Why Cooperatives: The New Zealand Context

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

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

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

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

New Zealand today

New Zealand’s ideological climate is largely unsupportive of cooperative development, in spite of the fact that high unemployment conditions are generally regarded as being conducive to the establishment of worker-owned cooperatives.

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

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

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

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

Why cooperatives?

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

Traditionally, cooperatives have been born out of oppressive economic conditions. Currently our economy has both positive and negative features.

Positive features include:

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

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

The Prout model proposes that rather than allowing economic control to be progressively centralised with wealth concentrated in fewer and fewer hands, the economy needs decentralising. It suggests that decentralisation be introduced by a system of economic democracy. Thus one of Prout’s basic principles is that society needs to set limits on the extent to which individuals can accumulate physical wealth.

Cooperatives or democratic firms offer a means of establishing such a system at the microeconomic level. Rather than perpetuating a situation where, according to Semler, “even in the largest companies, it’s rare for more that half a dozen people to decide corporate strategy and determine the destinies of workers”, in democratic firms, labour hires capital rather than vice versa.

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

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

Profit = income – labour and other expenses

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

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

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

Capitalism compared to worker cooperatives

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

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

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

How can cooperatives be financed?

Perkins of Cornell University suggests that cooperatives be financed by one of three methods:

  • self-financing
  • lease from the State or private holding company, or
  • financing by outside investors.

Self-financing

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

However, as shown by the collapse of the Weddell meat works, where workers lost their savings, wages and jobs, there can be problems. Some of the issues that self-financing raises are

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

– substantial buffer reserves which come from members being required to compulsorily save a minimum of 40 percent of profits

– organising participating firms into sector groupings that choose to pool their profits before distributing them to workers. In any given year, if one of the firms in the group made a loss and the others a profit, the loss-making firm would still get some of the net pool profit

– operating their own social security system

– retraining programmes

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

b) Under-investment. Equity in the self-financing model can be individual or communal. That coming from individual members needs to remain in their hands for them to be capable of autonomous decisions. It implies high individual equity levels, and raises the question of how to maintain those levels high enough to facilitate technical change and to sustain growth.

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

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

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

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

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

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

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

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

Non-voting share issues

In this model, outside investors buy equity shares and take a proportion of the profits. In contrast to share capitalism however, while being able to offer advice, outside investors cannot vote on policy issues. A variable debenture system could operate to diversify investment risk whereby shares yield two distinct returns, one fixed and the other linked to the profits or losses of the firm.

Obvious problems are that as an investment option, it is less attractive, at least to the unethical investor, when compared with the dominant current model in which workers are unentitled to significant if any profit or control. Also, profit drain to outside investors may lead to dilution of incentives.

Education

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

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

Local support

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

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

For the Mondragon group of cooperatives such a supportive function is provided by their banking institution – the Caja Laboral. Its effectiveness can be seen from it being ranked among the one hundred most efficient financial institutions in the world in terms of its profit over total assets ratio.

P.R.Sarkar suggests three basic factors in establishing successful community co-ops: 1) an integrated economic environment, 2) common economic needs, and 3) a ready market for the produced goods. He states that “for their success, cooperative enterprises depend on morality, strong administration and wholehearted acceptance of the cooperative system by the people. To encourage people to form cooperatives, successful cooperative models should be established and people educated about the benefit of the cooperative system.” Ethical issues arise when choosing between support for a system that divides or one that unites.

To conclude

Some of the benefits of workers organising on a cooperative basis include job security, productivity gains being passed on to workers and the strengthening of communities in the face of economic globalisation.

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

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

For further information

Proutist Universal, P. O. Box 984, Nelson, New Zealand
General Manager, Community Employment Group, P. O. Box 10671, Wellington, New Zealand International Cooperative Alliance, 15, route des Morillons, 1218 Grand-Saconnex, Geneva, Switzerland Commact (Commonwealth Association for Local Action and Economic Development), Commact House, KSD-21 Jalan Malawali, Taman Setapak, 53000 Kuala Lumpur, Malaysia (E-mail: baginda@pop.jaring.my )

Bibliography

Cameron B.K. and Giles P.J., “Public Policy and Cooperatives in New Zealand”, in 1992 Yearbook of Cooperative Enterprise, Plunkett Foundation, U.K.

Perkins, A., “On the transition from state planning to a cooperative system of production in the former Soviet Union”. Unpublished paper.

Sarkar, P.R., Proutist Economics – Discourses on Economic Liberation, Ananda Marga Publications, Singapore, 1992

Semler, Ricardo, Maverick, Century, 1993

Ac. Tadbhavananda Avt., A look at Decentralised Economy and the Cooperative System, Prout Research Institute, Copenhagen, 1993

“Cooperative Economics: An Interview With Jaroslav Vanek”, by Albert Perkins, New Renaissance, London, Vol 5 No 1

Vanek, Jaroslav, “Towards a Strategy of Democracy, Political and Economic in Russia”, a study presented to the March ‘93 Annual Congress of the Society for the Advancement of Socio-Economics

Mondragon Cooperative Corporation’s corporate profile and the Caja Laboral’s 1995 Annual Report

2 thoughts on “Why Cooperatives: The New Zealand Context”

  1. Hi Bruce

    Is there a Prout based political party in NZ standing in the upcoming election?

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