Rural Development No. 16 - Special on Co-ops

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    This information is being provided in electronic format
      by the International Co-operative Alliance (ICA)
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                *******************************
                      RURAL DEVELOPMENT RD 
                      No. 16, January 1995
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          Produced by FAO for the United Nations ACC 
               Sub-Committee on Rural Development


                  SPECIAL SECTION: COOPERATIVES

Contents:

1.   INTRODUCTION  Cooperatives Face the Future 
2.   BACKGROUND    Monopolies without power
3.   Strength in numbers
4.   Why East African farmers lost interest...
5.   WORLD BANK    "Co-ops are a private enterprise"
6.   Crash course in survival
7.   FAO/ILO       Restoring confidence in cooperativism
8.   External aid: handle with care
9.   EASTERN/CENTRAL EUROPE  Reform process "long, difficult"
10.  SOUTHEAST ASIA  Economically marginal "but getting strong"
11.  LATIN AMERICA Agents for local development
12.  CHINA         Private co-ops are blooming
13.  International Day of Cooperatives, 1995


----------------------------
INTRODUCTION
Cooperatives Face the Future 
----------------------------

   For agricultural cooperatives in Eastern Europe and
throughout the developing world, the 1990s could be a decade
of opportunity. The end of one-party political systems has
finally got government "off the backs" of millions of
small-scale producers and their organizations. The
liberalization of international trade could expand markets for
cooperatives' produce.   

   During the often difficult transition to a market economy,
cooperatives offer rural people an organizational means to
help solve their problems and advance their interests.
Cooperative enterprises have the potential to generate jobs,
secure access to goods and services at fair prices, and allow
members to enjoy the fruits of their labour. In the process,
cooperatives could also make a major contribution to
democratization and national economic development. 

   But for many agricultural cooperatives, the decade of
opportunity is also one of unprecedented risks. With the end
of state controls has come the abolition of subsidies;
structural adjustment has meant fewer resources for rural
areas; and the free market has brought with it tougher
competition, higher capital costs and reduced access to credit
- constraints that strike at the very basis of the
cooperatives, their business activities...

          Sources: This special section is based on 
          documentation provided by FAO, ILO, the World Bank, 
          COPAC and the International Cooperative Alliance 
          (ICA)

------------------------
BACKGROUND 
Monopolies without power
------------------------

On paper, cooperatives in the developing world and Eastern
Europe appear to be a potent social and economic force.
According to a recent United Nations report, at least 460
million people in the Third World were members of a
cooperative in 1994; using COPAC estimates for the late 1980s,
more than half of these members would be engaged in
agriculture or fisheries. In Eastern and Central Europe, at
least 90 million people are members of cooperatives, most of
them agricultural, while cooperative membership in China is
put at more than 160 million.

   But how many of the cooperatives are genuinely voluntary
associations of producers, and how many of them are
economically viable - or even functioning?

   A 1994 ICA review of cooperation asserts: "If we apply the
accepted definitions of a genuine cooperative, many - and
perhaps most - cooperatives in the Third World would find it
difficult to qualify. Many were formed on the initiative of
government, instead of being formed voluntarily."

  As for economic viability, the review found cooperatives
ill-prepared to meet challenges arising from rapidly changing
political and economic conditions: "As administrative pricing
systems are abolished, market forces will determine prices.
Cooperatives that enjoyed preferential treatment now have to
do without. Hobbled by a weak capital base, heavy debt and
limited credit-worthiness, many are unable to compete with
private traders. If the they fail as business enterprises,
they will simply disappear."
 
Troubled history

   The structural problems facing agricultural cooperatives
today have their roots in the troubled recent history of
Eastern Europe and many developing countries. 

   In Asia and Africa, colonial administrators saw
cooperatives as a way of bringing farmers into the cash
economy and encouraging cultivation of export commodities. But
whereas cooperatives in Europe began as autonomous self-help
organizations, cooperative development in its colonies was
systemically "top-down", with the final export entrusted not
to cooperative members, but to a state organization. 

   After independence, national governments continued to
support cooperativism, seeing it as a means of assisting - and
in some cases controlling - the rural population. 

   In much of Africa, cooperative membership was a
pre-condition for growing certain crops for the market.
Governments mandated cooperatives to implement their policies
and programmes, and appointed co-op managers. 

