable to define the nonprofit
and third sector in other regional or national contexts. For example, accord-
ing to European scholars, this American approach is unable to illuminate
its national diversities as well as its shared features in Europe (CIRIEC 1999:
154). Meanwhile, in countries of the southern hemisphere, this principle also
loses much of its meaning (Defourny and Develtere 2009). In other words,
the simple dichotomy between for-profit and nonprofit, so widely used in
the economic literature, does not suffice to explain the emerging organiza-
tional differentiation within the third sector (Bacchiega and Borzaga 2001:
274). Moreover, James (1989) finds that this principle may be overstated,
as organizations can cross-subsidize or engage in indirect profit taking by
increasing personal costs. It is also regarded by Steinberg and Gray (1993) as
for-profits in disguise. Recently, Borzaga, Depedri and Tortia stated (2010:
5), the nondistribution constraint itself is the source of some disadvantages
because it restricts the opportunity to collect financial resources for invest-
ments. Furthermore, Galera and Borzaga (2009: 217) put forward: the non-
profit distribution constraint can be either total or partial. So, it becomes
clear that this principle cannot be used as a line of demarcation between co-
operatives and nonprofits. This provides additional justification for using
the benefit theory of nonprofit finance in analyzing co-operative finance.
During the past two decades, as Chang and Tuckman summarized, an
impressive body of nonprofit research has emerged that focused on issues
of revenue choice and how to attain an efficient if not optimal mix of
nonprofit revenues (2010: 5). The volume edited by Dennis Young (2007)
is regarded by them (Chang and Tuckman 2010: 6) as the most compre-
hensive review of the major financial sources of nonprofit organizations.
According to Young, income diversification can take five basic forms: gifts
from donors, volunteers, or organization partners; fees from members or
consumers; government funds from taxpayers; investment returns; and in-
kind or barter (Young 2007: 350351). Based on previous findings, Young
Stakeholder Participation in Co-operative Capitals 205

has proposed four working principles regarding diversification of income


sources (Young 2007: 341343):

sources of income should correspond with the nature of benefits con-


ferred on, or of interest to, the providers of those resources;
each source of income has its place, and different types of income are
appropriate to support different missions and services;
a nonprofit organizations income portfolio should reflect the mix of
benefits that its services confer on its potentially diverse set of income
providers;
nonprofit income portfolios should also reflect basic organizational chal-
lenges, such as financial solvency, interactions among income sources, the
challenges (feasibility) of accessing and administering particular sources
of income, risk management, and long-term mission achievement.

These working principles of nonprofit finance are very much in line with my
observations in the field. They can greatly inspire the formation of an over-
all framework of Chinese agricultural co-operative finance. Furthermore,
the findings in this study suggest that co-operative leaders/founders should
be taken into account in the framework for co-operative fundraising. They
were important in this framework basically for three reasons. First, my cases
have presented an organizational change process in which, currently, a large
number of small growers are enlisted with a small number of qualified/
basic shares or membership fees, whereas in the initial stage of these co-
operatives, they only had a small number of large growers with the abil-
ity to invest. When co-operatives enlarged their capital bases, it was the
co-operative leaders who decided the sources of co-operative fundraising
through issuing additional capital shares to either the existing members
or involving new members. Secondly, the leaders beliefs, values and goals
played a major role in defining the organizational missions and goals. And
thirdly, the diversity of stakeholder participation patterns was shaped under
the influence of organizational missions which, in turn, were affected by
leaders personal traits and interests. In sum, an adapted framework of co-
operative finance is roughly drawn in Figure 12.1.
Leaders traits. Leaders knowledge and past experiences, and their demo-
graphic characteristics, may influence their attitude towards participation

Leaders Income
Mission Participation Benefits
traits portfolio
& services

Figure 12.1 A framework of co-operative finance


Note: adapted from Young (2007: 343).
206 Li Zhao

(Cyert and March 1963; Hambrick and Mason 1984; Kirkpatrick and Locke
1991), as well as their organizational performance and innovation (Miller
and del Carmen Triana 2009). As shown in my study (Zhao 2012), the found-
ing leaders backgrounds were quite diverse and included entrepreneurs,
large growers, salespersons, government officials, village cadres, and home-
makers. Further, because prior research suggests that gender diversity may
send signals to the public (Tsui, Egan and OReilly 1992), and that females
are traditionally underrepresented as leaders or board members (Miller and
Del Carmen Triana 2009), I paid special attention to gender diversity among
the leaders. My cases have suggested that when the establishment of a co-
operative was mostly influenced by one co-operative leader who attempted
to promote a co-operative social mission, the co-operative appeared to
be more open to new members. Besides, the founders with more educa-
tion, experience and competence (for example, the deputy to the Peoples
Congress, the Party secretary of a local association, the government cadre,
or the village Party secretary), are more likely to drive the organization to
be open to new members and stakeholders. Furthermore, contrary to male
leaders, female leaders are more likely to rely on sentiments to create social
connections, and more likely to engage in emotion-motivated commitment.
This particular trait seems to drive them to be more relationship-oriented
than task-oriented leaders. For them, a good relationship would mean social
connection not only with the local government and local and outside grow-
ers and clients, but also with other peer organizations, university experts,
banks, and local NGOs. In these situations, co-operative finance is more
likely to be more diversified.
Organizational mission. Since the organizational mission was defined
by the co-operative founders, the mission was shaped by the leaders traits.
The findings indicated that the higher the social status and connections of
the founding leaders, the more likely a co-operative was to be influenced
by the external stakeholders (governments, local NGOs). In those cases, the
external stakeholders would demand more co-operative social responsibil-
ity or a leading role for the co-operative in the local community. The same
is true for the female leaders, who are more likely to experience a process
of depersonalization of self-perception, and more likely to respond to the
expectations of the wider community. The co-operative mission may thus
transform from previously pursuing private benefits out of pure rationality,
to a mix of multiple missions that are based on either values, culture-cog-
nition, or rationality (Zhao 2012). According to Young (2007: 342), various
kinds of missions confer multiple types of benefits, hence justify mix-
tures of different sources of income. When the missions are value-based or
culture-cognition-based, the co-operatives are more likely to provide gen-
eral benefits to patron members (open to small farmer growers) and other
disadvantaged people (poor households, households having people with
disabilities, middle-aged women or the elderly), and hence are more likely to
Stakeholder Participation in Co-operative Capitals 207

attract government funds and support from local NGOs (for example a local
federation of the disabled, local federation of women, or local communist
youth leagues). Furthermore, note that when changes in the external envi-
ronment take place, the organizations more often than not face the choices
of either becoming more entrepreneurially oriented, for-profit firms, or try-
ing to maintain their social objectives but diversify their income sources for
reasons of economic viability. In this case, they may move closer to either
investor-owned firms or social enterprises (depicted in Borzaga, Depedri
and Tortia 2010: 10).
Attitude towards participation. My data did not seem to suggest a clear,
direct link between leaders attitudes towards participation and income
diversification. As in the case of most investor-owned firms, many co-
operative leaders, bounded by local context or power and interest-related
concerns, may not be inclined to take social responsibility, nor be inter-
ested in democratic and widespread participation in management and deci-
sion making. Many co-operative leaders, according to Huang, Xu and Song
(2006: 331), view co-operatives like enterprises, and intend to gain private
benefits by establishing the co-operative organizations. When a co-oper-
ative (particularly if established by a group of investor farmers) attempts
to transform from a previously registered co-operative or other type of
entity, to the current FSC motivated by government program funds, their
good economic performance appeared sufficient to win the government
project. It may be due to the fact that, currently, the government support
programs are emphasizing economic performance indicators more than
co-operative rationales and democratic participation mechanisms (also
see Yuan, this volume). So, even when co-operative leaders would attach
less importance to multi-stakeholder participation, they were still able to
receive government funding, collect fees, and at times receive volunteer
income and donations, and thus diversify their income sources.
Provision of benefits and services. Young (2006: 345) proposed four gen-
eral categories of benefits a nonprofit organization may provide:

1. private benefits (accrue specifically to individual consumers or clients,


which they recognize and are willing to pay for),
2. group benefits (accrue to an identifiable subgroup of society and are val-
ued by donors interested in helping that group),
3. public benefits (accrue to a sufficiently large segment of the general pub-
lic such that government financing is politically supported), and
4. trade benefits (accrue to institutions or groups that supply resources to
nonprofits [and] correspond with the specific missions or interests of
those suppliers).

With regard to this aspect, my previous findings indicated a strong link


between the provision of a mix of benefits and services, and co-operative
208 Li Zhao

income diversification. Co-operatives relying on a resource mix, just like


those with a lesser degree of income diversification, provide private benefits
(for example agricultural input for members and non-members; agricultural
product for clients), and trade benefits (skill training and market informa-
tion to local growers). But at the same time, they may also provide group
benefits (create jobs for a group of disadvantaged people), public benefits
(raise incomes and living standards of local farmers; promote local com-
munity development; maintain social stability), and other trade benefits
(provide opportunities for volunteers to gain social recognition and/or local
social connection; help fulfil partner organizations missions, such as pro-
mote local cultural value or provide green food). Therefore, as Youngs
third working principle states, the co-operative diversified capital formation
truly reflects a mix of benefits the co-operative confers on their diverse set
of income providers (Young 2007: 342).
Income portfolio. As discussed above, different ways of capital formation
are found to be related to provision of benefits and services, organizational
mission and value, and motivation and leaders traits. These factors may
influence a co-operative income portfolio. Co-operatives providing multi-
ple missions based on value, culture-cognition and rationality, led by some-
one possessing a higher degree of competence and social connection and
engaging in relationship-oriented social commitment, are more likely to
have a resource mix structure.
However, it is important to note that the underlying conditions present in
the framework may change over time, along with the organizational growth.
So, on the one hand, comparing with later-established organizations, we
can see earlier-established ones are more likely to draw from more revenue
streams along with the growth of their financial management capacity. On
the other hand, as the organizations become more mature, it may be possible
that leaders traits and preferences become less influential over time, and
that the question of income diversification becomes more of a management
and stability issue.8 Therefore, for future research, it would be preferable to
take into account this process dimension and examine how the co-operative
growth may affect the benefits theory framework of co-operative finance
proposed in the chapter.
Before moving on to the conclusions, one final remark needs to be noted
concerning income portfolios for co-operatives as member-based organi-
zations. Discussing membership income, Steinberg (2007: 154) stated that
money must be raised from members or the organization will not survive,
but members are both the source of revenues and the objects of organiza-
tional mission. New co-operatives in the West (particularly in the United
States), adopting organizational characteristics such as a closed member-
ship policy, using marketing agreements with members, and applying
transferable and appreciable investment instruments, as discussed by Cook
and Iliopoulos (2000) and Iliopoulos (2002), would perhaps exemplify
Stakeholder Participation in Co-operative Capitals 209

a member-oriented organizational mission. These co-operatives would


enhance members incentives to invest in their co-operative. While find-
ings from the Chinese co- operative sector also indicate that some new
co-operatives have started to adopt a defined membership policy, set up
members purchase agreements and, to a much smaller extent, use transfer-
able and appreciable investment instruments, the most significant feature
widely present in Chinese cases would perhaps be a varied membership
arrangement.
To give but one example, the leader in one co-operative divided members
into three categories based upon the amount of share contribution, rights
and responsibilities:

1. core members (8.5 per cent of total number of members, each providing
more than 1 per cent of total shares);
2. intimate members (30.5 per cent, 0.4 per cent each); and
3. associate members (61 per cent, who provided a symbolic membership
fee).

This design implicitly suggested a number of different contractual rela-


tionships, or a coalition of participants (Kaarlehto 1955; Ohm 1956, Trifon
1961), including the management team, large shareholders, and common
members. As suggested by theorists, each of those groups had its own objec-
tives and participated in the organization as long as it felt those objectives
were being met (Staatz 1987). Core members were entitled to both a patron-
age refund and a share dividend, so they felt their interests were protected.
Common members could acquire a patronage refund, enjoy a protected
price and receive skills training, so they were also satisfied with their mem-
bership. This membership policy in the Chinese context seemed able to
motivate investor members capital contribution, promote harmony and
social purpose by integrating patron members into the organization, and
diversify the income portfolio by receiving stable membership income as
well as government subsidies.

Conclusions

Empirical evidence in the Chinese co-operative sector revealed a number


of challenges faced by new and traditional co-operatives concerning capital
acquisition and long-term development.
This research concludes with some aspects for stakeholder involvement
in co-operative capital in China that would be essential for the sustain-
ability of these member-driven organizations. A first, and perhaps most
important, challenge concerns membership policy in the process of organi-
zational change. The process of enlarging membership in Chinese new co-
operatives was sometimes driven by the regulator and sometimes triggered
210 Li Zhao

by change of the co-operative leaders and their social expectations or cir-


cumstances. Each rationale seems to determine how the new membership
structure is designed. Co-operatives undergoing organizational change
under the changing regulation remained relatively small-scale in terms of
membership. Besides, they were relatively homogeneous, with little dif-
ference in members capital contribution, and the nature of benefits for
members was relatively homogenous. But co-operatives driven by the sec-
ond rationale (triggered by the change of the leader and their social expec-
tations) perhaps need to rethink how to increase member participation
and control through raising capital from their members (COPAC 1995).
Membership policy design would be important and challenging for reasons
of diversifying their income portfolios. Members in new co-operatives can
be at the same time owners, users, consumers, organization partners and
even volunteers. Each type of member identity should be linked with ben-
efits a co-operative generates. Since it matters whether there are the right
number and mix of members, and member income policies determine
this membership (Steinberg 2007: 154), a mix of membership structure
can be complicated and thus may pose potential challenges for these new
hybrids. Particularly, potential conflicts of interests and control within and
over a co-operative have already been widely identified between various
groups of member stakeholders in the Chinese literature (also see the chap-
ter by Yuan, this volume).
A second challenge, coupled with the first, may refer to the motivation
of the founding members. When co-operatives became community-ori-
ented and more socially responsible, these co-operative entrepreneurs have
played a major role in leading the process of change, designing member-
ship categories, and defining the benefits and rights accruing to members
in each category. Results of my interviews have indicated that sometimes
this changing process has de-motivated leaders who have invested a lot in
the establishment and operation of the co- operatives, since this impeded
them gaining more economic opportunities. Although there were some
cases showing the opposite, namely, co-operative leaders started to trans-
form into values-driven social entrepreneurs, they should nevertheless be
regarded as extreme cases, at least for the moment. Since a new co-op-
erative mission set by the leaders may be at the same time values-based,
culture-cognition-based and rationality-based, a mixed feeling towards
new profit distribution and membership would be perhaps more realistic
to expect. The findings currently indicate that accreditation, certification
and awards received from the authorities tend to function as external driv-
ing forces to motivate co-operative entrepreneurs to consciously take up
social roles. But, in the longer term, these external driving forces would
be expected to have less effects than internal ones, such as psychological
reward mechanisms (Frank 1992). In present-day China, characterized by
the promotion of capitalism, economic freedom and entrepreneurship, it
Stakeholder Participation in Co-operative Capitals 211

will be challenging to observe how these internal motivation factors fit


into the reality.
The third challenge is related to external capital acquisition (especially
government funds and debt capital). Concerning government funds, as
the findings show, some local governments have gradually abolished subsi-
dies for newly established organizations, as the co-operative numbers have
been increasing. Although this may present much prospect since govern-
ment grants and subsidies are considered as the lowest-quality capital due
to their short-run impact (COPAC 1995: 40), questions still remain as to
how public agencies can provide better, more effective financial supports
that satisfy the co-operatives needs. Although policy support (for exam-
ple the promotion of law and other preferential regulations) and indirect
financial support (for example the establishment of guarantee companies)
started to emerge, although so far they do not seem to suffice. Co-operative
development without government subsidies, particularly for those which
are smaller and farmer-oriented, would need to be followed up and exam-
ined in future research. With regard to debt capital, since the findings sug-
gest that loans from the banking system were not always easy to get, the
co-operation between co-operatives having different seasonal agricultural
activities may serve as one solution. But an unfavourable external environ-
ment concerning this option seems to be playing a constraining role. For
example, a strict definition towards co-operatives entitled to register can
potentially inhibit practices motivating members and non-members to con-
tribute more capital.
Finally, new co-operatives future development from the perspective of
capital formation would also be greatly challenged by their current insuf-
ficient capabilities to manage income sources and risks. According to Young,
even income source diversification cannot fully eliminate (un)systematic
risk under fundamental societal changes such as crisis or recession. For a co-
operative to collect various revenues, thus diversifying its income sources,
the next step would be developing the ability to manage them (c.f., Youngs
fourth working principle). Although the law stipulates that every member
should participate in co-operative fiscal management due to the organiza-
tions feature of mutual-aid, in reality, it is the co-operative leaders who
mostly take on the management responsibilities. Based on the proposed
framework of co-operative finance, we see that co-operative leaders knowl-
edge, experience, competence and social connections would be important
for attracting diversified revenues to reduce organizational dependence and
financial vulnerability. The government can play a more active facilitating
role in promoting and organizing systematic, steady, management-focused
trainings to co-operative leaders and members. In this way, not only would
these new co-operative hybrids develop in a more sustainable way, but
their leaders motivation would also be expected to increase thanks to the
enhancement of their personal quality and knowledge.
212 Li Zhao

Notes
1. Note that patron-members also provide basic shares, similar to investor-members
(who contribute, besides basic shares, also investment shares). Basic shares can
be capital shares that are seen as a basic condition for voting rights), or can be
just in the form of membership fees. Having a basic share is the minimum eligi-
bility requirement for becoming a member. In general in Chinese SHCs, patron-
members provide basic shares in order to be able to use the services provided by
co-operatives. Often they are either incapable or unwilling to provide investment
shares.
2. The Law of the Peoples Republic of China on Farmers Specialized Co-operatives (the
National Peoples Congress 01072007).
3. This section draws upon Zhao (2011).
4. Another discrepancy is that the number of founding members in a co-operative
is at least seven according to the regulation of Zhejiang, while the national law
stipulates five.
5. The Number One document refers to the first central document of the year, issued
jointly by the Central Committee of the CCP and the State Council. During the
period 19821986 and the years since 2004, there were Number One documents
that focused on rural issues. This illustrates the absolute priority granted to these
areas.
6. Even for the answer an enterprise, the informant emphasized that our co-opera-
tive is an enterprise which lets everyone get rich (interviews in the field).
7. The three rural issues or the issues of farmers, rural areas and agriculture are
considered to be vital to rural development in China.
8. I am indebted to Dennis Young for raising this point.

References
Bacchiega, A. and Borzaga, C. (2001) Social Enterprises as Incentive Structures: An
Economic Analysis, in: C. Borzaga and J. Defourny (eds) The Emergence of Social
Enterprises. London and New York: Routledge, pp. 273294.
Bonus, H. (1986) The Cooperative Association as a Business Enterprise: A Study in
the Economics of Transactions, Journal of Institutional and Theoretical Economics,
142: 310339.
Borzaga, C., Depedri, S. and Tortia, E. (2010) The Growth of Organizational Variety
in Market Economies: The Case of Social Enterprises, Euricse Working Papers, No.
00310.
Chaddad, F. (2009) Both Market and Hierarchy: Understanding the Hybrid Nature of
Co-operatives. Paper prepared for the International Workshop Rural Cooperation
in the 21st Century: Lessons from the Past, Pathways to the Future, June 1517,
Rehovot, Israel.
Chang, C.F. and Tuckman, H.P. (2010) Income Diversification, in: B.A. Seaman and
D.R. Young (eds) Handbook of Research on Nonprofit Economics and Management.
Cheltenham, UK and Northhampton, MA: Edward Elgar Publishing, pp. 517.
CIRIEC (1999) The Enterprises and Organizations of the Third System. A Strategic Challenge
for Employment, final report to the European Commission on the Third System and
Employment Pilot Action. Brussels: CIRIEC.
Cook, M.L. (1995) The Future of U.S. Agricultural Co-operatives: A Neo-institutional
Approach, American Journal of Agricultural Economics, 77(5): 11531159.
Stakeholder Participation in Co-operative Capitals 213

Cook, M.L. and Iliopoulos, C. (2000) Ill-Defined Property Rights in Collective


Action: The Case of US Agricultural Co-operatives, in: C. Menard (ed.) Institutions,
Contracts and Organizations. London: Edward Elgar Publishing, pp. 335348.
COPAC (1995) Capital Formation in Agricultural Cooperatives. Report of COPAC
International Technical Meeting, 810 November, Rome.
Cyert, R.M. and March, J.G. (1963) A Behavioral Theory of the Firm. Englewood Cliffs,
NJ: Prentice-Hall.
Defourny, J. and Develtere, P. (2009) The Social Economy: The Worldwide Making
of a Third Sector, in: J. Defourny, P. Develtere, B. Fonteneau, and M. Nyssens (eds)
The Worldwide Making of the Social Economy: Innovations and Changes. Leuven and
Den Haag: Acco, pp. 1553.
Frank, R.H. (1992) A Theory of Moral Sentiments, in: M. Zey (ed.) Decision Making:
Alternatives to Rational Choice Models. Newbury Park, CA: Sage Publications,
pp. 158184.
Freeman, R.E. (1984) Strategic Management: A Stakeholder Approach. Boston, MA:
Pitman Publishing Inc.
Galera, G. and Borzaga, C. (2009) Social Enterprise. An International Overview of
Its Conceptual Evolution and Legal Implementation, Social Enterprise Journal, 5(3):
210228.
Hambrick, D.C. and Mason, P.A. (1984) Upper Echelons: The Organization as a
Reflection of Its Top Managers, Academy of Management Review, 9: 193206.
Hansmann, H. (1980) The Role of Nonprofit Enterprise, The Yale Law Journal, 89(5):
835901.
Harris, A., Stefanson, B. and Fulton, M. (1996), New Generation Cooperatives and
Cooperative Theory, Journal of Cooperatives, 11: 1528.
Helmberger, P. (1966) Future Roles for Agricultural Cooperatives, American Journal of
Agricultural Economics, 48(5): 14271435.
Huang, Z., Xu, X. and Song, Y. (2006) On the Institutional Arrangements of Farmer
Co-operatives in China, in: S. Song and A. Chen (eds) Chinas Rural Economy after
WTO. Aldershot and Burlington: Ashgate, pp. 325335.
Iliopoulos, C. (2002) Long-term Financing in European Agribusiness Co-operatives:
Emerging Methods for Ameliorating Investment Constraints. Paper presented at:
the European Association of Agricultural Economists Conference, 2831 August,
Zaragoza, Spain.
James, E. (1989) The Nonprofit Sector in International Perspective. Studies in Cooperative
Culture and Policy. New York: Oxford University Press.
Kaarlehto, P. (1955) Co-operation as a Form of Economic Integration, Acta Agriculturae
Scandinavica, 5: 8597.
Kirkpatrick, S.A. and Locke, E.A. (1991) Leadership: Do traits matter?, Academy of
Management Executive, 5: 4860.
Lang, M., Castanias, R. and Cook, M.L. (2001) Ownership, Financial Instruments,
and Control of U.S. and Selected European Cooperatives, University of California
Center for Cooperatives Working Paper, Series No. 11.
Mnard, C. (2011) Hybrid Modes of Organization. Alliances, Joint Ventures, Networks,
and Other Strange Animals, in: R. Gibbons and J. Roberts (eds). Handbook of
Organizational Economics. Princeton: Princeton University Press.
Miller, T. and del Carmen Triana, M. (2009) Demographic Diversity in the
Boardroom: Mediators of the Board Diversity-Firm Performance Relationship,
Journal of Management Studies, 46: 755786.
214 Li Zhao

Ministry of Agriculture of PRC (2008) Construction and Management of Farmers


Specialized Cooperatives. Beijing: China Agriculture Press (in Chinese).
Ohm, H. (1956) Member Behaviour and Optimal Pricing in Marketing Cooperatives,
Journal of Farm Economics, 38: 613621.
Phillips, R. (2003) Stakeholder Theory and Organizational Ethics. San Francisco, CA:
Berrett-Koehler Publishers, Inc.
Staatz, J.M. (1987) Recent Developments in the Theory of Agricultural Cooperation,
Journal of Agricultural Cooperation, 2: 7495.
Steinberg, R. (2007) Membership Income, in: D.R. Young (ed.) Financing Nonprofits.
Putting Theory into Practice. New York: National Center on Nonprofit Enterprise and
AltaMira Press, pp. 121156.
Steinberg, R. and Gray, B.H. (1993) The Role of Nonprofit Enterprise in 1992:
Hansmann Revisited, Nonprofit and Voluntary Sector Quarterly, 22: 297316.
Trifon, R. (1961) The Economics of Cooperative Ventures Further Comments,
Journal of Farm Economics, 43: 215235.
Tsui, A.S., Egan, T. and OReilly, C.A. III (1992) Being Different: Relational
Demography and Organizational Attachment, Administrative Science Quarterly, 37:
549579.
Van Dijk, G. (1997) Implementing the Sixth Reason for Co-operation: New
Generation Co-operatives in Agribusiness, in: J. Nilsson and G. Van Dijk (eds)
Strategies and Structures in the Agro-food Industries. Assen, The Netherlands: Van
Gorcum, pp. 94110.
Von Pischke, J.D. (1993), Capital Formation and Performance: Issues in Cooperative
Promotion. Paper prepared for the COPAC Open Forum, 23 March, Rome.
Young, D.R. (2007) Toward a Normative Theory of Nonprofit Finance, in: D.R. Young
(ed.) Financing Nonprofits: Putting Theory into Practice. New York: National Center on
Nonprofit Enterprise and AltaMira Press, pp. 339372.
Zhao, L. (2011) Capital Formation in New Co-operatives in China: Policy and
Practice, Euricse Working Papers, No. 01511.
Zhao, L. (2012) New Co-operative Development in China: An Institutional Approach.
Doctoral Dissertation, Institute for International and European Policy, Catholic
University of Leuven, Leuven.
Zhao, L. and Develtere, P. (2010) New Co-operatives in China: Why They Break
Away from Orthodox Co-operatives, Social Enterprise Journal, 6(1): 3548.
Zhao, L. and Gijselinckx, C. (2011) Multi-stakeholder Co-operatives in China: A
Resource Mix Structure Approach, Social Enterprise Journal, 7(3): 259279.
13
Stakeholder Participation in
Co-operative Governance in China
Peng Yuan

Introduction

Since Chinas market-oriented reforms in the late 1970s, the Chinese agri-
cultural production system has transformed from a collectively owned
communal system, based on the agricultural sector modelled on the former
Soviet Union, into a household-based contract responsibility system. In this
farming system, small farmers entered a contractual relationship with the
village committee and gained long-term use rights of the collectively owned
farmland. In order to achieve economies of scale and risk-sharing, as well
as reduce the transaction costs, the Chinese farmers co-operatives have
emerged with the purpose of coordinating activities of the small-scale scat-
tered household operation in incomplete markets.
The Law on Farmers Specialized Co-operatives was introduced in October
2006. Since then, the development of farmer co-operatives in China has
been accelerated. According to the latest statistics from the Chinese State
Administration for Industry and Commerce, by the end of June 2012 the
number of registered farmers specialized co-operatives has reached 601,000
with 46 million household members accounting for 18.6 per cent of the
total number of rural households.
In China, co-operatives are widely distributed in various industries.
Among them, the cultivation industry accounted for 44 per cent and the
animal husbandry industry, 29 per cent, followed by other industries, such
as fisheries, forestry and traditional hand weaving. By the end of 2011, 95
per cent of farmers specialized co-operatives had provided technical serv-
ices to their members, and 49 per cent had provided the services regarding
both collective purchase of inputs and marketing. In 2011, the total turno-
ver of agricultural inputs and products of farmers specialized co-operatives
nationwide amounted to 202 billion RMB and 952 billion RMB, respectively,
an increase of 49.4 per cent and 66.7 per cent over 2010 (Chen 2012).
As shown by both official statistics and field studies by Chinese schol-
ars (Huang and Xu 2006; Zhao 2010), the rural elites have provided the

215
216 Peng Yuan

leadership for farmers co-operatives. They include professional large-scale


farmers, agricultural product dealers, businesses engaging in farm-service
industries, agricultural product processors, as well as village leaders. Also,
numerous previous studies have indicated conflicts of interest between
these rural elites (as co-operative initiators or leaders) and the other pro-
ducer-members. Chinese scholars have strongly criticized these non-farm-
er-run co-operatives as pseudo co-operatives (for example Guo 2010). The
World Bank (2006) has considered the development of Chinese co-operative
organizations as a pragmatic reaction to the Chinese rural problems rather
than a reflection of idealism. Among the studies of co-operative govern-
ance, some scholars have adopted the neo-institutional economic approach
(such as Cook 1995; Fulton 1997; Nilsson 1999; and Cook, Chaddad and
Iliopoulos 2004), while others apply the multi-stakeholder point of view (for
example Gijselinckx 2009; Lund 2010; Leviten-Reid and Fairbairn 2011).
Studies of co-operative governance in China have been on the rise more
recently (for example Zhang 2004; Lin and Huang 2006; Huang and Zhu
2008; Ma and Meng 2008; Zhang and Feng 2008; Zhang and Yuan 2009;
Wang 2011). Unfortunately, so far, there have been very few studies on co-
operative governance from the stakeholder theory point of view (similar to
co-operative capital studies discussed in the chapter by Zhao, this volume).
Since the 1990s, the existing influential research results on corporate gov-
ernance have been mainly based on industrial investor-owned firms (Yang
and Zhou 2000; Chen and Jia 2004; Jiang and Jin 2009). Concerning co-
operative governance in China, only a few works have touched on this field
(for example Ren and Guo 2009).
Since Edward Freemans (1984) landmark book, there have been different
views on stakeholder identification (Frederick, Davis and Post 1988; Clarkson
1995; Donaldson and Preston 1995; Jones and Wicks 1999). In this chapter
we provide a definition of co-operative stakeholders in farmers specialized
co-operatives, drawing on Hansmann (1996) and Mitchell, Agle and Wood
(1997). The stakeholders are defined as individuals or groups who have the
power or legitimacy concerning ownership rights, control rights and income
rights as well as other interest claims in the co-operative activities. They
include: farmer producers; suppliers of agricultural inputs and services; agri-
cultural products dealers, retailers and processors; local communities; and
local governments. Furthermore, based on the presence of three stakeholder
attributes, namely power, legitimacy and urgency (Mitchell, Agle and Wood
1997), a stakeholder classification will be explored in order to explain the
stakeholder participation in co-operative governance in Chinese agricul-
tural co-operatives. The analysis of the study is based on the authors field
investigations and case studies1 in recent years.
The chapter is organized as follows. Section two presents a brief back-
ground introduction, regarding the co-operative definition and governance
according to the law. Next, in section three a definition and classification of
Stakeholder Participation in Co-operative Governance 217

co-operative stakeholders and their interest claims within the Chinese con-
text are discussed. Section four examines in detail the problems and chal-
lenges concerning stakeholder participation in co-operative governance,
including principalagent problems, conflicts of interest among stakehold-
ers, as well as deprivation and opportunistic behaviour of members. Some
final conclusions are drawn in section five.

Legal arrangements for stakeholder composition and


co-operative governance in China

Legal arrangements of Chinese farmers specialized co-operatives can be ana-


lyzed with regard to the allocation of ownership rights, control rights and
residual income rights among different stakeholders (Hansmann 1996).
Ownership rights according to Article 2 of the law, a farmers special-
ized co-operative is a mutual-aid economic organization, which is volun-
tarily formed by production and business operators of similar agricultural
products or by providers or users of similar agricultural production and
business operation services on the basis of rural household contractual
management and which is subject to democratic management (emphasis
added). Article 14 of the law stated that every citizen, firm, government-af-
filiated agency or civil society organization engaged in activities associated
with co-operatives may become a member of the co-operative. However,
agencies that have a public administration function shall not become a
member. Therefore, the law allows some stakeholders, such as service pro-
viders, retailers or processors who are not necessarily agricultural producers
but are engaged in the related business operation, to obtain co-operative
membership. Article 15 of the law restricts the number of non-producer
members by stating that no less than 80 per cent of a co-operatives mem-
bers should be farmers. In co-operatives whose number of members is
less than 20, one company, government-affiliated agency, or civil society
organization can become a member; in those whose number of members
exceeds 20, the number of companies, government-affiliated agencies and/
or civil society organizations cannot exceed 5 per cent of the total number
of members. However, there is no set limit on members equity shares. This
is to be decided by the bylaws of each co-operative, according to Article 12
of the law.
Control rights as a result of member heterogeneity, there are some
corresponding adjustments in the voting rights. Article 17 has stated that
whereas the principle of one member, one vote is adopted by the law,
co-operative bylaws may grant additional votes to the members whose
contribution (shares or patronage) are relatively large, but these additional
votes cannot exceed 20 per cent of the total votes. The number of members
having additional votes should be disclosed to other members before each
general assembly. The bylaws can set restrictions on voting domains for
218 Peng Yuan

this class of members. Therefore, the key members with larger contribu-
tion in the co-operative can have more control rights than others in the
decision-making process. This provision is also regarded as a positive incen-
tive mechanism that is conducive to co-operative capital accumulation (see
also the chapter by Zhao in this volume).
Income rights according to Article 37, the net annual profits may first
be allocated to members in proportion to the patronage volume (amount).
The total patronage dividends returned shall not be less than 60 per cent of
the distributable profits. The remaining profit shall be allocated to members
on the basis of each members capital contribution and shares of common
reserve funds recorded in the members accounts, as well as the members
average quantified shares of the assets accumulated from government sub-
sidies and other donations. In summary, it is regulated that the distribut-
able profits in proportion to capital shares shall be no more than 40 per
cent of the total distributable profits, and common reserve funds should
be allocated to individual members accounts (also see Zhao, this volume).
That means, there is no specific co-operative common reserve. Moreover,
members have the right to withdraw their share of the reserve funds when
exiting the co-operative (Article 21), thereby turning the common reserve
funds into each members deposit in the co-operative, or the co-operatives
debt owed to its members. Absence of the common reserve funds in the law
is the result of the attempt to distance new co-operatives from the Peoples
Commune period (19581978).

Classification of co-operative stakeholders and


their interest claims

According to Mitchell and colleagues (1997), stakeholder salience is posi-


tively related to the cumulative number of the three attributes perceived by
managers (cf., proposition 1, p. 873). The stakeholders possessing at least two
attributes can be perceived as salient. They include definitive stakeholders
(those possessing all three attributes) and expectant stakeholders (those pos-
sessing two attributes). Besides, latent stakeholders are those possessing one
attribute. Since Mitchell and colleagues (1997) did not give detailed scores
for the division of each group, the three types of stakeholders are divided in
this chapter according to Mikalsen and Jentofts (2001) stakeholder typol-
ogy. The definitive stakeholders are defined as those groups which have at
least two high and one medium score for the three attributes. The expect-
ant stakeholders are considered as those who have at least two medium
scores. The rest are regarded as latent stakeholders.
After presenting the definitions of different types of stakeholders based
on stakeholder salience, this section further discusses the classification
of co-operative stakeholders and their interest claims within the Chinese
context.
Stakeholder Participation in Co-operative Governance 219

Classification of co-operative stakeholders


Farmers specialized co-operatives could be classified into two categories
based on founder identification. The first category is the single-stakeholder
co-operative model, which resembles the internationally recognized classical
co-operative type, the members of which consist of only farmer producers.
The second is a multi-stakeholder co-operative model, which is neverthe-
less different from the multi-stakeholder co-operatives in Western countries
(Lund 2010, quoted in Leviten-Reid and Fairbairn 2011). In what follows,
single- and multi-stakeholder models will be discussed, respectively.
Single-stakeholder model. Farmers specialized co-operatives of the sin-
gle-stakeholder type are co-operatives with homogeneous members. They
are all farmer producers, despite some differences in the production scale
and share contribution in co-operatives.
In this chapter, definitive stakeholders refer to farmer investor members
who are usually co-operative founders and core members. Currently, the
establishment of Chinese farmer co-operatives is driven by resourceful
households and followed by small farmers (see also chapters by Xu and Wu,
and by Zhao, in this volume). As core members, professional farmers have
played a key role in taking risks and in market exploration for co-operatives
as their key investor-members. Without the core members involvement,
co-operatives could hardly be developed. Therefore, they have strong deci-
sion-making power, and their legitimacy is recognized both legally and in
practice. Because of their leading position in co-operatives, their claims are
regarded to be urgent and are treated first. These claims include solving
their marketing problems through branding, advertising or social capital
networking, or improving their production infrastructure.
Expectant stakeholders include ordinary (non-investor) producer members,
business dealers, local non-member farmers, local community and local
governments. Ordinary producer members whose ownership, control and
income rights are typically smaller than that of investor members, are the
majority group in co-operatives and have high legal legitimacy (that is,
fulfilling the mission of helping small farmers, a mission set by the law).
However, as they possess relatively small production scales and capital
inputs and do not bear the risks of investment in co-operatives, their deci-
sion-making power concerning organizational operation and development
direction is low. Their voices in co-operatives do not appear strong enough
and their urgent legitimate claims are usually reflected in the claims of
investor members. Since they tend to depend on investor members (that is
dependent stakeholders in Mitchell, Agle and Wood 1997), their urgency is
described as medium.
Business dealers include retailers, suppliers and processors. As they con-
trol specific marketing resources critical for growth and expansion of co-
operatives, they hold power to influence co-operative decisions. However,
220 Peng Yuan

since most of these external stakeholders tend to be purely business-minded


with very few, if any, social outcomes in mind and since their position is
restricted by the law, they enjoy very little legitimacy in farmer-run co-oper-
atives. Furthermore, in a buyer-driven market, co-operatives appear highly
dependent on these stakeholders. This implies that their urgent claims, such
as quantity or quality requirements on members products and require-
ments on qualified agricultural inputs, are highly valued by co-operatives.
In all, these stakeholders score high on power and urgency, but low on the
legitimacy attribute.
Concerning local non-member farmers who transact with co-operatives
(for example selling their products to co-operatives or buying agricultural
inputs from co-operatives), they are the potential co-operative members.
Co-operatives are increasingly paying attention to their interest claims,
owing to serious market competition for agricultural products (medium).
If they would join co-operatives, they would become the organizations
dependent stakeholders (the ordinary producer members group). As they
have no specific assets or resources (for example financial or other resources)
that can be used by co-operatives, their power is very low. Since they are
non-members, their demands for more services, for example, are not highly
valued by co-operatives, although they are considered as both community
members and potential co-operative members. As a result, their legitimacy
could score in the middle range.
The local community refers to the village community, where co-operatives
are located. Most co-operatives have amicable relationships with the local
community. The community may provide some convenience for co-operative
operation, such as grant training sites or operation sites to let co-operatives
collect agricultural products or develop a social network with the related
organizations, and so on. In return, co-operatives are expected to provide
working opportunities for local villagers and to promote village harmony.
Therefore, the degree for the local communitys power and legitimacy could
be viewed as medium. Nevertheless, since co-operatives grow in a local com-
munity and engage members from the local community, when the latter has
some urgent claims such as asking co-operatives for a donation to support
people in disaster situations, or to receive a visiting delegation co-operatives
usually would put the local communitys claims on top of their priority list
to maintain their good relationship. Furthermore, it is worth emphasizing
that when some co-operative founders are community leaders, the relation-
ship between co-operatives and the local community is even closer. It is very
important for co-operatives to attract the communitys participation, particu-
larly in the initial stages of their development (see also Zhao, this volume).
The local governments at the county or township level are in charge of
facilitating co-operative development by providing financial support, tech-
nical assistance, human resource training and industrial promotion. They
have the relatively strong power to affect co-operatives behaviours, as they
Stakeholder Participation in Co-operative Governance 221

possess many important resources that co-operatives need, especially in


financially strong regions (see Zhao, this volume). Despite this fact, local
governments have low legitimacy, because farmers co-operatives are sup-
posed to be self-help organizations. However, as local governments are
increasingly turning to co-operatives to help provide better community
supports and services, their urgent claims and their relationships with co-
operatives are also regarded as critical and increasingly important.
Furthermore, in this study consumers are regarded as the co-operatives
latent stakeholders. With increasing purchasing power and the market struc-
ture changing into one driven by the buyer, the consumer group is an
increasingly powerful stakeholder group. Under government policy guide-
lines, more and more co-operatives develop their business to serve mem-
bers from field to table and face the consumers directly. As consumers are
becoming increasingly aware of the importance of food security, the influ-
encing power and legitimacy of consumers on a co-operatives decision-
making is on the rise.
Finally, though employees are regarded as definitive stakeholders in many
types of enterprises, they are quite small in number in most farmer-run
co-operatives in China (see Zhao, this volume). In fact, for the majority of
Chinese co-operatives members are the labourers, as their business scale is
small. Typically, if co-operatives hire seasonal part-time labour, they do it
without a contract. Therefore, employees power in co-operatives is quite
low. Meanwhile, their legitimacy and criticality are also low and not valued
by co-operatives. As a result, they can be viewed as non-stakeholders under
the current economic climate. Table 13.1 summarizes the attributes of dif-
ferent stakeholders in the single-stakeholder co-operative model.

Table 13.1 Different type of stakeholders in single-stakeholder co-operatives

Power Legitimacy Urgency

Definitive stakeholders
Farmer investor members High High High
Expectant stakeholders
Ordinary producer members Low High Medium
Business dealers High Low High
Local farmers having Low Medium Medium
transactions with
co-operatives
Local community Medium Medium High
Local governments Medium or high Low Medium
Latent stakeholders
Consumers Low to Low to Low to
increasing increasing increasing
222 Peng Yuan

Multi-stakeholder model. Several stakeholders positions would be affected


in multi-stakeholder co-operatives (see Table 13.2). First, a most significant
shift may happen for the business dealers. As they become the founders of
co-operatives and formal co-operative members, they would become the
definitive stakeholders who hold the legitimacy, power and urgency at high
levels. Accordingly, the producer investors status would become the expect-
ant stakeholders, since both their power and urgency turn to the medium
level, though their legitimacy remains high.
Besides, since the dominant stakeholder groups are outsiders, their relation-
ship with the community may be weak. In this case, the communitys power
in co-operatives may result in a low ranking. However, as the co-operatives
offices are still located in the community, the communitys legitimacy and
interest claims (urgency) still have some influence on co-operatives.
Concerning consumers, since more and more co-operatives obtain certifi-
cation for green food or organic food, their claiming rights are increasing.
Many co-operatives have their own product brands and some have become
locally well recognized. To maintain their market reputation, co-operatives
put value on consumers interest claims (urgency). However, since there are
no consumer-protection organizations in China, and they claim their inter-
ests mainly through the media, consumers are still latent stakeholders.
Finally, in the multi-stakeholder co-operative model, when the co-opera-
tive business scale becomes too large to be handled by co-operative members,
the professional full-time employee group becomes necessary for the man-
agement and expansion of co-operative operations. As a result, the impor-
tance of employees legitimacy, power and urgency has increased. In the long
run, as the Chinese populations birth rate continuously declines, the rural

Table 13.2 Different type of stakeholders in multi-stakeholder co-operatives

Power Legitimacy Urgency

Definitive stakeholders
Business dealers High High High
Expectant stakeholders
Farmer investor members Medium High Medium
Ordinary producer members Low High Medium
Local governments Medium or high Low Medium
Local farmers having transactions Low Medium Medium
with co-operatives
Local community Low Medium Medium
Latent stakeholders
Consumers Low to increasing Low to Medium
increasing
Employees Low to increasing Medium Low to
increasing
Stakeholder Participation in Co-operative Governance 223

labour market will face a limited supply of labour. In this case, the employ-
ees legitimacy would become higher (from low to medium ranking), and
the significance of their power and urgency would continuously grow.