   Says the World Bank: "Instead of becoming member-led,
self-administered, collective business organizations, rural
cooperatives became government-funded, semi-public
institutions. Most co-ops ended up as mere collecting agents
of agricultural produce for public marketing boards, as
distribution channels for agricultural inputs, or as lending
agencies for government- or donor-provided resources."

   "The rural population came to consider cooperatives as a
government instrument of exploitation or, conversely, as an
easy way to get government benefits."

   In Asia, too, newly independent states saw cooperatives
primarily as tools for rural development. Producers joined
co-ops to obtain credit or other services, and had little real
appreciation of cooperative principles, or their own rights
and responsibilities in managing the affairs of their
organization. 

   While most cooperatives in Latin America maintained their
independence, many small farmer cooperatives created as part
of land reform programmes during the 1960s and '70s were often
dominated by government officials.

Cold War legacy

In Eastern and Central Europe, farmers were forced to join
large agricultural production cooperatives. While the aim was
to create efficient production units and provide social
services to farmers, the element of coercion created social
tensions among rural people.

   In some cases, the push for larger farm units was actually
counter-productive - holdings became too large to be well
managed and many operated at a loss. Contrary to the principle
of self-administration, co-ops were expected to coordinate
their activities with national economic plans. Eventually,
Eastern Europe's disempowered farmers made such inefficient
use of production factors that most cooperatives had to be
heavily subsidized by the state.

   "Excessive political control is the principal reason why so
many cooperatives were unable to develop as genuine
cooperatives," ICA concludes. "In the marketing sector,
governments also exercised complete economic control -
cooperatives were given a monopoly in which they exercised
very little power over prices, margins or returns to their
members."

Fierce competition

   The end of East-West rivalry early has led to deep
political, social and economic changes in former socialist
countries of Europe and in many developing countries. Thanks
to these changes - and structural adjustment programmes - the
state-controlled cooperative sector is being abolished
worldwide. 

   Many governments have enacted laws that recognizes the
autonomy of cooperatives. Progress has been made in
dismantling cooperative ministries and parastatal agencies,
and in reducing government control of marketing.

   But the disengagement of cooperatives from the state is a
two-edged sword: after operating unchallenged for decades,
many cooperatives must now deal with fierce business
competition for the first time. In Africa, some 30 countries
are implementing reforms that aim at creating free market
economies. Says an ICA study: 

   "As better services are offered by private operators,
farmers may easily turn their backs on cooperatives.
Disillusioned and uncommitted members are more likely to
abandon their co-ops than to struggle for change. Cooperatives
that have been most heavily controlled by government will have
the greatest difficulty in adjusting to new economic
realities."

   But increasing political and economic freedom will also
give many cooperatives the opportunity to exploit their
competitive advantages, such as experience and physical
infrastructure, for the benefit of members.

-------------------
Strength in numbers
-------------------

   Agricultural cooperatives are a pillar of developed market
economies. In the USA, agricultural supply and marketing
generated gross business volume in 1992 of $93 000 million.
The marketing shares of the co-ops was to 80% for milk
production, 38% for cotton and cotton seed and 18% for fruits
and vegetables. 

   In Canada, eight of the top 10 agricultural firms are
cooperative enterprises.  In Germany, farmers make more than
half of their input purchases and output sales through the
cooperative movement. In Japan, nearly every farm enterprise
is a member of a supply and marketing cooperative. In 1993,
they accounted for 95% of rice production.

   In some developing countries, too, cooperatives play a key
role - they produce or market 60% of Bolivia's chickens and
nearly 30% of its eggs, 60% of milk in Tunisia, 45% of cocoa
in Cote d'Ivoire, 90% of fresh horticultural products in
Panama and 50% of wheat in Brazil.


-----------------------------------------
Why East African farmers lost interest...
-----------------------------------------

   Upon independence, Kenya, Tanzania and Zimbabwe all took an
ideological approach to cooperatives, viewing them more as
instruments of social change than as farmer-controlled
business associations.