Different stakeholder interest claims in co-operative governance


Farmer investor members. In most cases, farmer investors are also the found-
ing members of the co-operative. They are usually engaged in the commer-
cial farming, and their operational target is to pursue profit maximization.
They are considered as formal farmers by Schultz (1964, 1987). They have
some entrepreneurs traits, such as a spirit of innovation and willingness to
take risks, and they have long-term strategic plan for business development.
Therefore, their first care would be to keep their businesses sustainable and
prosperous along with the co-operatives healthy development. When they
set up the co-operative, they usually also take management responsibili-
ties rather than employ professional managers, since their business is small-
scale. Building a sound and stable supply chain with the upstream and
downstream stakeholders centred on their agricultural products is also a
top concern, along with the pursuit of good economic performance.
Producer members. Different from the investor members interest claims,
ordinary farmer producers are usually unwilling to take risks. They have no
other ambition except farming to secure a living for their families. Recently,
as the marketing environment for agricultural products has become increas-
ingly uncertain and the prices of agriculture inputs and products have fluc-
tuated dramatically, ordinary small farmers have become concerned about
avoiding the risks instead of pooling the risks together.2 The first reason for
them to join a co-operative is to have a stable marketing channel for their
products. Two other reasons also affect their participation, namely, selling
their products at a good price and reducing their production costs.
Business dealers. As the marketing environment is becoming more severe,
the competition among individual enterprises is replaced by competition
among the product supply chains. That means, many business entities have
a strong intention to reduce market uncertainty and risk by establishing col-
laborative relationships with upstream and downstream trading partners.
Besides, when they have made asset-specific investments and faced strongly
uncertain environments while conducting high-frequency transactions
(Williamson 1985), they require a long-term commitment and wish to set
up a strategic alliance by way of sharing property rights. That means they
tend to establish a co-operative together with farmer producers and become
an interest group. As the law allows them to be co-operative members, more
and more business dealers or processors have followed this path. Therefore,
their next interest claim appears to be to have a steady co-operative relation-
ship with producers in order to meet their demands for raw material and
other business demands for products quality and quantity, as well as for
regular and constant input and product supply at relatively stable prices.
224 Peng Yuan

Moreover, after establishing a co-operative together with farmer produc-


ers, they are likely to make efforts to gain government support, including
financial benefits, grants, favourable tax credits and other related services.3
Since, compared to small farmer-initiated co-operatives, they have more
capabilities for good economic performance, attracting capital resources
and using their relatively rich social capital, they are also at an advantage in
receiving government fiscal aid.
Employees. Since most co-operatives only have temporary, seasonal
employees, they usually pay at the piece wage rate rather than hourly rate.
Therefore, most temporary employees only care whether their salaries are
paid on time. When co-operatives expand their business, especially when
they include the food processing or storage process, they also hire full-time
employees. Besides being concerned about their salaries, these full-time
employees may also take into consideration their welfare, such as working
conditions and benefits.
Consumers. Their interest claims seem clear: when they buy co-operative
products, their first concern is product quality, followed by reasonable prices
(compared with the price for similar products in the market).
Local Community. Concern for community is one of the seven ICA prin-
ciples (Statement of the Co-operative Identity, ICA 1995). In reality, however,
in most rural areas, especially in the developed regions, it is the community
that cares for co-operatives. According to the Organic Law of the Villagers
Committees of China, the village committee is in charge of managing public
affairs and the public welfare of the village. Besides, the village committee
helps co-operatives develop in many ways by, for example, providing offices,
training rooms and relevant equipment for co-operatives as well as loading
areas and other infrastructure. They may also offer village accountants to assist
co-operatives in book-keeping4 or even assist them to build social networks.
This is believed to be conducive to strengthening community cohesion.
Since co-operatives can provide more local employment opportunities, they
potentially increase villagers incomes. This is also a second interest claim for
the community. Also, because co-operatives may enhance farmers democratic
consciousness, they further benefit and strengthen the community. This spill-
over effect is compatible with village committees interest claims, which fur-
ther encourages the village to provide services to local co-operatives.
However, the village committees attitudes towards co-operatives are sub-
tle in some senses. As a grassroots organization of self-governance, a village
committee is normally elected by the villagers in a democratic way. When
co-operatives become powerful, village leaders may feel a potential threat
coming from co-operative leaders, who may be elected to challenge their
social and political status. To avoid this, many village leaders form co-oper-
atives and are directly involved in their governance. In this case, compared
with other farmer-run co-operatives, they tend to be more concerned about
community development. This can potentially help them get/retain more
Stakeholder Participation in Co-operative Governance 225

political votes from the villagers. A former study indicated that one third of
co-operatives in China have been founded by village leaders (Huang 2009).
Local non-member farmers. In rural China, many local farmers who do
not join co-operatives engage in business transactions with co-operatives.
There are two main reasons for this development. From the farmers side,
their unwillingness to seek membership is because they do not want to be
bonded by a co-operative that has not established a reputation. They would
rather remain as observers outside the organization in order to reduce
risks. From the co-operatives side, many are not ready to absorb new mem-
bers, because they currently possess limited marketing channels and man-
agement experience. So, the interest claim for these local farmers is clear:
they only hope they may have more options to realize a better product
price, or lower-cost services or inputs.
Local governments. Local governments may collect limited tax revenues
from co-operatives. Nevertheless, helping farmer producers to increase
income, promoting local employment and keeping local society stable, have
become three important indicators for upper-level governments to evaluate
their political performance. In this context, many local governments have
paid particular attention to co-operatives social roles, which in turn can
assist them to achieve their performance objectives. Some county govern-
ments have linked budgets allocated to the lower-level government (at the
township level) to these performance indicators. As a result, some township
governments have increased pressure on village committees, calling for a
quantity-based development approach for farmers co-operatives.
Table 13.3 summarizes the different stakeholders interest claims described
above.

Table 13.3 Summary of stakeholders interest claims

Interest claims Rank 1 Rank 2 Rank 3

Farmer investor Organizational Stable supply chain Good economic


members sustainability performance
Ordinary producer Stable market High price for Low production
members channel products cost
Business dealers Stable supply or Stable co-operation Preferential
demand relationship resources from
governments
Employees Wage paid on time Social warfare
Consumers Qualified products Reasonable prices
Local community Community harmony Farmers income
growth
Local farmers Sell the products and
reduce the risk
Local governments Increase farmer Promote Social stability
producers income employment
226 Peng Yuan

Problems and challenges

Different stakeholders have different interest claims in co-operatives. This


implies that Chinese farmers co-operatives may face some problems and
challenges when different stakeholders are involved or participating in co-
operative governance. These challenges include principalagent problems
and conflicts of interest among stakeholders, as well as deprivation and
opportunistic behaviour of ordinary members.

Principalagent problems
In China, members of boards of directors in farmers specialized co-op-
eratives typically overlap with the management team. They are also rep-
resentatives of the investor members. Even if an election for the board of
directors takes place, in most cases it is symbolic, because the candidates
are often selected by the founders. Besides, ordinary members mostly
participate in a superficial way: that is, they are being informed by their
leaders. Furthermore, consultation only happens at the board of directors
level, while decision and control rights are in fact in the hands of a few
founders. In most cases, the legal arrangements concerning democratic
governance only exist on paper. As a result, the income rights of most ordi-
nary members cannot be guaranteed in accordance with the law, implying
violations of patronage principles in the distribution of surplus revenues
in most co-operatives. Distributable profits are in many cases allocated
only on the basis of members capital contribution, as in investor-owned
enterprises.
When the board of directors controls the decision-making rights and
makes decisions based on its own interest claims rather than on those of all
members, the principalagent problem would arise. As ordinary members are
in a vulnerable position, the general assembly usually seems only nominal.
Ordinary members only hold the rights to information at the general assem-
bly. Then, we need to ask the question: Who represents the majority mem-
bers interest?
In reality, on the one hand, ordinary members would vote with their feet.
On the other hand, since many co-operatives need to ensure that they can
supply the products in accordance with the terms of contracts with their
customers, co-operative leaders usually have to take into account ordinary
members interest claims in order to secure member stability. These two
points mean that the principalagent problem between co-operative leaders
and a majority of ordinary members (represented in the general assembly)
would be softened by the principle of voluntary membership (as required
by the law) and market competition mechanism. This also implies that dep-
rivation of ordinary members would become serious when co-operatives
experience good economic performance.
Stakeholder Participation in Co-operative Governance 227

Conflict of interest among different stakeholders


Previous theoretical and empirical works have addressed the conditions
for successful collective action (for example Wade 1988, 1994: 215; Ostrom
1990: 90; Baland and Platteau 1996: 343345). Among them, homogeneity
of identities and interests is believed to favour collective action in some
circumstances. In multi-stakeholder co-operatives in China, heterogeneity
of identities and interests exist among different definitive stakeholders who
are located in the upstream or downstream supply chain. Direct conflicts
of interest may arise when co-operatives sign trade/service contracts with
supplier/processor/retailer members (that is, business dealers) and producer
members, particularly when allocating surplus among different groups.
In the trading process among different stakeholders, it is often observed
that the rural elites take the lead in the co-operative management and
appropriate a great amount of benefit shares. Ordinary members usually
cannot exert influence. If the latter find that the residual income alloca-
tion or trading prices provided by the co-operative violate their interests,
they would choose to quit the organization. Their withdrawal may result in
the loss of co-operative business, which would threaten the organizations
sustainability. Nevertheless, in reality, this seldom occurs. The supplier or
purchaser members who set prices always tend to offer preferential prices to
ordinary members.
Beyond the definitive stakeholders, conflict of interest can also arise
between definitive stakeholders and expectant stakeholders. At present,
these are particularly represented by the divergent interests between the
local government and founding shareholders and, to a lesser degree, between
the local community and founding shareholders.
When granting subsidies to co-operatives, the local government would
highly prioritize co-operatives social responsibility to promote employ-
ment and enhance farmers income (for example setting as an evaluation
indicator the number of farmer-members in the co-operative). But co-op-
eratives are often unwilling to recruit more farmers as members, because
they need to equally allocate the government funds among all of them, as
required by the law. So, to meet the governments requirements, they may
simply choose to do business with farmers at the market price and not share
the profits with them.
For the communitys side, conflict of interest with co-operative found-
ers has been mainly reflected in resource utilization and co-operative lead-
ership. Many local communities hold the view that co-operatives just use
the communitys resources without providing necessary maintenance of
those resources. Co-operatives, on the other hand, believe that many com-
munities have not fulfilled their responsibilities to provide public services
as required by the Organic Law of Village Committees. However, the key
conflict between the local community and the founding members is about
228 Peng Yuan

competition for political power and status. As indicated above, to solve or


avoid this problem, many village leaders have been directly involved in
establishing co-operatives. Furthermore, central government polices also
encourage village cadres to run co-operatives.

Deprivation and opportunism


Different from the co-operative movement in many developed countries,
farmers co-operatives in rural China have not emerged from various
dynamic socio-cultural movements (cf., Develtere 1994; Fairbairn 2001;
Battilani in this volume). As mentioned above, many farmers specialized
co-operatives are run by rural elites for their own interests. When other
members become unable to effectively participate in co-operative operation
and management, the deprivation problem may arise. The elites are likely to
take advantage of the control rights to misappropriate ordinary members
economic interests by way of, for example, not disclosing financial informa-
tion, shifting the co-operative surplus into their individual pockets, appro-
priating government financial aid or subsidies as their personal property, or
investing government funds in those areas that are favourable for their own
business. In fact, lack of accountability and opportunism has become the
most serious governance issue in many co-operatives and may even affect
the organizational stability and further development.
At the same time, since ordinary members would mostly benefit from
co-operatives through patronage refunds, when they become uncertain
whether co-operative leaders share with them the distributable profits by
patronage, sometimes they may take the risk to behave inappropriately (that
is moral hazard). The examples can be, replacing quality products with ones
of lesser quality, or selling their products to outsider brokers who provide
higher buying prices.
In order to prevent ordinary members opportunistic behaviour, many co-
operatives have started to pay attention to contract management. Nowadays,
it has become popular for co-operatives to sign contracts with their mem-
bers individually, in which rights and responsibilities are clarified, includ-
ing the penalty in case of violation by either side.

Conclusions

This chapter discussed the two models of stakeholder participation in co-


operative governance in rural China: the single-stakeholder model, in which
co-operative members are farmer producers, and the multi-stakeholder
model, in which co-operative members include both farmer producers and
their business partners. The relative importance of stakeholders attributes
(power, legitimacy and urgency) may change in different models. The found-
ers, farmers or otherwise, have a high degree of stakeholder salience in both
models, as they are the primary risk takers and, as a result, they hold both
Stakeholder Participation in Co-operative Governance 229

the control rights and the residual claim rights. In both models, ordinary
farmers have not actively participated in the co-operative governance. Since
they are not able or willing to share the risks of co-operative operation with
the founding members, their control rights exist only on paper. Their main
concern in joining the co-operative seems to be to improve their individual
production and reduce risk. They would exert their control rights in co-
operatives by exiting, if that were a viable option.
In terms of participation and development of the local community, the
single-stakeholder model seems more favourable, owing to the close rela-
tionship between the community and co-operative founders. Different
stakeholders have their own interest claims in co-operative governance,
creating potential conflicts of interest. However, stakeholders with high
claim rights may realize their interests better than others would, whereas
the interest claims of other stakeholders cannot be guaranteed. Due to these
tensions, several governance challenges in Chinese farmers co-operatives
were identified in the chapter, including the principalagent problems
and conflicts of interest, as well as member deprivation and opportunis-
tic behaviour. At the same time, we conjecture that voluntary and open
membership, together with the market mechanism, may serve as effective
countermeasures to reduce the imbalance between the founding members
and ordinary farmer members.
As agriculture and food markets have become more competitive, agricul-
tural production has gradually transformed towards intensified specialization,
standardization and environmental consciousness. As a result, co-operatives
in China are introduced to modern agri-business. Under the market pressure,
only those farmers who have the entrepreneurial spirit may become success-
ful co-operative leaders. This implies that the multi-stakeholder co-opera-
tive model would become the dominant variant in the long run, whereas
the classical co-operative model (that is featured by the one man, one vote
decision-making process and surplus distribution by patronage rather than
capital shares) would have limited potential for further development.
Finally, we need to mention the limitations of the analysis. Since the
research is descriptive and preliminary, there is a lack of normalized, quan-
titative data analysis based on questionnaires for co-operative stakehold-
ers. Further studies are needed to verify and modify the arguments in this
chapter.

Notes
1. During the past eight years, the author has visited hundreds of co-operatives in
more than 40 cities or districts, 20 provinces and autonomous districts in eastern,
middle and western Chinese regions.
2. This phenomenon is prevalent in the field. When conducting fieldwork, we observed
that when farmers were thinking about the possibility to join a co-operative, they
230 Peng Yuan

usually asked first, What sort of benefits can you [the co-operative] give me?
Very few of them tended to think What sort of benefits can we [as members]
share? According to the results from a recent survey, in which 174 members
from 35 co-operatives in Shannxi province (in western China) and Shandong
province (in eastern China) were examined, members priority consideration was
having a stable income rather than profit maximization.
3. In fact, previous studies have shown that the foremost purpose for some business
dealers to establish a co-operative is to access these government programs and to
avoid tax liability. That is also why it is estimated that 80 per cent of farmer co-op-
eratives in rural China are pseudo co-operatives (Yuan 2008).
4. It has to be emphasized that, currently, most farmers co-operatives in China have
neither professional management nor professional accountants. They usually hire
a part-time accountant.

References
Baland, J-M. and Platteau, J.-P. (1996) Halting Degradation of Natural Resources: Is there
a Role for Rural Communities? Oxford: Clarendon Press.
Chen, H. and Jia, S. (2004) Empirical Study on Enterprises Stakeholders through
Three-dimension, Journal of Economic Research, 4: 8090 (in Chinese).
Chen, X. (2012) Improving Standardization Level and Self-Development Capacity of
Farmers Co-operative, Rural Operation and Management, 8: 710 (in Chinese).
Clarkson, M. (1995) A Stakeholder Framework for Analyzing and Evaluating Corporate
Social Performance, The Academy of Management Review, 20: 92117.
Cook, M.L. (1995) The Future of U.S. Agricultural Cooperatives: A Neo-Institutional
Approach, American Journal of Agricultural Economics, 77(5): 11531159.
Cook, M.L, Chaddad, F.R. and Iliopoulos, C. (2004) Advances in Cooperative Theory
since 1990: A Review of Agricultural Economics Literature, in: G.W.J. Hendrikse
(ed.) Restructuring Agricultural Cooperatives. Rotterdam: Eramus University.
Develtere, P. (1994) Co-operation and Development. Leuven: ACCO.
Donaldson, T. and Preston, L.E. 1995 The Stakeholder Theory of the Corporation:
Concepts, Evidence, and Implications, The Academy of Management Review, 20(1):
6591.
Fairbairn, B. (2001) Social Movements and Co-operatives: Implications for History
and Development, Review of International Co-operation, 94(1): 2434.
Frederick, W.C., Davis, K. and Post, J.E. (1988) Business and Society, 6th edition. New
York: McGraw-Hill.
Freeman R.E., (1984) Strategic Management: A Stakeholder Approach. Boston: Pitmen
Press.
Fulton, M. (1997) The Future of Canadian Agricultural Cooperatives: A Property
Rights Approach, American Journal of Agricultural Economics, 77: 11441152.
Gijselinckx, C. (2009) Co-operative Stakeholders. Who Counts in Co-operatives,
and How? Working Papers on Social and Co-operative Entrepreneurship, WP-SCE
0905.
Guo, X. (2010) 80 Per cent of Farmer-specialized Co-operatives are Criticized as
Just in the Name; the Ministry of Agriculture Builds Threshold for Normalized
Co-operatives, Journal of Chinese Co-operative Economy Association, 6: 810 (in
Chinese).
Hansmann, H. (1996) The Ownership of Enterprises. Cambridge, MA: Harvard
University Press.
Stakeholder Participation in Co-operative Governance 231

Huang, J. (2009) Success, Challenges, and Strategy on Farmer Specialized Co-operative


Organizations. Available at: http://info.service.hc360.com/2009/11/09105775850.
shtml (Accessed: 9 November 2009) (in Chinese).
Huang, J and Zhu, G. (2008) Governance Mechanism Study based on Members
Commitment in Farmers Cooperative Economic Organization, Exploration on
Economic Issues, 6 (in Chinese).
Huang, Z. and Xu, X. (2006) Co-operative Governance based on Capacity and
Relationship: A Study from the Experience of Zhejiang Provinces, Social Science of
Zhejiang, 1: 6066 (in Chinese).
Jiang, R. and Jin, Y. (2009) A Study on Stakeholders: Theory and Its Application. Beijing:
Beijing University Press (in Chinese).
Jones, T.M. and Wicks, A.C. (1999) Convergent Stakeholder Theory, The Academy of
Management Review, 24(2): 206221.
Leviten-Reid, C. and Fairbairn, B. (2011) Multi-stakeholder Governance in
Cooperative Organizations: Toward a New Framework for Research?, Canadian
Journal of Nonprofit and Social Economy Research, 2(2): 2536.
Lin, J. and Huang, S. (2006) Members Heterogeneity and Ownership Analysis of
Farmer Co-operatives, Agriculture Economic Issue, 3: 1217 (in Chinese).
Lund, M. (2010) Solidarity as a Business Model: A Multi-stakeholder Cooperatives Manual.
Cooperative Development Center. Kent, Ohio: Kent State University.
Ma, Y. and Meng, C. (2008) Double Principal and Agent Relationship on Chinese
Farmer Cooperatives, Agriculture Economic Issue, 5: 5560 (in Chinese).
Mikalsen, K.H. and Jentoft, S. (2001) From User-groups to Stakeholders? The Public
Interest in Fisheries Management, Marine Policy, 25(4): 281292.
Mitchell, R.K., Agle, B.R. and Wood, D.J. (1997) Toward a Theory of Stakeholder
Identification and Salience: Defining the Principle of Who and What Really
Counts, The Academy of Management Review, 22(4): 853886.
Nilsson, J. (1999) Co-operative Organisational Models as Reflections of the Business
Environments, The Finnish Journal of Business Economics, 4: 449470.
Ostrom, E. (1990) Governing the Commons: The Evolution of Institutions for Collective
Action. Cambridge: Cambridge University Press.
Ren, D. and Guo, X. (2009) The Cooperatives Development under Multi-Organization
Intervention, Management and Administration on Rural Co-operatives, 3: 2224 (in
Chinese).
Schultz, T.W. (1964, 1987) Transforming Traditional Agriculture. Chinese Version (Trans.,
Liang Xiaomin). Beijing: Shangwu Press (in Chinese).
Wade, R. (1988, 1994) Village Republics: Economic Conditions for Collective Action in
South India. San Francisco: ICS Press.
Wang, J. (2011) Restriction System Study on Members Opportunism Behavior
of Chinese Farmer Specialized Co-operatives, China Rural Survey, 5: 2532 (in
Chinese).
Williamson, O.E. (1985) The Economic Institutions of Capitalism. New York: Free
Press.
World Bank (2006) The Review and Police Suggestion on Chinese Farmers Special
Association. Beijing: Chinese Agriculture Publishing House (in Chinese).
Yang, R. and Zhou, Y. (2000) Theory of Stakeholders and Its Application. Beijing:
Economic Science Press (in Chinese).
Zhang, X. (2004) Promoting Farmers Co-operatives Development Based on
Specialized Farmers: Examples from Zhejiang Farmers Co-operatives Development,
Chinese Rural Economy, 11: 410 (in Chinese).
232 Peng Yuan

Zhang, X. and Feng, K. (2008) Game Analysis on the Control Rights Division of
Farmers Co-operatives, Chinese Rural Economy, 8: 6169 (in Chinese).
Zhang, X. and Yuan, P. (2009) Co-operatives Theory and Experiences of Chinas Farmer
Co-operatives. Beijing: Capital Economic and Trade University Press (in Chinese).
Zhao, T. (2010) The Co-operative Development in Rural China and Government
Support Polices. Paper presented at the Beijing International Forum on Eastern Asia
Farmers Co-operative Development Models. 20 September, Beijing (in Chinese).
14
Banking Co-operatives in China
Guangwen He

Introduction

In the 1950s Chinas rural credit co-operatives (RCCs) emerged. However,


over the years they gradually degenerated into purely commercial financial
institutions. Reforms in the RCC sector from 2003 further led to a complete
loss of Chinas formal co-operative financial system.
In 2004, however, rural China saw the creation of member-based mutual
credit funds (MCF). As an informal financial institutional arrangement,
MCFs meet the financial needs of farm households so the model spread
rapidly in Chinese traditional agricultural areas. By the end of 2006 and
early 2007, the China Banking Regulatory Commission (CBRC) issued a
series of policy measures to promote the opening up of rural financial mar-
kets, including a standardized method to promote the development of rural
member-based MCFs.
However, for various reasons1 the number of MCFs approved by the CBRC
was small.2 Facing a huge market demand, some local governments began
to promote the development of MCFs. Rural mutual fund associations in
some areas started to accept deposits, but had no CBRC business license.3
In August 2006, in order to meet the micro-credit demands of poor vil-
lage residents, the Chinese State Council Leading Group Office of Poverty
Alleviation and Development (CPAD) promoted the development of mutual
funds in poor villages.4 Thus, a number of different co-operative financial
institutions have developed in China in recent years.
The main issues that will be discussed in this chapter are the reasons
for the degeneration of the RCCs as co-operative financial institutions and
the characteristics of the various new co-operative financial institutions
exploring their institutional strength in meeting the financial needs of
rural households. In addition, the chapter looks at ways to improve the co-
operative financial system in China.

233
234 Guangwen He

Four stages of degeneration of the rural credit


co-operative system

North (1991) describes an institution as a system of constraints that pro-


vides the framework for human interaction and constrains peoples behav-
ioural choices, thereby reducing uncertainty. RCCs can be viewed in this
framework as the institutional constraints on the behaviour and choices of
the actors in rural Chinese communities, as they used to be the key model
of Chinas financial co-operatives system. Changes in the RCC system will
therefore affect the whole structure of Chinas financial system, the rural
economic structure and even the national economic structure. The govern-
ments RCCs reform initiatives were different in different historical peri-
ods, driven by different, at times inconsistent, motivations. A distinction
between the stages of reform and development of RCCs can be made with
respect to the similarity or dissimilarity of their aims (Ma et al. 2005), or it
can be based upon the position of RCCs in terms of leadership or adminis-
trative relationship5 (He 2001). In this chapter we divide the stages of RCCs
reform and institutional change from the perspective of the motivation for
the promotion of institutional change. Throughout the different stages in
the process of economic development of China over more than 60 years,
the government has adopted different strategies for economic development;
therefore, in different historical periods the governments motivation to
promote RCCs reform and institutional change varied.
The following are the four distinct stages of RCC development and
reform.
During the first phase (19511979) the RCCs were providing financial serv-
ices for rural production teams and small farm households. They became
collectivized, serving as a tool for the government to gain access to the rural
financial surplus.
In order to promote Chinas modernization in the early 1950s, the gov-
ernment implemented a catch-up strategy with the development of heavy
industry as its core priority. The government abolished market mechanisms
by means of artificially restricting the movement of production factors, dis-
torting prices of production factors and product prices, providing low-cost
resources for the development of heavy industry and gaining access to the
rural financial surplus. The government established public credit funds,
unified revenue and expenditure incorporated RCCs, aiming to concen-
trate the rural financial surplus and rural financial resources as financial
support for the state-owned economy in order to ensure industrialization
and growth of output within the planned economy. However, because of
this political pressure, village members only reluctantly joined the public
credit co-operative organizations. Membership was not voluntary, as mem-
bers were obliged to join the co-operative and were deprived of the right to
exit. Free riding was prevalent, resulting in a low labour supply (Lin 1994;
Banking Co-operatives in China 235

Zhang 1999). This proved to be an important cause of inefficiency of the


RCCs.
During the era of the centrally planned economy, RCCs not only vio-
lated the ICA principle of voluntary and open membership, but also the
principle of autonomy with mandatory participation by the government.
In 1958 RCCs merged with the banks operating in the peoples communes.
Farmers altruistic participation in co-operatives and private property rights
were neglected. In 1959 RCCs were delegated to the production team by the
production brigade, with a dual leadership and the newly established com-
mune credit department. In 1962, the central government made it clear that
credit co-operatives were mutual fund organizations for the rural popula-
tion. However, as an income contributor to the National Bank, they were
forced into the nations financial system and fell under the central plan.
As the farm households could not fight against public property rights, the
trust structure based on mutual understanding between the farm house-
holds was broken by the administrative authority, increasing the cost of
farm households co-operation (He and Luo 2004). In 1977, the State Council
claimed that the credit co-operatives were both a collective financial organ-
ization as well as a grassroots organization of the National Bank in rural
areas. In 1979, the central government decided that the RCCs would handle
various rural financial services, performing the functions and tasks of the
national financial sector.
Thus, RCCs were collectivized, semi-nationalized and served a new eco-
nomic function. They had turned into something that was a far cry from
the real co-operative financial organization they used to be.
In the second phase of reforms (19801996), RCCs became a tool for the
government to promote rural enterprise development.
From the beginning of the 1980s, dominated by the sense of reform and
opening, the government started to promote rural industrialization through
the development of rural township and village enterprises (TVEs), state-
owned enterprises and urban private enterprises. State-owned banks were
not able to meet the funding needs for these new developments. Therefore,
RCCs became the governments tool to support the development of TVEs.
To this end, the government in 1984 tried to restore the co-operative char-
acter of RCCs and proposed that they would be a mass co-operative finan-
cial organization that is self-managed and assumes sole responsibility for
profit and loss. The idea was that rural funding would be met internally.
Since then, under the management of the Agricultural Bank of China
(ABC), RCCs started to explore democratic management, business opera-
tion and organizational structure. However, RCCs continued to have a
peculiar position as a government-led grass-roots institution of the state-
owned banks. In 1993 the State Councils decision on the reform of the
financial system (State Document, No. 91, 1993) required RCCs to gradu-
ally separate from the Agricultural Bank of China and, in 1994, RCCs
236 Guangwen He

set up independent offices, but this reform did not exceed the bound-
ary of the national banking system, and RCCs were still kept within the
periphery of the state-owned financial institutional arrangements. Real
institutional change was not achieved.
In the third phase (19962003), the state-owned banks gradually with-
drew from the rural areas, especially abandoning less developed regions. In
these areas RCCs became leading rural financial institutions and were given
the policy function of supporting agriculture.
The guiding ideology of government reform of the rural credit co-operative
system was to: improve the level of rural financial services; increase invest-
ment in agriculture; promote comprehensive operations in trade, industry
and agriculture; promote integrated development in urban and rural areas,
as well as agricultural and rural economic development and opening up.
In order to improve the level of rural financial services, in 1996 the govern-
ment once again attempted to reform the RCCs. The State Councils decision
about the rural financial reform (State Document, No. 33, 1996) proposed
that RCCs should be re-regulated according to co-operative principles
and the co-operative nature of the RCCs should be restored, while RCCs
should be administratively detached from the Agricultural Bank of China.
This way, RCCs could gradually become replaced by co-operative financial
organizations with farm households as shareholders, democratically man-
aged by the members and mainly serving the interests of the farmer-share-
holders. In 1999, the National RCC Working Conference recommended the
formation of the county (city) Rural Credit Co-operative Union (RCCU).
This organ, assuming the functions of management and services, aims to
gradually renew the organizational arrangement of RCCs.
After the Asian financial crisis in 1997, the state-owned banks quit rural
areas while attempting to reduce financial risks, improve asset quality in
preparation for overseas listing and improve economies of scale and prof-
itability. The least developed areas were abandoned, leaving space for the
development of RCCs. However, some of the reform intentions of 1996
and later were not implemented. We see three important reasons for this
development.
First, in some areas the 1996 reform program to weaken government con-
trol did not meet the preferences of decision-makers in the national govern-
ment departments, thus no action was taken.
The second reason is that RCCs did not provide sufficient incentives for
members. As a co-operative financial organization, these incentives are
mainly the ability to obtain financial services and a share of profit. From
the early 1950s to the late 20th century, it proved to be difficult for Chinese
rural households to obtain financial services, and they did not participate
in the distribution of profits.
Third, just like the state-owned banks, the RCCs business development and
mode of operation have increasingly been commercialized. Simultaneously,
Banking Co-operatives in China 237

RCCs subsequent reforms from the co-operative to public ownership have,


as a consequence, a very high cost of transformation back to the co-opera-
tive system.
During the fourth stage (from 2003 to present), RCCs became a tool used
by local governments to allocate financial resources.
In June 2003, the State Council issued the Pilot Program for Deepening
Rural Credit Co-operative Reform RCCs (Guofa, No. 15, 2003), urging RCCs to
serve agriculture, rural areas and farm households. It required them to have
clearly defined property rights, to strengthen their binding mechanism and
to enhance their service function. In the meanwhile, local governments were
asked to take the responsibilities of the reform and the state could provide
proper support. The aim was to speed up the development of RCCs with farm
households, rural businesses and various types of economic organizations as
shareholders, in order to make them become real community-based financial
institutions. RCCs were asked to play a more pivotal role as drivers of rural eco-
nomic development and to become the first financial support for farm house-
holds, in order to increase their income and promote balanced development of
urban and rural economies. Since then, the pilot program has been conducted
in eight provinces.
Afterwards, in August 2004, the central government promulgated Views
on further deepening the pilot reform of RCCs (Guobanfa, No. 66, 2004),
enlarging the pilot reform from a previous eight provinces to 21 provincial-
level localities.
In this phase of reform, RCCs have to choose among four modes:

1. rural commercial banks (with shareholding ownership),


2. rural co-operative banks (with hybrid ownership),
3. rural credit co-operatives with a county union as a unified legal entity
(that is township RCCs in the county being merely as branches), or the
ones having multi-tier legal entity structures (that is township RCCs and
the county union being separate legal entities),
4. the original rural credit co-operatives.

As proposed in Guofa (2003, No. 15), the latter is possible if the RCCs can-
not meet the conditions to develop into rural commercial banks, rural co-
operative banks or a unified legal person. The state document, Guofa (2003,
No. 15), defined the rural commercial bank, rural co-operative bank and
rural credit co-operative as in Table 14.1.
Moreover, Guobanfa (2004, No. 66) clearly stated that the co-operative
system is an alternative form in this market-oriented economic reform. At
this point the RCCs sector had in fact initiated a market-oriented, com-
mercialization-oriented reform and institutional change. In 2008, the
China Banking Regulatory Commission (CBRC) made it clear that when
the county unions stability is achieved, RCCs should evolve step-by-step
238 Guangwen He

Table 14.1 The three transformation choices for RCC in China (2003)

Rural
Rural co-operative Rural credit
commercial bank bank co-operative

Relatively developed Relatively dense


economy, with higher population, grain and
degree of urban and rural cotton commodity base
Adapted to regional integration county

Initiator (number of 500 1,000 No specific requirements


persons)
Total assets of the whole 1 billion 1 billion Financial assets exceed its
county (in RMB Yuan) liabilities
NPLs ratio 15% 15% No specific requirements
Minimum registered 50 millions 20 millions 10 millions
capital (in RMB Yuan)
Core capital adequacy 8% 4% 2%
ratio

Source: The state document, Guofa (2003, No. 15).

into shareholding financial enterprises. Thus, the co-operative principles


are actually abandoned. Whereas former transformations have neglected
co-operative principles because of collectivization, contemporary reforms
ignore them because of commercialization.
This development process is in fact a government-mandated institutional
change. In this process, the defect brought about by the dual social struc-
ture of Chinese society is obvious. Faced with a lack of independent status
and the bargaining power of rural individuals and economic entities, RCCs
were transformed by a powerful government that fully demonstrated its
dominant force, doing so according to its own, shifting interests.

The diversity of Chinas financial co-operatives

The fall of the formal financial co-operative system does not mean the end
of Chinas financial co-operatives, nor does it preclude the creation of a new
formal system. The most recent reforms of the RCCs no longer put the co-
operative system in a prominent position, but as long as the people have the
right to choose, and as long as there are economically and financially dis-
advantaged groups or unmet needs, there still exists a basis for co-operative
finance.6
New co-operative financial organizations will continue to come into
being; thus, the financial co-operatives and (public or private) commercial
finance can continue to maintain their complementary relationships.
Banking Co-operatives in China 239

China has a large number of vulnerable groups (rural households, micro-


enterprises, economically less-developed areas). Clearly, there is need to
work together, and the demand for more co-operation7 is there. In China,
co-operative financial organizations already have thousands of years of his-
tory and exist in various forms in several regions of the southern China
province of Zhejiang, in Fujian, in Taiwan and in several other regions. They
are active on a local level, playing an important role in the local economy
(Besley and Levenson 1996; Tsai 2000; Tsai 2002; Min Quan, Zhong and
Jian Tuo 2003; Jian Tuo, Min Quan and Zhong 2005).
On 20 December 2006, the China Banking Regulatory Commission
(CBRC) issued a document on the adjustment of rural areas financial
institutions access policy to better support new socialist countryside con-
struction (CBRC Document No. 90, 2006). On 22 January 2007, a docu-
ment called interim Provisions on the Administration of Rural Mutual
Fund Association (CBRC Document No. 7, 2007) was published, and on
4 February 2007, a rural mutual fund association model statute (CBRC
Document No. 51, 2007) was established. The two documents provided
operational guidelines for approval and formation of rural mutual fund
associations and defined them as new banking financial institutions. The
first pilot areas were chosen in Sichuan, Qinghai, Gansu, Inner Mongolia,
Jilin and Hubei provinces (autonomous regions). In February and March
2007, three rural mutual fund associations were approved, according to the
new regulations, as a product of the Chinese governments promotion of
rural financial innovation. The newly granted legitimacy of informal rural
mutual fund associations has opened the prospect of development of rural
mutual fund associations in China, indicating that real co-operative finan-
cial arrangements exist alongside the formal financial system. A new class of
rural banking financial institutions has been born in rural China, marking
an important step in efforts made by the Chinese government to resolve the
gap between the supply and demand of rural finance. Thus, one can observe
the logic of the evolution of the financial co-operative system in China.
Insufficient supply of formal finance leads to spontaneous informal finan-
cial innovation among the rural population. Thus, rural mutual fund asso-
ciations emerged, first as an informal institutional arrangement and, later
on, became acknowleged by the government, fixed by laws and regulations
and increasingly promoted, thus becoming a type of formal system arrange-
ment. This is a type of an induced institutional change process different
from the embedded mandatory institutional change8 of the Chinese rural
credit co-operative system in the early 1950s. The most significant differ-
ence between the induced institutional change process and the mandatory
institutional change is that the former is demand-driven, whereas the latter
is always driven by the regulator.
However, while the rural mutual fund associations in rural China are a
product of spontaneous innovation by the rural population, their generation
240 Guangwen He

Table 14.2 Development model of Chinas rural mutual fund associations


Motivation for Source of Financial Registration Operating
entry Existing form funding license status area

Informal Spontaneously Existing Does not None No or at Village or


formed independently accept civil affairs intervillage
by farm savings department
households Accepts None No or at Village or
savings in civil affairs intervillage
disguise department
Coexists with Does not None No or at Village or
specialized accept civil affairs intervillage
co-operative savings department
organizations Accepts None No or at
savings in civil affairs
disguise department
Semiformal Promoted Nominally Accepts None At civil affairs Towns or
by local coexists with savings in department villages
government co-operatives disguise
but in reality
functions
independently
Promoted Exists Does not None At civil affairs Village
by central independently accept department
government savings
Formal Established Exists Accepts Yes Administrative Village or
According to independently savings department for town
the rules of industry and
the Banking commerce
regulatory Coexists with Accepts Yes At the Village or
commission specialized savings administrative town
co-operative department for
organizations industry and
commerce

a
Normally, savings are the only source of funding in banking co-operatives. But, according to
Chinese law, savings collecting should be licensed by the banking supervision authority. So, some
of the informal rural mutual fund associations do not accept savings, their sources of funding are
the member contributions. And there are also some of the informal rural mutual fund associations
that accept savings without governmental license.
Source: The author.

and development paths are highly varied. According to whether they are
regulated, managed and/or supervised within the regulatory and supervi-
sory framework, we can divide them into formal, informal and semi-formal
types (Table 14.2).

Formal rural mutual fund associations


According to the document regarding interim Provisions on the
Administration of Rural Mutual Fund Association (CBRC Document, No.
7, 2007), rural mutual fund associations refer to community-based bank-
ing institutions which are approved by the banking regulatory authority,
made up of townships, administrative villages farm households and rural
Banking Co-operatives in China 241

micro- and small entreprises which voluntarily become shareholders and


provide deposits, loans, settlements and other services for their members.
By the end of March 2013, CBRC had approved a total of 49 such rural
mutual credit funds.
These formal rural mutual credit organizations are of two types:
The first type is those independent rural mutual fund associations emerg-
ing from CBRCs rules.9 CBRC gives financial operating license registered at
the administrative department for industry and commerce. Their operating
range is the township or village. Xingle rural mutual fund association in
Qinghai, for example, was established on 28 March 2007 with registered
capital of 360,000 yuan and composed of ten farm households and rural
micro-entreprise owners in the township (of which there are: one employee
engaged in financial work, three rural micro-entreprise owners, two ordi-
nary farm households, three planters and a vegetable broker, who voluntar-
ily became shareholders).
This type of rural mutual fund association is licensed to accept savings
and can lend funds from the interbank market, allowing for fast growth
of their assets. For example, Figure 14.1 illustrates the changing tendency
of deposits and loans for Fengfu rural mutual fund association in Dafeng
County of Jangsu Province. As Table 14.3 indicates, its loan usage is diverse,
with a maximum loan term of 12 months.
The second type of formal associations are the rural mutual fund asso-
ciations established from the existing farmers specialized co-operatives
that followed the Banking Regulatory Commissions rules. Licensed by
the Banking Regulatory Commission and registered at the administrative
department for industry and commerce, they can accept deposits. A typical

5000
4500
In 1000 RMB Yuan

4000
3500
3000
2500
2000
1500
1000
500
0
Oct. 2008

Nov. 2008

Dec. 2008

Jan. 2009

Feb. 2009

Mar. 2009

Apr. 2009

May. 2009

Jun. 2009

Jul. 2009

Aug. 2009

Sep. 2009

Oct. 2009

Nov. 2009

Dec. 2009

Deposit outstanding Loan outstanding


Figure 14.1 The changing tendency of deposit and loan for Fengfu rural mutual
fund association
242 Guangwen He

Table 14.3 The proportion for loan usage and loan term of Fengfu rural mutual fund
association

Loan usage (from Loan term (from


11 October 200929 Proportion 15 April 200831
December 2010) (in %) December 2009) Proportion (in %)

Farming 7.66 One year 51.39


Breeding 12.30 Six months 46.01
Housing 1.41 Five months 0.51
Trading 70.84 Four months 2.09
Construction 3.54
For land renting 4.24

case is Baixin Rural mutual fund association in Yanjia village, Lishu County,
Jilin Province (established in March 2007). This credit co-operative was
spontaneously established by 32 farm households in Yanjia village with a
registered capital of 101,800 yuan.
Another case is Jufuyuan rural mutual fund association in Yaodianzi
Township in Shandong Province, established in March 2008, with regis-
tered capital of 537,000 yuan. It was formed from the previous farmers
specialized co-operatives comprised of farm households and rural micro-
entreprises that voluntarily became shareholders of the newly formed com-
munity-based mutual banking institution. This financial co-operative has
48 shareholders in total. It can provide deposits and loans services, settle-
ments and other services for their members.
The following cases show how these financial institutions finance equity.
Table 14.4 shows the shareholding structure of Shilipu rural mutual fund
association in Lishu County, Jilin Province, and of Shengyuan rural mutual
fund association in Shunping County, Hebei Province.
Because of the simple organizational structure, the members of rural
mutual fund associations normally elect five to seven members to the board
committee and three of them are entrusted to manage the association.

Informal rural mutual fund associations


Informal rural mutual fund associations are rural financial co-operatives
which exist and operate outside of the central governments unified opera-
tions and management regulatory and supervisory framework. Informal
rural mutual fund associations are a product of spontaneous innovation by
the rural population. They were formed in situations where formal financial
institutions in rural areas could not meet the credit demands of rural house-
holds and rural micro-entreprises. Thus, rural households and local micro-
entreprises voluntarily made capital contributions, becoming shareholders
in the formed rural mutual fund associations.10
Banking Co-operatives in China 243

Table 14.4 Shareholding structure of Shilipu and Shengyuan rural mutual fund
associations

Shilipu rural mutual fund Shengyuan rural mutual fund


association(with license, association(without license,
August 2008) January 2013)

Contributions in Share Contributions in Share


1,000 RMB yuan (in %) 1,000 RMB yuan (in %)

Member 1 50 31.250 20.1 11.11


Member 2 50 31.250 20.1 11.11
Member 3 10 6.250 20.1 11.11
Member 4 10 6.250 20.1 11.11
Member 5 10 6.250 20.1 11.11
Member 6 10 6.250 20.1 11.11
Member 7 5 3.125 20.1 11.11
Member 8 5 3.125 20.1 11.11
Member 9 5 3.125 20.1 11.11
Member 10 5 3.125
Total 160 100.00 180.9 100.00
a
Obviously, in Table 14.4 Shengyuan rural mutual fund association is an informal mutual fund
association. The author has put the formal one and informal one together and tries to show
readers their shareholding structures.

The reality of these informal mutual fund associations is more complex.


Some exist independently, others coexist with farmers specialized co-op-
eratives. Some do not accept deposits, others accept deposits in disguise.
None of them obtained CBRCs operating licenses. Some do not register,
others have registered under the civil affairs department (in exceptional
circumstances, some registered under the administrative department for
industry and commerce). Normally, their operating range is within the vil-
lage. However, there are also inter-village operations, and some are even
operating in a more widespread area.
Fumin Co-operative, for example, was informally set up and developed
by seven residents of Shuoji Township, Funing County of Jiangsu. This
co-operative was identified and filed by the Fumin County office of the
agriculture industrialization. It received a partnership enterprise operating
license from the administrative department for industry and commerce
(but its business field did not include the mutual fund). The co-operative
internally set up a supplies-services department11 and a mutual funds
department. To become members of the mutual fund association, commu-
nity members voluntarily buy membership shares (50 yuan/share).Capital
surplus (or deficit) among members is transfered to the mutual fund depart-
ment to earn interest.
244 Guangwen He

Semi-formal rural mutual fund associations


A third form is a semi-formal mutual fund association. These associations
exist and operate outside of the central governments regulatory and super-
visory framework, but are promoted by the relevant central government
department or by the local government.
In order to provide access to loans for rural households and rural micro-en-
treprises, some local governments encourage rural households, co-operative
organizations and micro-entreprises to voluntarily establish rural mutual
fund associations and buy membership shares. For instance, in 2006, in
order to implement the Number One central government document, the civil
service department in Jiangsu Yancheng Municipal government handled
the registration procedure and the Peoples Bank of China branch office
of Yancheng City guided the drafting of rules and regulations for the pilot
projects in different districts and counties. These rural mutual fund asso-
ciations were relatively more standardized compared to the spontaneously
formed mutual fund associations in other areas. The independent, grass-
roots mutual funds are registered at the civil affairs department. Although
they do not have the operating licence from CBRC, they accept deposits.
They operate normally within the township, but some also formed at the
village level.
Another type of mutual fund association supported by the central govern-
ment was the result of the poverty-reduction policy. In order to efficiently
relieve the problem of a shortage of capital needed by poor rural farm house-
holds for economic development, the related central government department
actively explored new models and improved the mechanism for the use and
management of the fiscal poverty alleviation fund to improve the ability of
poor households for self-development and sustainable development in the vil-
lages. On 18 May 2006, the state Council Poverty Alleviations leading group
office and the Ministry of Finance jointly issued a Notice on the Development
of Poor Village Mutual Fund Association Pilot. Nationwide, 14 provinces
(including Hebei, Shanxi, Inner Mongolia, Heilongjiang, Anhui, Jiangxi,
Henan, Hunan, Sichuan, Guizhou, Shaanxi, Gansu, Ningxia, Xinjiang) were
chosen for the pilot. Each province chose ten poor villages, from one or two
key counties each village listed by the government as a pilot village.
Poor villages mutual funds are composed of a fiscal poverty-alleviation
fund transferred by special arrangement to the poor village at an average
of 150,000 yuan to each pilot village as a micro-finance revolving fund.
Villagers invest their own funds in order to become shareholders; however,
the poor households do not need to invest and can be donated shares. The
poor village mutual funds are driven by the principles of member own-
ership, member use, member control and member benefit. The villagers
borrow from the mutual fund to develop their production. This model is
already being implemented nationwide in China. By the end of 2012, about
Banking Co-operatives in China 245

15,000 villages had established village mutual fund associations. Poverty-


alleviation funds transferring to the villages and households is a major
breakthrough.
Normally, poor village mutual funds are village-based and only the mem-
bers who hold shares have the right to lend from the fund. The fund is
autonomously governed and managed, similar to co-operatives. The village
management group is responsible for its sustainability. As there is no infor-
mation assymmetry when lending decisions are made, the share of non-
performing loans (NPL) is very low. Most of the poor village mutual funds
bear no NPLs. Because of the huge demand, most of the poor village mutual
funds are facing fund shortages.

Conclusion

In the process of reform and institutional change of the RCCs, these for-
merly co-operative financial institutions gradually lost their co-operative
nature due to a range of policies shaping institutional change over the past
60 years. However, there is still room for the development of real financial
co-operatives in China, as evidenced by the new associative forms of mutual
funds in rural areas.
Mutual fund associations with farm households and micro-enterprises as
members can easily overcome or even avoid moral hazard caused by informa-
tion asymmetry. Also, among all the operating mechanisms that are close
to rural households, middle and low income households and micro-enter-
prises, credit methodology has the most sustainable development capacity.
While informal and semi-formal mutual fund associations function in rural
areas, they lack the legal status. The government should enact a financial co-
operatives law, allowing financial co-operatives to exist, and clarifying their
legal status. Formalizing them is what is supposed to be the governments
role in the future of Chinas co-operative financial systems transformation.
Our hypothesis is that mutual fund associations will play a major role in the
future of Chinas co-operative financial organizations.
Mutual fund associations, located and operating at the community or vil-
lage level, provide their members access to credit. This model is similar to
the common rotating savings and credit associations (RoSCA) known world-
wide. However, its capital strength is limited and its equity settings need to
be improved. It is most important that the government should enact appro-
priate laws and regulations for a more standardized development of finacial
co-operatives in rural areas.

Notes
1. For example, a shortage of workforce, diverging opinions on the regulation of
member-based mutual funds, lack of trust in the private financial sector, and so on.
246 Guangwen He

2. At the end of March 2013, CBRC licensed 49 MCFs, and the licensed MCFs are
banking institutions and permitted to accept savings.
3. According to the Regulation of Savings Management issued by Chinas State Council
in 1992, accepting savings should have a license issued by financial authority.
4. According to CPAD statistics, by the end of 2011, 13,500 villages in 1,013 counties
had organized the Impoverished Village Mutual Fund Association, and the overall
funds totalled 2.624 billion yuan, of which 1.959 billion yuan are fiscal budget
funds. The FHs contribution was 535 million yuan; the other fund resource
provided 130 million yuan. The number of the FHs that joined the Impoverished
Village Mutual Fund Association was 1.12 million; the accumulative number of
borrowers was 685.2 thousand and the accumulative loans were 2.524 billion
yuan.
5. In RCC history, the leadership and administrative relationship experienced a
series of changes. During 19521958 it was the central government. During 1958
1978, the leadership moved to the peoples communes and the village production
brigade. During 19781983, PBC was RCCs administrative authority bureau. In
19831996, RCC became the grass-roots organization of the Agricultural Bank of
China (ABC). In 19962003, PBC had the authority to supervise RCCs. Since 2003,
provincial governments have exercised the supervising rights.
6. But it does not mean that once poverty will have been eradicated, financial
co-ops are no longer needed. Financial co-ops will remain interesting as a
complementary model in a diverse system of finance, whereby financial and
democratic participation are key distinguishing features of these co-ops, espe-
cially attractive to people who may want to quit financial institutions that are
operating on a mere profit-maximizing basis (as we have seen in the West and,
for instance, in Belgium a new initiative to start up a new co-operative bank
(New-B) has attracted more than 25,000 members in less than five days even
before the bank is operational. This means that people, indeed, are hungering
for a co-operative alternative, driven by the ICA principles (which most of them
do not know, but when they read and hear about them, they like them!). Those
new members are clearly all middle-class people.
7. Simply more co-operation in the sense of working together and also in the sense
of co-operativism = co-operation according to the ICA principles.
8. In the early 1950s, RCCs were introduced by government and were organized in
each township in China. At the same time, the rural mutual fund associations
were established by the farmers themselves. At this point, we would say that
RCCs were embedded into rural China by the government.
9. Examples are Gansu Jingtai County Longwan Shilin rural mutual fund associa-
tions, Gansu Minxian County taozhu Minxin Rural mutual fund associations,
Qinghai Ledu Yurun town Xingle Rural mutual fund associations, Sichuan
Cangxi Yimin Rural mutual fund associations, Inner mongolia Xilinhaote city
Baiyinxile ranch Chengxin Rural mutual fund associations, Inner Mongolia
tongliao city liaohe town rongda rural mutual fund associations, liaoning
Haicheng WangShi township Hongxing rural mutual fund associations and
many more.
10. Examples are Henan Lankao County He Village Self-help groups, Henan Lankao
Nan ma Zhuang Self-help group, Henan Lankou Huzhai Self-help group, Anhui
Mingguang pan Village Xingwang Farm households mutual fund association,
Shandong Ling County mutual fund association, Jilin Lishu County Xingkai City
mutual fund association, Jilin Lishu County Xiajia mutual fund association, He
Banking Co-operatives in China 247

nan Puyang loan co-operative, Jiangsu Funing County Shuoji Fumin co-operatives
and so on.
11. Supplies services include agricultural production technology, pest control and
agricultural production materials.

References
Besley, T. and Levenson, A.R. (1996) The Role of Informal Finance in Household
Capital Accumulation: Evidence From Taiwan, The Economics Journal, 106: 3959.
He, G. (1999) Seeing Rural Financial Repression to Financial Deepening from
the Lending Practices of Rural Residents Funds, Chinas Rural Economy,
X: 4248.
He, G. (2001) Research on Development Model and Operational Mechanism of Co-operative
Finance. Beijing: China: Financial Publishing House, p. 78.
He, G. (2003) The Institutional Innovation of RCCs are Not in Optimal Mode,
Financial News, 9 May 2003.
He, Y. and Luo, J. (2004) The Co-operative System and the Reform of RCCs, Price
Theory and Practice, IIX: 1720.
Jian Tuo, T., Min Quan, L. and Zhong, X. (2005) Mutual Aid Association and the Rural
Consumer: An Empirical Analysis Chinas financial one academic year.
Jun, Z. (1999) The Economics of Co-operative Team: A Literature Review. Shanghai:
Shanghai University of Finance and Economics Press, p. 100.
Lin, J.Y. (1994) System, Technology, and China Agricultural Development. Shanghai:
Shanghai Joint Publishing, pp. 1643.
Min Quan, L., Zhong, X and Jian Tuo, Y. (2003) Study on Mutual Aid Association:
Taizhou Case. Chinas Rural Financial Reform Symposium, Working Paper.
Ma, J. and Lu X.(2005) Inconsistencies with the Interests of RCCs Development and
Reform, Nankai Economic Research, III: 7077.
North, D.C. (1991) Structure and Change in Economic History. Shanghai: Shanghai Joint
Publishing.
Tsai, K.S. (2000) Banquet Banking: Gender and Rotating Savings and Credit
Associations in South China, The China Quarterly, 161: 142170.
Tsai, K.S. (2002), Back-Alley Banking: Private Entrepreneurs in China. Cornell University
Press. Ithaca NY
15
The Grassroots Co-operative Housing
in Urban China:
The Case of LINECITY
Yuqi Wang

Introduction

Having adequate and sufficient housing is considered as a basic human right.


In China, the welfare housing policy reform in the late 1970s and the urban
housing market reform since 1998 contributed to a booming residential
housing market (Figure 15.1). Although this booming market has increased
the amount and variety of housing supply, it has not met the expectations
with regard to citizens right to housing. A previous study showed that in
2008 the average price/income ratio (selling price/annual income) across the
country arrived at 8:1, higher than the standard ratio of 6:1; the ratio in
metropolitan areas such as Beijing and Shanghai was over 10:1 (Xu 2010).
In major cities, housing market has become unaffordable for the majority of
mid- to low-income residents (Ni 2009).
Faced with such soaring housing prices, a number of citizens began to
experiment with co-operative housing in more than 50 cities nationwide,
aiming to build affordable housing through financial co-operation among
future owners. However, since 2003, when the first proposed initiative was
published by a grassroots leader on the Internet, and up until 2009 (when
this study was carried out), no co-operative housing has been successfully
built. Currently, two approaches dominate the residential housing supply in
Chinas cities: one is the market housing constructed and sold by for-profit
real estate developers; the other is the welfare housing operated by the gov-
ernment (although often constructed by developers entrusted by the gov-
ernment) and sold below the market price. In other words, the grassroots
co-operative housing experiments during 20052008 failed to develop a
new approach for housing supply within the existing urban housing and
land institutions in China.
This study provides an analysis of Chinese co-operative housing experi-
ences, focusing on LINECITY (Beijing), the first and most systematically
organized grassroots co-operative housing in China. Based on in-depth
interviews with Linggang Yu (the founder of LINECITY and the leader of

248
The Grassroots Co-operative Housing in Urban China 249

130.0 124.7
118.7 116.9
120.0
112.6
Price Index

110.0 105.7
103.5
106.2 106.0
100.0 103.7 105.0
98.1
90.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Figure 15.1 Market price index of residential housing (previous year = 100)
Source: National data annual data (20002011), National Bureau of Statistics of China, http://
data.stats.gov.cn/workspace/index?m=hgnd.

all its co-operative housing activities) during December 2009 and January
2010, this study illustrates the obstacles to grassroots co-operative housing
development in the general context of Chinese housing construction indus-
try, land and financial institutions, as well as socio-cultural development.
The study concludes that the failure of grassroots co-operative housing is
not surprising in the context of the current institutional setting in China.

Grassroots co-operative housing in China

A distinct approach
Grassroots co-operative housing refers to the co-operative housing con-
struction movement that emerged in 2003 in Chinas urban areas. It is
generally defined as an initiative in which a group of citizens pool their
funds to buy the use rights of a jointly selected parcel, form a collectively
agreed construction plan with professional consultation and build non-
profit houses for their own occupancy (China Coop 2009). In the context
of the urban housing system and land institution in China, grassroots co-
operative housing distinguished itself from the two mainstream housing
approaches: on one hand, grassroots co-operative housing is a spontane-
ous and self-organized citizen groups activity, which is different from
the official nonprofit welfare housing programs dominated and regulated
by the government. As a result, it is not qualified for financial support
trough taxation subsidies from the government. Instead, most grassroots
co-operative housing projects operate as a company, participate in the
urban land market and real estate market and compete with for-profit
real-estate developers. On the other hand, grassroots co-operative hous-
ing provides houses to their members at cost rather than pursuing real-es-
tate profits. Each member also has a share in the collective property of the
co-operative housing community. Besides, instead of passively accepting
250 Yuqi Wang

the existing house size and style in the market, members have the possi-
bility to participate in the architecture and interior design and even form
a representative committee to supervise the construction process.
Because none of the grassroots co-operative housing experiments have
succeeded so far in China, these features are merely illustrated in the opera-
tion plans and project proposals of the organizations. Nevertheless, they
have offered a new vision and won public support, implicated in public sur-
veys on grassroots co-operative housing. For example, in early 2005, CCTV
(China Central Television, the countrys largest official television station)
and Sohu Real-estate Network (a leading real-estate professional website
in China) have conducted a survey, showing that 77.55 per cent of the
respondents believed grassroots co-operative housing was feasible and that
80.61 per cent of respondents thought it could help lower the overall price
level of the urban housing market (Chen and Wang 2005: 74). According
to another survey hosted by CCTV and Sina Network (Chinas largest Web
portal), at the end of 2006, 95 per cent of the 2,917 public responses claimed
to support grassroots co-operative housing, and 88 per cent of them chose
the option, It can save a large amount of money, as the reason for their
support (Sohu 2006). Meanwhile, another phone-survey was carried out by
SSIC (Social Survey Institute of China, the first non-government polling
organization in China) in seven major cities, including Beijing, Shanghai,
Guangzhou, Xian, Wenzhou, Shenyang and Chongqing. It showed that
93.4 per cent of more than 1,000 respondents were supporters of grass-
roots co-operative housing, with 65.6 per cent who believed it is creatively
established when facing the surging housing price and 61.3 per cent of the
respondents who believed it could help to restrain the increase of housing
market prices (Dong and Hong 2007).
Such enthusiasm is contrasted with numerous criticisms of both the real
estate industry in pursuit of excessive profits and government welfare hous-
ing projects that in many cases seem insufficient (Ni 2009; Zhou 2010: 22).

The case of LINECITY


This chapter describes the experience of LINECITY, a major grassroots co-
operative housing organization in China. LINECITY was founded in Beijing
by social entrepreneur Linggang Yu. Beijing is one of several cities that have
seen the fastest and largest increases in real-estate and land prices. Beijing is
also one of the major destinations of inter-urban and rural-to-urban migra-
tion, which increased the demand for housing and pushed up the market
prices (Ni 2009 and Xu 2010). As a result, the need for affordable housing
has spurred the earliest grassroots co-operative housing initiative. In 2003,
Yu issued a call for a grassroots co-operative housing development through
the Internet (www.lvye.org), appealing to citizens to co-operate to be our
own developers (Yu 2009) instead of buying houses in the real estate mar-
ket. With strong public support, as well as enthusiastic attention from the
The Grassroots Co-operative Housing in Urban China 251

media, such as Phoenix TV of Hong Kong, Yu registered Beijing LINECITY


Co-operative Consulting Ltd. (LINECITY for short) under the local industry
and commerce administration authority.
In comparison with other grassroots co-operative housing organizations
in China, LINECITY had the most comprehensive organizational rules and
explicit operation processes, which are clearly illustrated on both its web-
site and Yus blog. It also has made more attempts and, correspondingly,
has experienced more failures. Whereas the co-operative housing organi-
zations in Shenzhen, Wenzhou and Guangzhou were suspended after one
failure and others never put proposals into practice (Li 2007 and Zhu 2009),
LINECITY proposed six housing projects between 2003 and 2008, posted
advertisements through the Internet and enrolled citizen participants. Its
repeated failure illustrated the dilemma of the co-operative structure and its
benefit-sharing mechanisms in the institutional context of urban China.

LINECITYs co-operative structure, process and benefit sharing

Internal and external organizational structure


Legal status
Although LINECITY did not aim to earn real estate profits, it registered as a
limited liability company, received the Industry and Commerce License and
had the same legal status as for-profit real estate developers, because organiza-
tions registered as NPOs in China are not legally qualified to participate in
land auctions, housing construction or the housing market.

Membership and representation


Any citizen who agreed with the rules of the co-operative could sign an agree-
ment and pay the 500 yuan membership fee to declare formal participation.
At the time of LINECITYs registration, there were 220 formal participants.
However, according to Chinas Corporation Law, a limited liability company
shall be jointly invested in and incorporated by no less than two and no more
than 50 shareholders (Article 24). Therefore, 220 participants could not all
be registered as shareholders at the same time. As a solution, 29 members
self-recommended to be named shareholders, leaving the others to be hidden
shareholders. In this way, each named shareholder represented ten hidden
shareholders, engaging in information delivery, communication and project
supervision. In other words, these 29 participants have naturally formed a
management board to collectively make decisions about land purchase, fund
operation, design and construction of the houses, as well as managing the co-
operative property in the new community once the units have been built. All
other participants were expected to be involved in the management of hous-
ing projects and the co-operative housing community through their repre-
sentatives. Besides, seven directors and three supervisors were elected among
252 Yuqi Wang

Table 15.1 LINECITYs operational structure of individual co-operative housing

Core Collaborating Professional service


organization organizations responsibilities

LINECITY Beijing Jin-cheng-tong-da Law Firm Contracts & legal affairs


consulting
CITIC Trust & Investment Co. Ltd Fund operation
Guojin Management Consulting Co., Project management
Ltd
College of Environment & Energy Energy & environment
Engineering, Beijing University of conservation control
Technology
Construction company (TBD) Project construction

Source: Interview with Linggang Yu on 20 December 2009.

the 29 named shareholders to form the board of directors and a supervisory


board. These two boards were mainly responsible for the implementation and
amendment of LINECITYs co-operative bylaws (Yu 2010).

Collaboration network
Most LINECITY members were not housing-development professionals, so
they could hardly accomplish the housing projects on their own. LINECITY
intended to hire several organizations, mainly companies, to acquire profes-
sional services concerning land purchasing, fund management, construc-
tion and so on. Table 15.1 lists these collaborating organizations and their
responsibilities.

LINECITYs operation process


A co-operative housing project starts with the leasing contract for residen-
tial construction land1 provided by the local land authority, and then fol-
lows a 12-step process as outlined in Figure 15.2.
When a parcel suitable for the co-operative housing development was
leased by the government, LINECITY would put an advertisement on its
website and call for participants (step 1 in Figure 15.2). Those who wanted to
participate needed to pay 30,000 yuan as the initial down payment to regis-
ter in a project group (step 2), in addition to the 500 yuan membership fee.
When there was a sufficient number of registered participants (the number
being mainly contingent on the gross construction area of the parcel as set
by the government), a group for one particular parcels development would
be established (step 3). Then, in step 4 participants would need to pay the
second instalment of the down payment which, together with the initial
down payment, would cover approximately 52 per cent of the estimated cost
of each housing unit (including the land cost).
The Grassroots Co-operative Housing in Urban China 253

1. Project advertising

2. Participant registration

3. Project group establishment (when reaching


the minimum number of participants)

4. Participatory fund 5. Find Collaborative 6. Project proposal


contribution Institutions and evaluation

7. Confirming a project proposal, signing contracts with collaborating


organizations and participants

8a. Greeting the intended land 8b. Failing in land auction

9a. Construction 9b. Construction management

10. Acquiring pre-sale permit

11. Acquiring bank loan


12. Final acceptance of construction

Figure 15.2 The operation process of co-operative housing project

At the same time, the total amount of money collected at this stage was
expected to be enough to win the land-use rights in the government land
auction. Not having built any housing property, LINECITY had no collat-
eral to borrow from the bank. Its members could not apply for bank loans
before signing for the ownership of the expected houses. Access to outside
capital was either illegal or highly risky, so the only resources for the land
fund were the liquid assets of LINECITY members participating in a particu-
lar project. Therefore, LINECITY had to gather enough participants signing
the contract promising that they would deposit the contracted down pay-
ment into a bank account between the announcement of the land auction
and the date of the auction. This account was to be managed by CITIC Trust
& Investment Co. Ltd. If LINECITYs bid were successful and it paid off the
land value within the allotted time (15 days after the auction date), it could
proceed to the construction step. At that time the construction company
and Environment & Energy Engineering College of Beijing University of
254 Yuqi Wang

Technology would join in the project. Only when it could proceed to the
10th step, would LINECITY be able to acquire, from the real-estate manage-
ment authority, the pre-sale permits, which could be used as a collateral to
borrow from the bank and cover subsequent construction costs.

Acquiring and sharing the benefits of co-operation


The financial co-operative benefits acclaimed by Linggang Yu contain two
aspects: one is the price gap between LINECITY houses and the common
commercial houses supplied by real-estate developers, because LINECITY
participants can buy their houses at cost (or contract price), which is much
lower than the market price; the other is the revenue from the collectively
owned real-estate built in LINECITYs residential community. For exam-
ple, residents of a community built by real-estate developers should pay
additional money to rent a garage in the community, which is owned by
the developers. But in the LINECITY community, the garage is a common
property and can be used without charge, so the actual price-gap is even
larger when the garage rent is subtracted from the contract price. As another
example, the ground floor commercial units in the LINECITY community
can produce revenues accruing dividends to members, based on the funds
they contributed to this co-operative project. The contract price minus all
types of collective revenues will give the final price of co-operative houses.
The total co-operative benefits represent the benefits that could be enjoyed
by co-operative housing participators, which could otherwise be taken away
from for-profit real-estate developers.
Table 15.2 gives a clear comparison between the benefit distribution
model of the co-operative housing and for-profit real-estate development.
For the LINECITY approach, the contract price refers to the price listed in
the co-operative project contract; the final price refers to the actual price
that co-operative members pay for their houses; and the price difference
stands for the return from the collective property. For the real-estate devel-
oper approach, the estimated market price refers to the price estimated by
real-estate developers as written in their tender for land auctions; the actual
selling price refers to the selling price of the houses built by the developers
and put on the market several years after the land auction, with the price
difference showing the increase in commercial housing prices during those
years. In comparison, the price-gap between the two approaches illustrates
the rate of return to co-operation. To be more specific, the estimated rate of
return (LINECITY price compared with the estimated market price) repre-
sents the profit gained by for-profit real estate developers. The large actual
rate of return (LINECITY price compared with actual selling price) shows
that co-operative members can avoid the price increase by paying off their
houses before the land is purchased.
The seemingly comprehensive organizational structure and attractive co-
operation profits, as described above, contrast sharply with the repeated
The Grassroots Co-operative Housing in Urban China 255

Table 15.2 Co-operative benefits claimed by LINECITY (3 examples) (LINECITY


approach versus common commercial real-estate developer approach)

Real-estate
LINECITY developer approach Co-operative rate of
approach (yuan/m2) (yuan/m2) return (%)

Estimated Actual Contracted


Parcel (Real- Contract Final market selling rate of Final rate
estate Name) price price price price return of return

Dong-Si-Shi- 8,000 6,000 18,000 33,000 292 542


Tiao (Swiss-
House)
Shao-Yao-Ju 6,750 4,850 10,000 18,000 187 400
(Yuan-
Da-Du)
Garden-Bei- 6,500 6,000 13,500 20,000 175 300
Road No.
25 (Teng-
Hua-Zi
Yard)

Annotations: Parcel refers to the name of the land when offered for auction by the government.
Real-estate name refers to the names of the housing projects constructed by real-estate developers
who had won the land-use rights in the land auctions and completed the projects several years
later.Source: Interview with Linggang Yu on 20 December 2009.

failures of LINECITY. The remaining part of this chapter will explain the
dilemma of LINECITY in the context of the housing-development circle,
land and financial institutions, as well as the social culture in urban China.
The conflict between LINECITYs operation rules and the contextual situa-
tions imposed obstacles to the success of the proposed housing projects.

Obstacles to the success of LINECITY

As mentioned before, LINECITY is not eligible to receive the land, fund-


ing, or taxation subsidies which are enjoyed by government welfare housing
projects. It had to follow the rules of market housing development: partici-
pate in the land-auction process to compete with real estate developers for
land-use rights; and finance land purchasing, house construction and organ-
ization management with private funding sources, including the financial
market and personal savings of co-operative housing participants.
However, the theoretical process as displayed in Figure 15.2 did not work
out in practice. None of the six projects that were proposed by LINECITY
in the period between 2003 and 2008 were able to collect enough money
to bid for the selected parcel. For the first three projects, LINECITY did not
256 Yuqi Wang

participate in the land auction at all, because there were too few participants
and, thus, the amount of money collected was below the auction starting
prices. For the latter three projects, LINECITY entered the land competition
but offered prices far lower than those offered by all other competing real-
estate developers. In other words, LINECITY never went beyond the 8th step
of the process carried out by Linggang Yu. The following analysis explains
the reasons for LINECITYs failure in land competition and fundraising.

Unfavourable land and financial institutions


High winning bids in land auctions
Since urban land reform started in 1997, the land leasing prices in Chinas
cities kept soaring and accelerated the increase of urban real-estate prices.
In expectation of huge land appreciation, higher housing prices and more
profit, real-estate developers further raised their bidding prices in land
auctions. The Garden-Bei-Road No. 25 parcel, for example, was leased in
March 2007 with nine companies, including LINECITY, participating in the
auction. The bidding price of LINECITY was 99 million yuan, while all the
other companies offered a price beyond 110 million yuan, with the highest
bidding price 135 million yuan. Because other factors, such as the project
proposal, were also considered as competing indices, the final winner was
a company with a bid of over 123 million yuan, 24.84 million higher than
LINECITYs bid.
Limited financing sources
One major reason for the disparate bidding levels between LINECITY and
real-estate developers rests in the different availability of funding sources.
Statistics show that Chinas urban real-estate developers rely on bank loans
to support 5060 per cent of the cost of housing projects. There is no official
statistic on the fund-resource structure of the for-profit real-estate develop-
ers in Chinas cities. Different researches came up with different estimates.
The Peoples Bank of China 2004 Real-estate Financial Report shows that
bank loans make up 55 per cent of the cost of a real-estate project (PBOC,
2006). The China Banking Regulatory Commission estimated that bank
loans comprise 60 per cent of the whole fund resource of real-estate compa-
nies (CBRC, quoted from: Ni 2009: 330). Another contemporary investiga-
tion carried out by Development Research Center of the State Council in
Zhejiang, Guangdong and Shanxi shows that bank loans occupy as much
as 80 per cent of the whole fund resource of real-estate companies in these
provinces (Zhang 2009: 186).
In contrast, LINECITY would not qualify for borrowing from the bank
until it had the land-use rights, started the construction and obtained
the pre-sale permit from the real-estate authority. So, the disparity in the
financial ability between LINECITY and real-estate developers was further
enlarged in the current institutional environment.
The Grassroots Co-operative Housing in Urban China 257

Unfavourable land leasing rules


It is generally acknowledged that before the auction the bidders should keep
their intentions and bidding price secret in order to prevent malicious com-
petition such as deliberate over-bidding. However, LINECITY had to adver-
tise its project proposal to recruit participants, and all the details about the
organizational structure, funding management and operational process
were published in order to win the confidence of potential members. At first,
such advertising proposals were posted on both the co-operative-LINECITY
homepage and Linggang Yus personal website, thus being available to eve-
ryone, including the competitors. Later on, Yu realized the importance of
secrecy and replaced Web advertisements with insider consultation meet-
ings. But, compared with viewing the information on the Internet, attend-
ing a meeting is less convenient. As a result, these developments actually
increased the participating cost and led to fewer participants. For example,
the co-operative LINECITY posted a notice online for an inside consulting
meeting on 29 August 2009, a Saturday. It turned out that less than 30 per-
sons attended the meeting (LINECITY 2009).
While the bidding price is not the sole factor in winning land-use rights,
almost all other factors count against LINECITY. For example, according
to the scoring standards of the Garden-Bei-Road No. 25 parcel, the full
score (100) was based on the bidding price (30), payment schedule (30),
financial strength (20) and comprehensive quality (20). Previous analyses
have shown the disadvantages of LINECITY in the first three indicators;
the final indicator included certain aspects, such as enterprise qualification,
the judges impressions and the level of professionalism in construction and
marketing. Hardly any of these aspects earned LINECITY a higher score
compared to other competing real-estate developers. Although it promised
to offer houses at a lower price to low-income citizens, which was in line
with the governments welfare housing policy, LINECITY scored the lowest
among the nine competitors.

Co-operative rules failed to attract participating members


Unable to borrow from the financial market, LINECITY relied on the per-
sonal funding of participants. In the six proposed projects, the number of
participants never reached 270, and the total amount of down payment that
could be collected in step 4 did not reach a level that would allow LINECITY
to win the competitive bid in the land auction (step 8). Although LINECITY
once peaked at over 600 registered members, its funding collection rule and
exit punishment rule kept the majority of these members from signing the
contract and devoting their finances to the proposed projects.
In terms of funding collection, the required fund contribution was far
beyond the expectation and financial ability of most LINECITY supporters.
For one thing, although Yus project aimed at citizens who cannot afford
258 Yuqi Wang

housing built by real-estate developers, Yu decided to prevent the LINECITY


community from becoming a low-quality and poorly managed low-income
slum. Yu was hoping to build high-quality houses and to locate the co-
operative community in places easily accessible to public transportation
and with complete urban infrastructures. It is obvious that higher quality
and better location will largely increase the land cost, construction cost
and the final housing price. However, based on several public investigations
cited above, most grassroots co-operative housing supporters were low- to
middle-income citizens in urgent need of an affordable house to live in. So
they mainly focused on the visible gap between the price promised by the
co-operative proposal and that estimated by for-profit real-estate develop-
ers. According to Yu, many people who showed interest in participating in
LINECITY expected the contract price to be below 1/3 of the market price
of neighbouring houses. Especially, they hoped the LINECITY down pay-
ment to be much lower than the down payment needed to buy a similar
housing unit in the market. Take the Dong-Si-Shi-Tiao parcel, for exam-
ple. According to Yus calculations (referring to the housing price and land
price in neighbouring areas), LINECITY participants should have paid as
much as 30,000 yuan initial down payment (to register) and 150,000 yuan
follow-up down payment (to sign the contract) for a unit of 60 m2. The
required amount exceeded the financial ability of most low- to middle-in-
come households in Beijing and was roughly the same as the down payment
for market housing at that time (April, 2005). It turned out that only about
100 people, 50 per cent of those registered who already paid 30,000 yuan,
were able to sign the project contract. So LINECITY did not participate in
the land auction at all.
In terms of the exit penalty, LINECITY required that as long as a project
proposal is confirmed and contracts are signed, participants should deposit
their funds at scheduled dates in order to pay the land price and construc-
tion fee. Failing to do so was considered as an exit from the co-operative. In
this case, the remaining members would have to increase their contribution
to make up for total fund shortage, or LINECITY would have to borrow from
a bank (using the land won at auction as collateral) and the corresponding
interest cost should also be shared by the remaining participants. However,
too many exits would jeopardize the project. In order to protect the interests
of most participants, LINECITY set its exit penalty to a loss of the 500 yuan
deposit if a person exits after registration, plus 50 per cent of all the funds
already paid. That is, if one exits after registration, one will lose 15,500 yuan
(500 yuan deposit plus half of the 30,000 yuan initial down payment); if the
exit occurs after one signs the contract with LINECITY, one will accordingly
lose 15,500 plus half of the follow-up down payment. The later one exits,
the more the forfeit. In theory, according to Sukumars (2001) argument on
institutional potential and Heller and Hillss (2008) proposals on collec-
tive decision-making rules, LINECITYs exit punishment rule is effective in
The Grassroots Co-operative Housing in Urban China 259

ensuring that people benefit from co-operative behaviours (such as fulfill-


ing the promised funding responsibility) and in avoiding non-co-operative
behaviours (such as malicious default or exit). However, in order to win
more supporters, LINECITY advertisements put more focus on the bene-
fit side. So, when those already registered finally noticed the penalty rule,
many felt cheated and a few even questioned Yus personality, regarding
him as a fraudster who wanted to embezzle the money in the name of exit
punishment. When several such accusations were posted on the website,
the credibility of LINECITY was seriously affected.

Social and cultural impediments to participation


The co-operation rules of LINECITY contained three basic ideas the col-
lectively owned benefit to members; the correspondence of benefit sharing
and cost bearing; a risk to the public of trying a new housing development
approach that is out of the mainstream and not explicitly approved by the
government. However, all of these elements are not compatible with the
social fabric and culture of contemporary urban China.
On the first point, LINECITY highlights collective ownership as a crucial
aspect of co-operative benefits. This idea accords with the experiences from
housing co-operatives elsewhere. Comparing different financial structures of
housing co-operatives, Sukumar (2001) shows that collectively owned prop-
erty is the key in providing nonprofit housing to low-income households;
however, without a continuing revenue stream from collectively owned
property the centripetal forces of collective benefits will expire once mem-
bers obtain their housing, and members will have a strong motivation for
speculation by selling their housing at market price. In urban China, mainly
due to the dichotomous economic structure following the market economic
reform, the co-operative economy and collective ownership have largely
faded out of peoples vision and concern (Lu 2006). In the case of LINECITY,
the collectively owned benefit was an invisible part of the overall co-oper-
ation benefit (see final rate of return in Table 15.2) and was neglected by
most people. Citizens who had an interest in participating also tended to
compare LINECITYs price with the price of welfare housing offered by the
government, without noticing the difference in the actual value of these
two kinds of real-estate (that is, the owners of governmental welfare housing
only have partial property rights of the houses, which have been subsidized
by the government). Besides, during the urban-housing and land-institution
reforms, there has been increasing support for the opinion that private own-
ership is more advanced than public ownership or collective ownership, and
that the majority of people just could not wait to embrace their private prop-
erty (Xiao 2000: 4042). So, the collectively owned revenue did not seem to
be attractive to many citizens.
Secondly, many citizens were unwilling to share the operational cost of
LINECITY, even if they found the potential benefit attractive. LINECITY
260 Yuqi Wang

hired two employees to run the company, and the total daily operational
cost was about 5,000 yuan per month. It also needed to spend about 30,000
yuan in preparation time to attend a land auction with a complete project
proposal (to take the Garden-Bei-Road No. 25 as an example). The 500 yuan
non-refundable membership fee that LINECITY collected from each partici-
pant (no matter whether he/she would sign a project contract), was meant
to pay for the basic operational cost. Although the sharing of operational
costs is common in most housing co-operatives in the West (Siegler and Levy
1986), LINECITYs membership fee was questioned and challenged by many
citizens. One reason is that in the mainstream housing provision approaches,
the operational cost is implicitly included in the overall cost charged by real
estate developers and is compensated by housing prices; housing buyers are
usually not aware of bearing this cost. So they tend to consider the cost-
sharing of co-operative housing as unreasonable. Another reason involves
the fact that few would like to share the potential cost of failure. For exam-
ple, Sukumars research on Indian low-income housing co-operatives shows
that, households will participate if benefits from the collective outweigh
costs of participation. Alternatively, collective action problems (such as free-
riding) can also arise. For example, some households may reap benefits of
the collective without paying their dues or without participating (Sukumar
2001: 153). Besides, Hansmann also observed that it is difficult for those who
participate in a newly established housing co-operative or condominium to
achieve a consensus on the cost-sharing rule (Hansmann 1991: 38). In the
LINECITY case, the fact that no grassroots co-operative housing organiza-
tion in China (including LINECITY) had ever won a land auction encour-
aged people to watch and wait. Being afraid of losing the membership fee,
they would choose to wait until LINECITY had won the parcel (Wu 2008).
Thirdly, the negative attitude of the government increased the uncertainty
of LINECITYs success and, as a result, deterred some LINECITY supporters
from participating in the project. The governments negative attitude was
largely owing to the fact that, in early 1990s, there were serious fraud cases
in the name of collecting public funds. So, the government did not trust
the grassroots co-operative housing organizations founded and managed
by ordinary citizens. At the national level, the Ministry of Construction, as
the central government department in charge of housing and urban con-
struction affairs, explicitly expressed concern about the risk of money col-
lection for co-operative housing (ChinaNet 2007). At the local level, the
municipal governments in charge of the local land leasing and real-estate
development were reluctant to encourage this new approach, even if the
welfare housing they provided was not able to satisfy the demand for afford-
able housing (Tang 2007; Zhou 2007: 9; Chen 2007: 9; CCTV 2007; CCTV
Dialogue 2007). Such a negative attitude was most apparent during the
NPC and CPPCC (National Peoples Congress and Chinese Peoples Political
Consultative Conference) in 2007, when advocates for grassroots co-operative
The Grassroots Co-operative Housing in Urban China 261

housing from 16 cities collectively expressed their support for this housing
approach. According to the news reports of Xinhua News Agency, Chinas
major official media outlet, many NPC deputies and CPPCC members sug-
gested the government treat grassroots co-operative housing as a kind of
welfare housing solution for low- and middle-income citizens. However, the
minister of Chinas Ministry of Construction explicitly warned the public
to avoid illegal fund-raising activities, which could be advertised in the
name of co-operative housing (Econ Journalist 2007: 6). Histories of suc-
cessful co-operative housing in the West have shown that official support
had a very important role to play in the early development of the initiative.
The negative attitude of Chinas government further threatened the publics
belief and confidence in emerging grassroots co-operative housing.

Conclusions

LINECITY was born as a self-organized citizens group in response to the lack


of affordable housing in Chinas cities. Instead of seeking solutions within
the mainstream housing provision approaches, LINECITY experimented
with a co-operative approach, in that future house owners were involved in
the whole housing development cycle, collectively financing the land pur-
chase and house construction and thus being able to obtain a lower-priced
house with extra collective property benefit.
However, in the economic and social context of urban China, LINECITY
had to operate within the existing framework of land and financial institu-
tions. The unfavourable land-auction market, financial environment and
social and cultural characteristics placed LINECITY at a disadvantage in
implementing its co-operative rules, attracting members and competing
with real estate developers.
Moreover, since these contextual institutional and cultural constraints
exist in most cities across the country, the co-operative rules and operat-
ing process of LINECITY as described are unlikely to succeed in the current
economic and socio-cultural environment in urban China. These obstacles
resulted in LINECITYs failure.

Note
1. Urban construction lands leased by the local land authority are of three categories:
industrial, commercial and residential.

References
CCTV (2007) CCTV Survey: 95% Responses Support Co-operative Housing. Available
at: http://news.sina.com.cn/c/20070116/161212053540.shtml (Accessed: 20
February 2010).
262 Yuqi Wang

CCTV Dialogue (2007) How Far Are We From Co-operative Housing, telecast on
11 January 2007. Available at: http://www.56.com/u50/v_MjE1MjUyNzk.html
(Accessed: 20 February 2010).
Chen, Y. and Wang, Z. (2005) Insights Into the Co-operative Housing in China,
China Today Forum, 5: 74.
Chen, Z. (2007) The Black Hand Behind Wenzhous Co-operative Housing, The
Economic Observer, 12 November 2007, 9.
ChinaNet (2007) Ministry of Construction Warned the Risk of Money Collecting by
Grassroots Co-operative Housing. Available at: http://www.china.com.cn/policy/
txt/200708/30/content_8770211.htm (Accessed: 24 February 2010).
Company Law of the Peoples Republic of China, issued on 27 October 2005, imple-
mented from 1 January 2006 on.
Dong, M. and Hong, L. (2007) Public Survey in Seven Cities Proves an Over Nine-
Tenths Public Support Rate for Co-operative Housing, China Network. Available
at: http://www.china.com.cn/txt/200701/16/content_7662333.htm (Accessed: 20
February 2010).
Econ Journalist (2007) Representatives Lobbying for Legal Regulation to Co-operative
Housing, The Economic Observer, 6, 12 March 2007.
Hansmann, H. (1991) Condominium and Cooperative Housing: Transactional Efficiency,
Tax Subsidies, and Tenure Choice, The Journal of Legal Studies, 20(1): 2571.
Heller, M. and Hills, R. (2008) Land Assembly Districts, Harvard Law Review, 121:
14651527.
Li, W. (2007) A Study on the Risk Evaluation of Co-operative Housing. Master Thesis,
Chongqing University.
LINECITY (2009) Project Notice. Available at: http://www.linecity.cn/huiyi.htm
(Accessed: 10 December 2009).
Lu, J. (2006) A Study on the Legalization of Housing Co-operatives. Beijing: Law Press.
Ni, P. (ed.) (2009) China Housing Report 20092010. Beijing: Social Sciences Academic
Press.
China Coop (2009) Get an Idea of Co-operative Housing, China Co-operative Housing
Online. Available at: http://www.17jfz.com/see/ (Accessed: 16 August 2009).
PBOC (2006) 2004 China Real Estate Finance Report, Real-estate Finance Research Group
Annual Report (2006). Beijing: China Financial Publishing House.
Siegler, R. and Levy, H.J. (1986) Brief History of Cooperative Housing, National
Association Housing Co-operative Internal Material. Available at: http://www.
coophousing.org/uploadedFiles/NAHC _ Site/Resources/nahc%20history%20
Siegler.PDF.
Sohu Real-estate (2006) A survey: Will You Participate in the Grassroots Co-operative
Housing? Available at: http://house.focus.cn/news/20061118/256437.html
(Accessed: 20 February 2010).
Sukumar, G. (2001) Institutional Potential of Housing Co-operatives for Low-income
Households: The Case of India, Habitat International, 25: 155.
Tang, W. (2007) Shanghais Co-operative Housing Being Forced to Change into
Collaborative Purchasing, Shanghai Securities News, B06.
Wu, H. (2008) A Study on the Risk and Strategy of Co-operative Housing, Consumer
Guide, 5.
Xiao, L. (2000) The Principal and Trend of Housing Co-operatives, Chinese and
Foreign Real Estate Newsletter, 19: 4042.
Xu, C. (2010) The Features, Problems and Policy Implications of the Contemporary
Real Estate Market in China, China Price Index, 1.
The Grassroots Co-operative Housing in Urban China 263

Yu, L. (2009) Whether Co-operative Housing Could Ever Succeed? Available at:
http://blog.sina.com.cn/s/blog_47465aa50100eido.html (Accessed: 10 December
2009).
Yu, L. (2010) On Co-operative Housing and Harmonious Society. Available at: http://
blog.sina.com.cn/s/blog_47465aa50100gvp6.html (Accessed: 24 February 2010).
Zhang, Z. et al. (2009) Real-estate and the Capital Market. Beijing: China Financial
Publishing House, p. 186.
Zhou, J. (2010) The Development of Real Estate Market Under the Crisis, China
Finance, 1: 22.
Zhou, L. (2007) Wenzhous Co-operative Housing in Disputation, The Economic
Observer, 9, 12 November 2007.
Zhu, H. (2009) A Study on the Feasibility of Co-operative Housing in China. Master
Thesis, Southwest Politics and Law University.
16
Conclusion: Co-operative
Innovations in China and in the
West: Recent Trends and Challenges
Caroline Gijselinckx, Sonja Novkovic and Li Zhao

Co-operatives come in various forms and practices in the West as well as


in the East. In their respective contributions, the authors in this book pro-
vided valuable insights with respect to those realities in China, in Western
European countries and in North America, both in agriculture and in other
economic sectors. In this concluding chapter we highlight some general
trends identified by the chapter contributors and sketch future avenues.
Conceptualizing co-operatives as dynamic constructs, influenced by inter-
nal and external factors, we describe common challenges for co-operatives
around the world when they respond to societal and economic issues. We
identify divergences and convergences in institutional contexts for co-op-
eratives in China and in Western countries, highlighting path dependence
for co-operative transformations under different policy regimes as well as
cultural and economic systems. Transformations of co-operatives occur
at the levels of membership, capital formation, internal governance and
external relationships and co-operation. New co-operative forms emerge
in both the traditional and in new fields of activities, as well as in varied
socio-political contexts.
Thus, we aim to provide systematic insights in this highly heterogene-
ous field and point to convergences, divergences and future avenues. We
are well aware of the fact that much more systematic comparative research
is needed, focusing on specific sectors and including more countries and
regions. With this book we hope we have charted the way.

Co-operatives as dynamic constructs

Co-operatives can be seen both as emergent results of human action and as


recurrent patterned arrangements which influence the choices and oppor-
tunities available to people. As particular constellations of structural and
cultural characteristics, co-operatives are socially real entities (Fleetwood
2004) but also evolving and dynamic constructs. They are real, not in
the sense of material entities, but in the sense of having an impact upon

264
Conclusion 265

peoples actions, which means that in their absence, people would act in dif-
ferent ways. However, co-operatives are dynamic and are dependent upon
the ways they are conceptualized and put into practice. They take on vari-
ous forms according to how their members perceive the co-operative way
of doing business as suited for their purposes. Dependent upon how peo-
ple constantly elaborate that is reproduce or transform their structural
and cultural properties through their actions and interactions; they are also
defined by time and space. The options that are open to people when they
establish or transform co-operatives are constrained and enabled by their
socio-economic, political and legal environments.
From the time the first principles of co-operative entrepreneurship have
been formulated by the pioneers of what now has become the international
co-operative movement and, up until today, leaders and representatives of
co-operative movements around the world have tried to define the co-oper-
ative identity, that unique set of tenets that distinguish co-operatives from
other organizations and enterprises. As Dame Pauline Green, president of
the International Co-operative Alliance, expressed in her speeches during
the United Nations International Year of Co-operatives: Co-operatives are
businesses, but not business as usual. Perhaps the most basic definition of
a co-operative would point to its being an economic organization owned
and controlled by its members, with the purpose to provide and distribute
benefits to its members (Barton, in Nilsson 1999). A broader set of values
and principles of co-operative entrepreneurship was self-reflexively defined
by the International Co-operative Alliance (ICA) during its World Assembly
in 1995, based upon a century and a half of co-operative entrepreneurship
with various types of members and members purposes and in various eco-
nomic sectors and countries. The seven co-operative principles1 in the ICA
Statement of Co-operative Identity are mere guidelines for co-operatives,
exercised with a large degree of flexibility.
The concept-dependency of co-operatives is illustrated by the differences
in interpretation and operationalization of those principles. While some
co-operatives adhere to a strict interpretation, others take a more relaxed
stance. In their flexibility, the co-operative principles express the intent
to exercise co-operative values and stay true to the co-operatives purpose,
ensuring member-user control.
For example, the principle of voluntary and open membership mainly
distinguishes co-operatives, as voluntary member organizations, from
coerced forms of co-operation, such as those that existed in many commu-
nist or other totalitarian regimes. It may be interpreted as an absolute free
entry and exit of members. In consumer co-operatives and co-operatives
where less capital is needed, this may be easier to realize than in a dairy co-
operative with high capital requirements. Many co-operatives then inter-
pret the principle of voluntary and open membership in the sense that
no one can be forced to join and no eligible applicant can be refused. Also,
266 Caroline Gijselinckx, Sonja Novkovic and Li Zhao

there will be no discrimination among eligible members and nobody can be


forced to stay a member. However, just as rules with respect to entry may be
formulated in the bylaws of the co-operative, rules with respect to exit may
also be internally defined.
With regard to the principle of democratic control, a strict interpreta-
tion may involve the organization of voting rights according to the rule
one member, one vote. A looser interpretation would lead to a restriction
of multiple voting rights, still safeguarding a co-operative from majority
shareholders whilst at the same time accounting for differences among het-
erogeneous members in terms of patronage or capital contribution, or other
differences deemed important by members. How democracy is exercised
will also differ depending on the type of co-operative direct democracy
will be more challenging in second-tier co-operatives, for example. A strict
operationalization of the principle of autonomy and independence would
prohibit any interference from outsiders. In a less-strict interpretation, it
may be operationalized to allow external capitalization or make use of gov-
ernment support, without giving voice to those private or public outsiders
who would restrict control by user-members. Or, with this principle even
more loosely applied, a co-operative may include economic participation
and participation in decision making by non-users, as long as the majority
of voting rights remains with the users.
Co-operatives are dependent on the practices of their members and other key
actors, in particular their management. Once set up, they do not continue to
exist unchanged, as an evident realization of the mission, values and rules
formulated in their bylaws. They are living organizations, continuously evolv-
ing through the conscious and unconscious, intentional and unintentional
actions of the members, managers or personnel. As with every other organi-
zation, co-operatives have formal and informal cultures and structures. The
informal structures emerge in the day-to-day interactions and relationships
among the internal stakeholders of the organization. They emerge from the
way the organization and its formal rules, procedures, relations, norms and
values are lived and practiced. Whether a co-operative continues, transforms
or winds down is contingent upon, among other factors, whether members,
managers and employees feel supported or constrained by it, whether they
see their interests served or not, whether they feel their motives and values
corroborated and whether their needs and aspirations are fulfilled.
Of course, contextual factors are also important. That is why a co-operative
is time-and-space dependent. Legal and policy frameworks, political regimes,
market exigencies, phenomena such as globalization and technological evo-
lutions, societal and demographic circumstances, social norms and values
these all form constraints and drivers in the development of co-operatives.
But co-operatives can also influence those factors. Indeed, as various chap-
ters in this book illustrate, co-operative innovations also inform the devel-
opment of legal frameworks and policy measures; co-operatives can have a
Conclusion 267

very positive effect on the members living conditions and options available
to them; and positive experiences with co-operatives may increase trust and
norms of reciprocity and transparency.
These complex internal and external realities drive or impede co-opera-
tive innovations. Co-operative innovations have to do with the co-opera-
tive model (its internal governance and capital formation), but also with the
shaping of the relationships with other co-operatives and economic actors.

Common challenges for co-operatives

In the East and the West, the co-operative form has been used to find solu-
tions to a variety of societal challenges, from socio-economic development
of deprived groups in society to the delivery of health and social services.
Co-operatives around the world have developed various answers to those
challenges, some more innovative than others, depending on how co-op-
eratives actualize the principles of user-ownership, user-control and user-
benefit. Economic and societal pressures prompt co-operative innovations.
Western co-operatives have a long tradition in finance and agriculture,
and in China these two sectors are also the first sectors in which co-oper-
ative entrepreneurship was promoted. In those sectors, high capitalization
requirements and pursuit of scale economies have driven some co-opera-
tives to experiment with new ownership structures, whilst others resorted
to networking as a growth strategy. Multi-stakeholder models have also
been elaborated, and co-operative networks have been used by those actors
who rediscovered and reshaped the co-operative model for the provision of
social or public goods or services. In those new co-operatives, membership
(with financial and democratic participation) has been opened up to multi-
ple stakeholders because the purpose of the co-operative has been broadened
from a single-type member orientation to a general-interest orientation.
Those evolutions have put innovative co-operatives in a co-operative tri-
lemma (Gijselinckx and Develtere 2008) between member interests, inter-
ests of other stakeholders (either primarily economic or social, or both) and
government interests. The theoretical and in-depth case studies upon which
the contributions in this book are based show how they develop stakeholder
participation in capital and governance and how they also find themselves
in a co-operative trilemma.
Albeit situated in very different institutional contexts, by virtue of their
nature as economic member organizations co-operatives in East and West
face similar challenges:

to get and keep members involved for a common purpose;


to adequately define the needs of their (potential) members and the com-
munities in which their (potential) members are embedded;
to develop adequate responses to those needs;
268 Caroline Gijselinckx, Sonja Novkovic and Li Zhao

to collect human, social and financial capital and cooperate for a com-
mon goal;
to organize democratic decision making, balancing equality and fair-
ness in accordance with contributions (in terms of capital, labour or
transactions);
to develop fair benefits related to these various sorts of contributions;
to develop mechanisms to solve conflicting interests and problems related
to collective property rights;
to develop structures that create economies of scale and reduce transac-
tion and production costs on the one hand, while staying close to their
members on the other hand;
to develop and maintain trust relationships with governments and other
relevant stakeholders that are influenced by, and have an influence upon,
the organization;
to continuously balance economic and social objectives in a globalized
world.

Co-operative innovations, as described and analyzed in this volume, provide


pathways to tackle these challenges. Their critical examination can show
future paths to take or to avoid if the co-operative way of doing business is
to be preserved and put to service for human need, not human greed.2

Institutional contexts for co-operatives: legal and policy


frameworks

Significant divergences between China and the West with respect to policy
regimes in general and the policy support measures for co-operatives in par-
ticular, cannot be neglected. Although market-oriented reforms have been
implemented since the end of the 1970s in China, this vast country still
is a state-led economy. The context in which Western co-operatives oper-
ate, although diverse, is decentralized capitalist market economy. Just like
many Western countries, China had a relatively long tradition of co-opera-
tive and mutualist organizations before those models were captured by Mao
Zedongs communist regime. In the 1920s, reformers and philanthropists
who came back from Western Europe and Japan introduced Western co-
operative models into China. In 1923 the first Chinese credit societies were
established, promoting the German Raiffeisen system (Zhao 2013). That was
long before the models for co-operative financing existed in various areas
in post-1949 China (see He, in this volume). However, during the 1930s and
1940s these and other co-operatives were prompted by political motives,
and co-operative ideas generally became the national governments tool of
policy and control (Zhao 2013: 1097). During the period of central plan-
ning, Peoples Communes were established in 1958, thwarting the devel-
opment of independent co-operatives.
Conclusion 269

In the reform era since 1978, when the household contract responsibility
system was adopted and agriculture became de-collectivized, the national
government turned a blind eye to co-operatives that spontaneously emerged
in rural areas. In present-day China co-operatives are being stimulated by
national, provincial and local governments as an instrument for poverty
alleviation and rural development. In 2007 the national Law on Farmers
Specialized Co-operatives was enacted (see, in this volume, Xu and Wu;
Yuan; Zhao), providing a national legal framework for agricultural co-op-
eratives. Besides those national laws, 16 provincial-level co-operative laws
had been put in place by the end of 2011 (Zhao and Yuan 2013). As to finan-
cial co-operatives, the China Banking Regulatory Commission introduced a
Rural Mutual Fund Association statute and provided operational guidelines
for the approval and formation of rural mutual fund associations (see He,
in this volume). Particularly during the past five years, the institutional rec-
ognition has driven the development of rural co-operatives in China (Zhao
and Yuan 2013). Conversely, the lack of a general co-operative law and spe-
cific statutes for co-operatives in other sectors impedes the development
of co-operatives in other economic sectors, such as housing (as argued by
Wang in this volume).
In Western countries, co-operative laws and regulations are highly diverse,
but they have some general common features. From their origins, which in
many countries date back to the 19th century, they remained firmly embed-
ded in a liberal democratic tradition characterized by private property, mar-
ket allocation, voluntary entry and exit, democratic governance, autonomy
and independence (Melnyk 1985). Though from time to time stimulated
by government policy, co-operatives are bottom-up initiatives. Government
support for co-operatives was the result of action and advocacy by social
and political movements striving for better living conditions and fairer eco-
nomic relationships, developing co-operative models as economic answers
to societal needs. Throughout Western history co-operative laws, regulations
and policy measures were a response to evolutions in the field, not the other
way around (see, in this volume, Battilani; Borzaga and Depedri; Vzina and
Girard). Another common characteristic of Western co-operative statutes is
that they are mostly not confined to specific sectors. Co-operative laws and
articles with respect to co-operatives in corporate and commercial laws in
the West provide a general legal framework for co-operative entrepreneur-
ship. However, recently in some Western countries specific regulations for
co-operatives with social purposes (Italian social co-operatives, Qubcois
solidarity co-operatives, French co-operative societies with a general inter-
est) have been developed (see, in this volume, Borzaga and Depedri; Vzina
and Girard). This legal evolution follows trends and dynamics with respect
to the use of the co-operative model in new areas.
As in China, co-operatives in the West first developed in agriculture and
finance, with consumer co-operatives also among the pioneers. In recent
270 Caroline Gijselinckx, Sonja Novkovic and Li Zhao

years, negative consequences of government and market failures in the deliv-


ery of social, public and common goods are being perceived. At the same
time budget restrictions are tighter, whilst societal demands are increasing.
In combination with a search for more social cohesion and involvement of
private actors in the provision of social services, as well as a limitation of
opportunistic behaviour of recipients, co-operatives are increasingly being
discovered and supported as an instrument for the delivery of social services
and governance of public and common goods. New regulations are devel-
oped to frame co-operative membership, governance and financing for the
common, public or social good (see, in this volume, Borzaga and Depedri;
Vzina and Girard; also, see Thomas 2004; Gijselinckx, Coates and Deneffe
2011). But co-operatives in the West are not simply a result of government
and market failures. Different from China, they are increasingly rediscov-
ered as the intentional design for a people-centred and values-driven enter-
prise, allowing their founders the realization of positive liberty (Zamagni
and Zamagni 2010).There is ample evidence of ideological flexibility of
both co-operatives and supportive policy measures for co-operatives (see
Battilani, in this volume). In the UK, co-operatives are stimulated by gov-
ernments across the political spectrum because they are keen on enhancing
user participation in public-services delivery, as well as more accountabil-
ity, efficiency and, hence, legitimacy (Simmons and Birchall 2005). Often,
those co-operatives providing common, public or social goods and services
take an innovative multi-stakeholder form. Specific regulations for multi-
stakeholder co-operatives have been developed in some Western countries.
There is discussion about the efficiency of those tailor-made regulations for
multi-stakeholder co-operatives when existing co-operative laws are flex-
ible and allow co-operatives to formulate all kinds of categories of members
with well-defined rights and responsibilities (Mnkner 2004). The contri-
butions in this volume by Vzina and Girard and by Borzaga and Depedri
provide evidence that clear but flexible legal frameworks are favourable for
the development of co-operatives with a social aim, not least because they
create a legal and societal recognition for the use of co-operative models
with a social purpose or general interest. Conversely, Zhao (in this volume)
suggests that a strict definition provided in the legal framework may poten-
tially inhibit co-operative development and the rise of innovative solutions
to challenges found on the ground.
Besides providing clear legal frameworks, supportive policy measures for
co-operatives can come in the form of removing administrative burdens
and providing economic and fiscal incentives. Many Western governments
have created tax incentives for co-operatives and their members. From the
times of the first regulations with respect to co-operatives, up until today,
tax incentives remained popular and effective policy measures to stimu-
late co-operative entrepreneurship. Other enabling policy instruments
include low-interest loans, granting public land to cultivate or buildings
Conclusion 271

in which to provide services, granting procurement contracts, or granting


public works without tender. Procurement incentives were often practiced
in Western countries before World War II but became less prominent in
recent years (see Battilani, in this volume). However, Borzaga and Depedri
as well as Vzina and Girard describe how, in contemporary times of gov-
ernment failure and high societal needs, new regulations with respect to
Western co-operatives with a social purpose frame complementary roles
for public authorities and co-operatives and even allow public bodies to
become members of such co-operatives and contribute financial, natural
and material resources.
Chinese governments, both at national and provincial levels, develop sim-
ilar supportive policy measures for the co-operatives in the economic sectors
they deem important, most importantly agriculture. Since the introduction
of the household contract responsibility system and the de-collectivization
of agriculture, local pilot projects have informed the development of insti-
tutional frameworks and policy measures for co-operatives. By the end of
2011, 30 provincial level governments had issued policies and documents in
support of the development of local co-operatives (Zhao and Yuan 2013). In
this volume, Xu and Wu, Yuan, Zhao and Zachernuk and Liu describe policy
measures including operational guidelines for the recognition and support
of farmers co-operatives and rural mutual fund associations, tax incentives,
subsidies for registered co-operatives and public-awareness campaigns, as
well as centrally formulated targets for county- and township-level officials
for registering new co-operatives. In combination with the legal frame-
works for farmers specialized co-operatives and mutual-fund associations,
in recent years these policies have led to the explosive development of rural
co-operatives. Critical voices point out that many of them are pseudo co-
operatives, or a faade used to elicit government support and funding (Zhao
and Yuan 2013). Indeed, the co-operative landscape in China, at least with
respect to agriculture and financing for rural enterprises and households,
is highly heterogeneous. Research by Xu and Wu, Zachernuc and Liu, Yuan
and Zhao provides in this volume a closer examination of the types, char-
acteristics and drivers of those newly emerging co-operatives in China,
thereby shedding light on this varied reality. The chapter by Wang on hous-
ing co-operatives, on the other hand, shows how the lack of recognition of
co-operatives as an entrepreneurial model in other economic sectors and
in urban areas as well as the incompatibility of existing laws and regula-
tions with respect to land ownership hinder the development of housing
co-operatives. Thus, although starting from a different position, both in
China and in the West a feedback loop can be observed between institu-
tional frameworks stimulating co-operative development and co-operative
innovations on the ground driving institutional development. In countries
and policy domains where co-operative entrepreneurship is recognized as
an alternative way for effective provision of particular goods and services,
272 Caroline Gijselinckx, Sonja Novkovic and Li Zhao

they are being stimulated. In other places they are not, which impedes their
development.
A trend in Chinas rural co-operatives that is not readily observed in
Western countries, but which is present in developing and transition econo-
mies (Zachernuc and Liu, in this volume) has to do with government sup-
port for co-operative development for a particular top-down policy aim
such as poverty alleviation. With a high risk of failure, these developments
have to be carefully examined so as not to impede the growth of the demo-
cratic co-operative model in Chinas economy.

Co-operative innovations: co-operative transitions and


transitions in co-operatives

Consumer co-operatives in Western Europe and North America have a long


tradition in food and household retail as well as finance, while producer co-
operatives have a long tradition in agriculture. In China, agriculture is expe-
riencing the most vibrant development of co-operatives since the initiation
of the household contract responsibility system and the de-collectivization
of agriculture.
Recently, multi-stakeholder forms have been developed in Western coun-
tries, most often in sectors where the co-operative models have been discov-
ered as innovative forms of organization, financing and governance (see, in
this volume, Novkovic; Vzina and Girard; Borzaga and Depedri). In tradi-
tional co-operatives, membership is confined to users. Thus, the co-opera-
tive is owned and financed by the users and controlled by them and has the
sole purpose of providing and distributing benefits based on use (Dunn in
Bijman et al. 2012). Traditionally, only one category of members is perceived.
Depending on the type of users, co-operatives are instruments for realiza-
tion of benefits for their members consumers (consumer co-operatives),
producers (producer co-operatives) or workers (worker co-operatives).
In multi-stakeholder co-operatives, different categories of stakeholders are
recognized as members. Multi-stakeholder models differ with respect to the
ways those different categories of members are treated in terms of economic
participation and participation in decision making. Those differences are
related to motivations for the establishment of co-operatives, different mis-
sions and values, expected benefits and services, leadership styles and socio-
economic and political contexts.

In agriculture
Because of the high capitalization requirements in agriculture, globalization
of markets, the pursuit of large-scale production, weakening government
support, demographic changes in rural areas and the existence of prob-
lems related to vaguely defined property rights (Cook and Burress 2009;
Iliopoulos and Hendrikse 2009; Iliopoulos, in this volume), traditional
Conclusion 273

agricultural co-operatives have been challenged to find new methods to


raise equity. In his contribution, Iliopoulos describes transformations
of Western agricultural co-operatives, from the development of radically
new member-ownership structures, through the development of holding
structures with non co-operative subsidiaries (in Europe) and mergers with
non-co-operative enterprises, to complete demutualization. He presents a
typology of new ownership structures, distinguishing those innovations
where equity is still exclusively provided by members, on the one hand
(proportional investment co-operatives, member-investor co-operatives,
new generation co-operatives), from those innovations where non-mem-
bers supply capital to the co-operative (capital-seeking companies, investor
share co-operatives and conversion into investor-owned firms) increasing
the risk of its transformation to a different form. Battilani, in her chapter,
warns us that large mergers and acquisitions, the establishment of foreign
subsidiaries by co-operatives and the search for external capital raise new
questions and challenges with respect to maintaining member ownership
and control. Iliopoulos agrees that co-operatives seeking external capital are
faced with a trade-off between accumulating capital and maintaining con-
trol in the hands of member-patrons. Furthermore, co-operatives which are
developing new property rights structures among their members are faced
with a trade-off between maintaining member-control and accommodat-
ing an investment mentality among membership. In both cases, they are
faced with a higher risk of losing user-member control, a higher emphasis
on investor benefits over user benefits and, eventually, demutualization.
Thus, Iliopoulos argues that those innovations should go hand in hand with
the introduction of adequate governance structures and mechanisms, pre-
serving member control and balancing equity and equality. A different set
of capitalization options has been used by some agricultural co-operatives
that opted for co-op friendly outside investment with a clear share-buyout
strategy to maintain member control (see Novkovic in this volume).
Cook in his chapter elaborates further on the important issue of govern-
ance. From his analysis of the origins and development of different types
of stakeholder governance in U.S. agricultural co-operatives, he points out
how the historical conflict between stock and non-stock models informs the
division between user-driven versus investor-driven framework in U.S. co-
operatives. He argues that in all types of co-operatives member engagement
is crucial in both the economic participation and in governance. According
to Cook, empirical research shows clearly that it is not only structure, but
also process that matters. Based upon case studies, he presents recommen-
dations with respect to boards of directors, pointing to the importance of
balanced expertise of board members (and a possibility of hiring outside
expertise), board training, reviewing board processes to enhance active
engagement and emphasizing active contribution and passion when select-
ing and evaluating board members.
274 Caroline Gijselinckx, Sonja Novkovic and Li Zhao

In his chapter on co-operative strategies in times of globalization, Spear


also refers to the types of transformations of co-operative models described
by Cook and Iliopoulos. Even stronger than the latter and in line with
Battilani, Spear cautions of danger of losing the co-operative identity, and
proposes alternative strategies. Just like Battilani and Novkovic, he argues
that networking might be a strategy for the preservation of a true voice
for members and for continued building on social norms of trust and reci-
procity. Describing knowledge networks and inter-co-operation as a way to
think globally and act locally, Spear sees a co-operative advantage in the
very exploitation of co-operative forms and values, allowing co-operatives
to realize advantages in different countries related to human, physical,
knowledge and capital resources, as well as infrastructure.
The parallel between the co-operative values and principles and the
characteristics of networks is elaborated by Novkovic, who distinguishes
various types of co-operative networks, starting with the co-operative as a
network of independent members. On top of that, Novkovic sees four more
types of networks: inter-organizational networks, supply-chain networks,
co-operative federations and sector networks for co-operative development
and complex networks. She describes networking as a reflection of the very
structure of co-operatives as networks of members. Just like co-operatives,
networks are hybrid forms of governance. They are intentional creations
that govern members transactions and restrict their activities to prevent
negative externalities and to secure positive ones, while also maintaining
autonomy. Networks are based on the very norms of trust and reciproc-
ity that are characteristic of co-operatives. Just as in co-operatives, those
social norms are predominant mechanisms for incentives and control in
networks, besides hierarchy and price mechanism. The open-endedness
of contracts in co-operative networks allows for flexibility and adaptabil-
ity, given that the underlying principles of the relationship between the
members is clearly understood and put into practice. Thus, networks allow
co-operatives to keep participatory decision making in and by member
organizations. Networking also allows keeping capital in its subordinated
role in a people-centred business. As a growth strategy, networking gener-
ates innovative responses to market and regulatory demands, foiling demu-
tualization or transformation into quasi-co-operatives.
Up until now, co-operative networks have not been abundant in China.
In their contributions to this book, Xu and Wu distinguish several types of
co-operatives in China, but networks are not many. According to Xu and
Wu, less than 5 per cent of the total number of co-operatives in China are
second- or third-tier co-operatives. Xu and Wu offer a strong plea for the
development of unions and federations, especially of rural mutual-aid finan-
cial co-operatives, to support the development of farmers co-operatives and
assist them in realizing objective pro-poor characteristics as vehicles for pov-
erty alleviation. In China, traditional co-operatives form a minority of the
Conclusion 275

impressive number of farmers co-operatives that have been established so


far (see Yuan, Zhao, Xu and Wu; Zachernuc and Liu in this volume). Xu and
Wu estimate that less than 10 per cent of farmers co-operatives in China are
structured and operate in line with the ICA co-operative principles (together
with farmers associations accounting for 30 per cent of the national total).
The introduction of the co-operative way(s) of doing business in the politi-
cal, social and economic context of contemporary China seems to go hand-
in-hand with transformations of the traditional co-operative model.
Xu and Wu describe modern co-operatives as innovative forms of mem-
ber-owned, member-controlled and member-benefit co-operatives, open-
ing the possibility of capital mobility and evaluation through the market
(among members). This type still limits ownership to patron members but,
in contrast to traditional co-operatives, strict rules guide the relationship
between the co-operative and its members. A minimum amount of shares
and advance payment, equivalent to patronage, is obliged and delivery con-
tracts between members and the co-operative are formulated. Profit distri-
bution and voting rights can be arranged according to patronage. Xu and
Wu see a parallel between this model and the new generation co-operatives
distinguished by Cook and Iliopoulos in the United States. However, this
innovative type of co-operative accounts for less than 10 per cent of the
total of newly established farmers co-operatives in China. As another new
co-operative form, shareholding co-operatives, based on Xu and Wus esti-
mation, account for 40 per cent of the total.
Shareholding co-operatives discussed by Xu and Wu and Yuan and Zhao
in their respective chapters in this book, are commonly established by rural
elites (big farmers, agricultural product dealers, farm service businessmen,
agri-food processors, village leaders). Additional voting rights are distributed
according to patronage or capital shares. Often, these shareholding co-oper-
atives have property relationships with partner enterprises (being or having
subsidiaries). Rural elites who founded these co-operatives have the power,
the legitimacy and the urgency of definitive stakeholders, and they control
rural co-operatives (see Yuan in this volume). According to Yuan, Zhao and
Zachernuc and Liu (in this volume), their entrepreneurialism is supported
by central and lower-level governments who see rural co-operatives as an
important instrument of rural development and poverty alleviation. Local
leaders are attracted by government financial support for co-operatives and
want to realize targets for the establishment of farmers co-operatives set by
higher-level governments. They see co-operatives as instruments of commu-
nity development and ways of establishing and legitimizing their leading
social and political roles in this respect.
Zhao, in her chapter, elaborates on the multiple motives of founders of
co-operatives in rural China. She observes that co-operatives set up to real-
ize multiple purposes, rather than just to serve the economic interests of
the founders, appear to be based on a broader mix of resources, including
276 Caroline Gijselinckx, Sonja Novkovic and Li Zhao

members contributions, government subsidies and social capital in the


form of volunteer work and private donations. She also perceives innova-
tions for co-operative capitalization in terms of publicprivate partnerships
and the establishment of guarantee-providing agencies.
In many cases, shareholding co-operatives are not (fully) owned and
controlled by small farmers and are, therefore, not primarily driven by
service-provision to small farmers. Due to interconnections between their
founders and village elites, who are often also involved in the communist
party branch or in local governments, the autonomy and independence of
those co-operatives can be questioned. However, given exigencies in the
agricultural and agri-food markets in China, this co-operative type is pre-
dominant and on the rise. Just like agricultural co-operatives all over the
world, Chinese farmers co-operatives are in great need of capital and have
to realize economies of scale to be able to compete. This can hardly be built
upon the limited resources of small farmers who find themselves in a situa-
tion of deprivation (Yuan, in this volume).
In their chapter, Xu and Wu argue for the establishment of rural mutual-
aid financial co-operatives guided by governments in order to stimulate the
establishment and growth of farmers co-operatives able to generate pro-
poor characteristics. Zachernuc and Liu, on the contrary, express a warn-
ing that top-town established co-operatives and the set-up of co-operatives
driven by opportunism rather than user orientation, will likely fail to live up
to the expectations and promise for poverty alleviation. They make a plea
for bottom-up establishment of co-operatives, coupled with apex organiza-
tions and networks providing professional support and training (including
technical, marketing and management training), economies of scale and
financial resources. A combination of the insights of Zachernuc and Liu
on the one hand and Xu and Wu on the other hand, would lead to the rec-
ommendation to always involve and engage farmer users and to develop a
broad co-operative network, rather than isolated, small co-operatives.
Chinas shareholding co-operatives arose from the collective rural arrange-
ments by which small farmers (households), local government and local
enterprises collectively owned and managed their local resources (Zhao and
Develtere 2010). Small farmers inherited land-use rights and became the
cornerstones of new co-operative arrangements that include private capi-
tal and local government. The innovative shareholder co-operative model
attempts to secure the rights of small farmers; however, with relative com-
pensation of farmers versus enterprises as an indication, capital ownership
exerts decision-making rights and economic power, further accentuating
income inequality and inequity brought about by marketization of Chinas
economy in its most primal form. These developments call for policy change,
at the minimum to introduce profit sharing (understanding that this does
not guarantee longevity of the co-operative model), and ideally secure joint
ownership of the value chain for all rural stakeholders. Where community
Conclusion 277

interests are at the centre of the co-operative arrangement, its longevity may
be more likely. Debates that contrast land-use rights with full-fledged land
ownership (including the right of land disposal) are also of relevance for
Chinas future co-operative developments. Similar to Western second-gener-
ation co-operatives that experience a range of outcomes, from securing the
secondary role for capital to demutualization, co-op development in rural
China can go either way: with disposal rights, farmers may cash out on their
land ownership, effectively triggering demutualization (similar to privatiza-
tion experiences in Eastern Europe), or stick together to secure long-term co-
operative ownership and income flow for their families and community.

Co-operative social enterprises


Borzaga and Depedri and Vzina and Girard, in their respective contribu-
tions to this volume, argue that co-operative models were introduced in
new sectors in Western countries as an innovative response to high soci-
etal needs, limited government budgets and as a search for more efficient,
but also more participatory, models of service provision and enhancing
social cohesion and solidarity. New legal frameworks have been devel-
oped though with various degrees of success in order to stimulate the
development of social enterprises, for example, social purpose companies
in Belgium (1995) and community interest companies in the UK (1995).
In some countries, the co-operative model has been adapted and is used
widely as an organizational arrangement to provide social services in a
not-for-profit, participatory, but nevertheless entrepreneurial way (Borzaga
and Spear 2004; Galera 2004; Spear 2004): social co-operatives in Italy
(1991); solidarity co-operatives in Qubec (1997) and Portugal (1998);
co-operatives of social initiative in Spain (1999); co-operative societies
with a collective interest in France (2001); and nonprofit co-operatives in
Sweden (2006) (Gijselinckx 2012). According to Borzaga and Spear (2004),
transformation of the co-operative form appears to be a prerequisite for
expanding activities in new areas and, especially, to the social econ-
omy. The transfer of co-operatives to new domains, especially to social
and public services, informed the innovation of co-operative models.
Co-operatives providing social and public goods and services transform
the traditional co-operative member-orientation to a wider community-
orientation. In their chapter, Borzaga and Depedri describe how Italian
social co-operatives are recognized as entrepreneurial forms that are fit for
the provision of social and public services. Their development and recogni-
tion were influenced by severe government failure, inadequate traditional
institutions, and families inability to cope on their own. The co-operative
model was turned to because of its democratic and social characteristics,
but it needed to be transformed from the viewpoint of a social enterprise.
Thus, social co-operatives are democratically governed, with a social mis-
sion, constrained profit distribution and oriented toward general instead
278 Caroline Gijselinckx, Sonja Novkovic and Li Zhao

of member interest. Benefits in social co-ops are not restricted to mem-


ber-users. Different types of contributions were recognized as a basis for
membership (capital investments, member fees, prices paid for services,
paid and voluntary work and other). Different categories of members are
possible, including investor-members who are not directly benefiting from
the use of the co-operative. Rules have been developed with respect to
the participation of those multiple types of members in the co-operatives
resources and benefits as well as in decision-making structures devel-
oped first as an experiment and, later, institutionalized in the legal frame-
work (Borzaga and Depedri). Social co-operatives in Italy are recognized
as privileged private partners for the delivery of social services and work-
integration activities. Local government support to social co-operatives
comes in the form of procurement of services, as well as cost coverage in
some cases.
Vzina and Girard compare the characteristics and development of
those pioneering Italian social co-operatives with other new co-operative
forms that have been developed elsewhere, inspired by the Italian exam-
ples, namely the French co-operative societies with a collective interest and
the Qubcois solidarity co-operatives. The authors systematically com-
pare the purpose, eligible member categories, governance, financing and
actual evolution of those new co-operative forms. Multi-stakeholder models
open up membership to multiple stakeholders and broaden the entitle-
ment base of member rights and benefits to a wide range of contributions
(Gijselinckx, Coates and Deneffe 2011; Gijselinckx 2012). Vzina and Girard
find that multi-stakeholder co-operatives in these three cases are set up to
pursue social-economic purposes and provide an organizational frame for
networking among various actors working towards a common social goal.
They operate with a mix of resources and frequently collaborate with local
governments, but there are also differences among them, particularly with
respect to the role of government, volunteers and investors in their govern-
ance. Vzina and Girard argue that looser frameworks are more stimulat-
ing for the development of co-operatives with a social purpose. They also
claim that multi-stakeholder forms are informative for single-stakeholder
co-operatives that would want to integrate different member categories and
develop closer relationships with their core stakeholders.
As argued in their respective chapters by Battilani, Novkovic and Spear,
and by Borzaga and Depedri, co-operative networks highly support the
development of those new co-operatives and the new co-operatives, in turn,
develop new advocacy and service-providing networks.
The development of social co-operatives in China is in its infancy. While
the space for new forms of provision of social services has opened up with
its decentralization in the 1980s and 1990s, the new co-operative law of
2007 addressed only agriculture. Agricultural co-operatives, however, part-
ner with other stakeholders to satisfy community needs in a wider context
Conclusion 279

of community-services provision. China will need to develop the legal


structure in support of co-operatives outside agriculture, including federa-
tions and second-tier co-operatives, before one could expect their meaning-
ful presence in various segments of the economy. However, building on the
engagement of existing co-operatives in their communities offers promise
for such developments.

Co-operative financing
Financial institutions play a vital supportive role in the economy. They allow
households, enterprises, civil society organizations and public bodies to save
and invest money that is fuelling the economy. Different types of financial
institutions are needed to accommodate different financial needs and the
expectations of diverse economic players. In their chapter on banking co-
operatives, Ferri and Kalmi argue that co-operative banks in Western Europe
and North America are an important part of the financial sector. They exist
in almost all European countries and in the United States and Canada and are
particularly prominent in France, Italy, Austria, the Netherlands and Finland.
In Europe co-operative banks emerged from different traditions (Raiffeisen
and Schultze-Delitsch as the most important ones); they take different forms
but, according to Ferri and Kalmi, they share some common characteristics.
Usually, co-operative banks are organized in tightly integrated groups with
local banks served by their central organizations (sometimes with a regional
structure in between). Democratic decision making is organized at the local
level, the local banks assuming membership in a higher-level network.
Shares of co-operative banks are usually nominal, not (directly) tradable and
not evaluated. The banks are service oriented and attached to localities, a
feature especially important for local small- and medium-sized enterprises.
Long-term capital is built up by accumulation of indivisible reserves (see also
Ayadi et al. 2010). Co-operative banks proved to be especially resilient dur-
ing the recent financial crises, because they were not involved in high-risk
trading, and their transactions are predominantly with the real economy.
In their contribution Ferri and Kalmi take the edge off the arguments com-
monly expressed against co-operative banks arguments suggesting they are
inefficient, unsophisticated and an anachronism. In spite of the challenges
faced by co-operative and other banks alike which led some co-operative
banks to demutualize, merge with non co-operative banks, hybridize, set up
foreign non co-operative subsidies and strengthen the role of the centre the
authors urge co-operative banks not to lose their co-operative identity. They
also stress the importance of promotion of the co-operative model to policy
makers in order to avoid legislation that may hamper their development and
the development of their clients/members alike.
Battilani and Borzaga and Depedri highlight the importance of mutual
funds for the development of co-operatives in all economic sectors and in the
social economy in particular. These funds provide a professional backstop
280 Caroline Gijselinckx, Sonja Novkovic and Li Zhao

to, and finance the development of, new co-operatives as well as co-opera-
tives in financial distress. All Italian co-operatives are legally obliged to set
aside 3 per cent of their annual profits, thereby supporting the development
of the co-operative sector. Ferri and Kalmi also point to the importance
of building societies in Europe and savings and loans associations in the
United States. Some are self-terminating, others are permanent.
In China, mutual aid financial co-operatives are being established in order
to support rural development (Xu and Wu and He, in this volume), although
no co-operative financial instruments are offered in the housing sector. New
co-operative financial institutions have the potential to play an important
role in providing financial services to localities, replacing the rural credit
co-operatives which have been collectivized, then commercialized, thereby
losing their co-operative character. The new co-operative financial institu-
tions are closer to farm households and micro enterprises and are supported
by central and lower-level government policy measures as instruments of
poverty alleviation and viability of the rural economy. According to He, as a
product of spontaneous innovation by rural economic actors, these institu-
tions come in informal, semi-formal and formal variants, the latter being
established according to the rules of the Banking Regulatory Commission
and registered at the Department for Industry and Commerce. Although a
legal framework has recently been put in place, governments seem to treat
mutual aid financial co-operatives as a second-best option, looking at com-
mercial development banks as a preferred option. Based on the analysis of
Ferri and Kalmi and He it appears that in China as well as in Europe there
is a current tendency among governments to favour large (multinational)
banks, innovative and efficient in terms of return on assets or equity. In
China, the government is deemed to be more supportive of the industrial
economy, not taking into account the potential that co-operative banks
could have for the economy as a whole (He, in this volume). In Europe, large
commercial banks are deemed important for the economy but need to be
regulated in order to avoid the excesses that have led to the financial crises
of recent years (Ferri and Kalmi, in this volume), insufficiently taking into
account the different objectives and characteristics of co-operative banks
that tend to stabilize local economies. In her chapter on the efforts to estab-
lish co-operative or mutual real-estate development groups in China, Wang
ascribes the limited success of these efforts to unfavourable land-leasing and
auction rules and limited financial resources and institutions. Next to fair
trade (Zachernuc and Liu), housing could in fact be a real niche market for
co-operatives in China, as are water, energy and other utilities.

In conclusion

Co-operatives in the East and in the West are at a crossroads. On the one
hand, opportunities are ripe for co-operative development. The legacy of
Conclusion 281

the 2012 and the ensuing Blueprint for the Co-operative Decade are uniting
the global co-operative movement unlike any other effort since the end of
the Cold War. Developing states with strong government leadership, China
included, see co-operatives as a real opportunity to develop a people-cen-
tred economic model to address local needs, in particular to provide food
security and the reduction of poverty. Neo-liberal governments and eco-
nomic actors value the co-operative model as a mechanism that fills the gap
left by the failing government services or lack of lucre for private business
ventures. But to develop co-operatives, to understand their potential and
their long-term effectiveness in addressing particular problems, or simply
their longevity and its effects, the co-operative movement will need to fill
some gaps and bridge a few divides. Among those, most notably, are voids
or lapses in education and awareness, in democratic governance and in co-
operative business and capitalization strategies.
The Blueprint is only the beginning. A concerted effort will have to fol-
low to understand nuances in the co-operative model across cultures and
environments, such as Chinas, yet also to recognize self-destructive inno-
vations that may resolve some short-term issues, yet not help the long-term
development of co-operative economies and society, in the West and the
East. Policy makers on both ends of the earth will be pressed to understand
the enormous potential of the co-operative model for their economies and
their people. But for this potential to be realized, besides supportive policies,
co-operatives as the heart of a movement need to strengthen their demo-
cratic delivery of member control and access to the co-operative brand of
capital that serves as a means to a different end, rather than as a vehicle for
opportunism. This is a challenge. Co-operatives will need to find a way to
use the co-operative identity to create opportunities fit for co-operatives
and to think of themselves collectively as the ninth largest economic power
in the world. Surely, co-operation among co-operatives in China and the
West would bring this vision closer to reality.

Notes
1. The principles are: voluntary and open membership; democratic member con-
trol; member economic participation; autonomy and independence; education,
training and information; co-operation among co-operatives; and concern for
community.
2. This was the title of the song elected by the International Co-operative Movement
for the celebration of the UN International Year of Co-operatives.

References
Ayadi, R., Llewellyn, D.T., Schmidt, R.H., Arbak, E. and De Groen, W.P. and (2010)
Investigating Diversity in the Banking Sector in Europe: Key Developments, Performance
and Role of the Cooperative Banks. Brussels: Centre for European Policy Studies.
282 Caroline Gijselinckx, Sonja Novkovic and Li Zhao

Bijman, J. et al. (2012) Support for Farmers Co-operatives. Final report . Wageningen:
Wageningen UR.
Borzaga, C. and Spear, R. (2004) Introduction, in: C. Borzaga and R. Spear (eds) Trends
and Challenges for Co-operatives and Social Enterprises in Developed and Transition
Countries. Trento: Edizioni 31, pp. 314.
Cook, M.L. and Burress, M.J. (2009) A Cooperative Life Cycle Framework. University
of Missouri-Colombia, Working Paper.
Fleetwood, S. (2004) An Ontology for Organisation and Management Studies, in:
S. Fleetwood and S. Ackroyd (eds) Critical Realist Applications in Organisation and
Management Studies. London: Routledge, pp. 2550.
Galera, J. (2004) The Evolution of the Co-operative Form: An International
Perspective, in: C. Borzaga and R. Spear (eds) Trends and Challenges for Co-operatives
and Social Enterprises in Developed and Transition Countries. Trento: Edizioni 31,
pp. 1739.
Gijselinckx, C. (2012) Cooperative Answers to Societal Challenges: 9 Insights from 2
x 9 Cases in: M.-J. Brassard and E. Molina (eds) The Amazing Power of Cooperatives.
Texts Selected from the International Call for Paper Proposals. Qubec: International
Summit of Co-operatives, pp. 403418
Gijselinckx, C., Coates, A. and Deneffe, P. (2011) Co-operative Answers to Societal
Challenges. Synthesis. Leuven: HIVAKU, Leuven, VIONA-Study Report.
Gijselinckx, C. and Develtere, P. (2008) The Co-operative Trilemma. Co-operatives
between Market, State and Civil Society. Working papers on Social and Co-operative
Entrepreneurship, WP-SCE 08.01, p. 25.
Iliopoulos, C. and Hendrikse, G. (2009) Influence Costs in Agribusiness Cooperatives:
Evidence from Case Studies, International Studies of Management and Organization,
39(4): 6080.
Melnyk, G. (1985) The Search for Community: From Utopia to a Co-operative Society.
Montral: Black Rose Press.
Mnkner, H. (2004) Multi-stakeholder Co-operatives and their Legal Frameworks,
in: C. Borzaga and R. Spear (eds) Trends and Challenges for Co-operatives as Social
Enterprises in Developed and Transition Countries. Trento: Edizioni 31, pp. 4982.
Nilsson, J. (1999) Co-operative Organisational Models as Reflections of the Business
Environments, The Finnish Journal of Business Economics, (4): 449470.
Simmons, R. and Birchall, J. (2005) A Joined-up Approach to User Participation
in Public Services: Strengthening the Participation Chain, Social Policy and
Administration, 39(3): 260283.
Spear, R. (2004) From Co-operative to Social Enterprise: Trends in European
Experience in: C. Borzaga and R. Spear (eds) Trends and Challenges for Co-operatives
as Social Enterprises in Developed and Transition Countries. Trento: Edizioni 31,
pp. 99116.
Thomas, A. (2004) The Rise of Social Cooperatives in Italy, Voluntas: International
Journal of Voluntary and Nonprofit Organizations, 15(3): 243263.
Zhao, L. (2013) Conceptualizing the Social Economy in China, Modern Asian Studies,
47(3): 10831123.
Zhao, L. and P. Develtere (2010) New Co-operatives in China: Why They Break Away
from Orthodox Co-operatives?, Social Enterprise Journal, 6,1: 3548.
Zhao, L. and Yuan, P. (2013) Rural Co-operatives in China: Diversity and Dynamics,
The Chinese Economy, special edition, forthcoming.
Index

adverse selection, 121 in China, 184, 23347


agency costs, 86 criticism of, 114, 11820
Agricultural Bank of China (ABC), 235 development of, 11418
agricultural co-operatives, 3, 21, 39, during financial crisis, 12122
478, 52 future of European, 12224
see also farmer co-operatives, governance, 11920
Chinese inefficiency of, 118
about, 102 profit maximization and, 1201
boards of directors, 1067, 10811, tenets of, 1134
273 Banking Regulatory Commission,
capitalization of, 8195, 198214 2412
Chinese, 16378, 198214 bargaining co-operatives, 102, 104
decline of, in U.S., 102 Bayantuohai Specialized Co-operative,
governance of, 98111 187
innovations in, 27277 Belgium, 12, 13, 21, 141n8, 246n6,
mission of, 512 277
ownership structures, 812 Berners-Lee, Tim, 150
stakeholder participation in, 5, Bingham Act, 99
8195, 98110, 198214 Blanc, Louis, 15
taxonomy of, 1045 Blueprint for the Co-operative Decade,
traditional, 824, 87 1, 281
in U.S., 98111 boards of directors, in agricultural
agro-food business, 478, 845, 164 co-operatives, 1067, 109110,
Agropur, 54 273
Alabama model, 99 brand names, 32
amalgamation, 13, 18, 1921 building societies, 115
Apache, 154 business dealers, 221, 222, 22324,
Apache License, 147 225
apex organizations, 180 business unit, 30
Arla Foods, 1920, 37
Asian Development Bank, 4 Caisse Populaire, 54
Asian financial crisis, 236 California model, 99
Austria, 22, 25n1, 116 Canada, 2, 18, 20, 47, 54, 64, 113
Austrian Empire, 13 see also Quebec
authority, 51, 60n6, 107, 157, 195 capital
autonomy, 33, 34, 42, 48, 50, 53, 59, access to, 34, 38, 57, 138
67, 132, 135, 173, 235, 266, 269, accumulation, 17
274, 276 debt, 84
mobility, 32
banking co-operatives, 6, 11325, raising, 1189
27980 resources, 29

283
284 Index

capitalization, 5, 48, 27980 poverty alleviation and, 163, 170,


challenges for agricultural 174, 179197
co-operatives, 847 promotion of, 185
of Chinese agricultural representational impact of, 189
co-operatives, 198214 resource management and, 18990
factors influencing patterns of, 2039 rural mutual fund associations,
innovations in, 812 23845
models for, 8794 social co-operatives, 278
recent developments in, 8494 stakeholder participation in,
stakeholder participation in, 8195, 198214, 21532
198214 variety of, 1989, 275
traditional, 824 Christianity, 21
Capper-Volstead Act, 100, 102 Chunhui Corporation, 1856
Catholicism, 21 cloud computing, 154
Central Europe, 16 collective capital model, 8891
centralization, 33, 43 collective entrepreneurship, 747
China collective goods, 31
democracy and, 195 command economies, 16
economic reforms in, 1, 2345 commodity prices, 81
fair trade in, 1889 common-property problem, 85
housing policy, 2489 commons
modernization and, 195, 234-5 efficiency of the, 1534
poverty alleviation in, 163, 1813, FLOSS as code commons, 14953
2445 knowledge, 1523
urban land reform, 256 ownership of, 1512
China Banking Regulatory tragedy of the, 143, 151
Commission (CBRC), 170, 184, common stock, 83
233, 23740 community, 220, 2245, 226
Chinese co-operatives, 14 community orientation, 36
agricultural, 34, 198214 comparative advantages, 2930, 37
banking, 184, 23347 competition, self-regulation of, 36
capitalization of, 198214 competitive advantage, 29, 32, 34, 37,
challenges for, 2678 43, 53
compared with Western, 4 competitive yardstick school, 1034
development of rural, 16378 complex networks, 48, 49, 578
experience of, 1837, 1916 concept-dependency, 2656
future development of, 1745 conflicts of interest, 2278, 229
governance of, 21532 congruence, 39, 412
government and, 1956 Conseil de la cooperation du Qubec,
grassroots co-operative housing, 56
24863 Conserve Italia, 19
innovations in, 2747 consortia, 34, 5354, 57, 60n5
institutional contexts, 26872 consorzi, 43
legal framework, 1835, 187, 2001, consumer co-operatives, 22, 39, 52,
21518 272
models of, 1857, 190 consumers, 224, 225
networks, 274 contracts, 51, 274
policy support for, 188, 2001, control problem, 86
2712 control rights, 2178
Index 285

Coop Consumatori, 19 functional classification of, 1023


co-op development networks, 567 governance, 356, 37, 94, 98111,
CooperationWorks!, 57 11920, 21532, 273
Co-operative Bank, 42 as hybrids, 4950
co-operative banks, see banking innovations in, 2, 4, 18, 268,
co-operatives 27280
co-operative development institutional contexts for, 26872
determinants of, 1525 introduction to, 16
networking and, 1821 investor-share, 83, 88, 92
social and political movements and, local, 104
215 marketing, 102, 104
state intervention and, 1518 member-investor, 87
Cooperative Development Centres, 57 modern, 1679, 275
co-operative identity, 3, 5, 24, 47, 48, multistakeholder, 25, 42, 6477,
5154, 59, 60, 265, 274 272, 278
co-operative leagues, 568 new-generation, 18, 39, 48, 878,
co-operative models, 2, 11, 185190 105, 165
co-operative networks, 5, 1821, non-stock, 99
4761, 274, 2789 overcoming limitations of, 3840
complex networks, 578 poverty alleviation and, 163, 170,
co-op development networks, 567 174, 179197
as hybrids,4950 principles of, 1834
of independent producers or producer, 180
patrons, 512 regional, 105
inter-organizational networks, 49, role of, 1
50, 534 schools of thought on, 1034
introduction to, 479 shareholding, 166, 167, 198, 276
organizational forms of, 49 social, 656, 702, 75, 12642,
social dimension of, 5158 2778
supply-chain networks, 556 solidarity, 679, 7173, 75, 1267,
typology of, 49 277
co-operatives stock, 99
see also agricultural co-operatives; structure of, 102
Chinese co-operatives; Western trends for, 264
co-operatives undercapitalization of, 16, 47
advantages of, 3942, 170 worker, 489, 52
bank, 5, 11325 co-operative strategies
bargaining, 102, 104 exploiting advantages, 3942
challenges for, 2678 globalization and, 2944
consumer, 22, 39, 52, 272 limitations on, 346
defined, 51 srategic options, 367
differences between conventional systemic options, 424
firms and, 234 copyleft, 147
as dynamic constructs, 2647 copyright, 147, 152
fair-trade, 42, 49, 55-6, 59, 61n14, corporations, 101
181, 1889 corporation spirit, 12
features of, 102 cross-border activities, 19
financing of, 27980. see also CTA, 224
capitalization culture, 30
286 Index

dairy co-operatives, 20 farmer co-operatives, Chinese, 36,


dairy sector, 13 16378, 276
Danish pork industry, 53 1 + N model, 1756
debt capital, 82 classification of specialized, 1645
decentralization, 33, 58, 60n10 classification of stakeholders,
definitive stakeholders, 218, 221, 22 21825
de-linked capital model, 89, 901 control rights, 217
democracy, 195 federations, 168
democratic governance, 5, 35, 266 future development of, 1745
demutualization, 2, 18, 35, 47, 82, 92, income rights, 218
93, 116, 133, 273, 274, 277 legal framework, 215, 2178
Denmark, 14, 13, 1920, 21, 64 modern, 1678
deprivation, 228 mutual-aid financial organizations,
deregulation, 29, 30, 116, 120 1701
Desjardins movement, 54, 60n11 ownership rights, 2178
direct investment, 823 pastoral co-operatives, 173
dividend-bearing common stock, 83 pro-poor, 16970
dual share structure, 38 shareholding, 1656
Dutch Rabobank, 117 stakeholder participation in, 21532