  This "visionary approach", FAO says, gradually gave way to a
rigid, centrally controlled system in which co-ops became
simply a link in state-run agricultural production and
marketing chains. In Tanzania, the existing cooperative
movement was dismantled, its apex organization becoming an
affiliate of the ruling party. Under the cooperative law of
1982, most cash crops were considered to be owned by the
Tanzanian government.

   "These changes led to sharp declines in the production of
most commercial crops," FAO says. "As governments burdened
cooperatives with greater social responsibilities - such as
road-building, public education and delivery of other
government services - the cooperatives sank deeper into debt."

     "Cooperatives were highly regulated by law, yet performed
poorly in terms of efficient service to member farmers.
Payments for produce were delayed, there were involuntary
deductions, and the governments skimmed off profits which
rightly belonged to the farmers."

   Not surprisingly, farmers came to view cooperatives as
government entities rather than as their own organizations.
Cooperatives had ceased to be economic organizations and had
become political bodies. Says FAO: "Farmers" interest - and
investment - in their cooperatives simply evaporated".

---------------------------------
WORLD BANK
"Co-ops are a private enterprise"
---------------------------------

   The World Bank says cooperatives should be seen as private
sector enterprises that develop new products and markets,
stimulate investment and guide and strengthen agricultural
development. A recent Bank study proposed key components of a
strategy to create a favourable business environment for
cooperatives and to provide incentives for them to become
"competitive, efficient and commercially viable".

*  First, cooperatives must be free to determine their own
lines of business without being directed by governments to
involve themselves in non-viable activities.

*  Second, the trading conditions under which they operate
should be such that efficiently-operating societies are able
to realize sufficient returns to cover their expenses and to
generate capital for the further development of their
business. 

*  Third, cooperatives should not be subject to
administratively-imposed price controls, but should be allowed
to determine their prices and margins in an open market. 

   "Co-ops can only become viable and independent if they
operate as business entities in pursuit of profitability," the
Bank says.

    "Their development and expansion should be determined by
member ability to manage, control, and, to a reasonable
degree, self-finance. 

   "Most resources for expansion should come from funds earned
through surpluses in trading operations. The decision to
expand should be made by members rather than governments or
donors pursuing their own objectives. Whether expansion should
focus on further economic services or on social services
should be up to cooperative management and members."

   The Bank says many governments and donors have considered
cooperatives "inherently appropriate" and have paid little
attention to their real economic potential. 

   "Practice has shown, however, that cooperatives can only
succeed where the economy is relatively monetized and where a
certain level of surplus is produced," the Bank says.
"Experience also suggests that service co-ops dealing with
export crops are more successful than those for subsistence
crops.

   "Among cooperatives organized to market and process cash
crops in sub-Saharan Africa, those that have fared best have
dealt with crops for which simple processing can provide
significant value added (e.g. coffee or milk). Cooperatives
dealing with high bulk and low value food crops have seldom
been economically viable."

   The Bank says that, as a lending institution, it is
well-placed to contribute to cooperatives development. Its
role includes:

*  helping governments identify legislative, policy and
institutional reforms;

*  working with donors and rural organizations on strategies
and programmes for cooperatives;

*  facilitating capacity-building through direct support to
institutions that assist cooperatives.

   "The primary role of government should be not to control or
regulate cooperatives' activities, but to provide a conducive
policy and business environment for their operations," the
World Bank says. "The legal framework governing cooperatives
should, if needed, be revised so as to reduce the role of
government agencies in control and supervision."

   Building cooperatives into multi-functional societies calls
for management systems that allow efficient internal control
and effective planning, execution and monitoring of business
activities, job-oriented staff training programmes, and
training of both management and the general membership.


------------------------
Crash course in survival
------------------------

   An ICA report advises Africa's threatened cooperatives to
focus immediately on improving business efficiency in order to
survive. 

   Managers without a business talent should be replaced and
new managers should be rewarded for performance. The
composition of cooperative boards should be changed to admit
people with proven business experience.

   "All co-ops will have to reduce their costs to meet
competition in a liberalized market", ICA says. "Weak
cooperative organizations with non-viable processing and
non-core activities should in many cases close them down.

   One of the most difficult tasks facing cooperatives is to
improve capital structure and access to credit: "A big
increase in member capital is unrealistic if a co-op cannot
provide a competitive service. Where they are indebted as a
result of government directives, they should press for debt
relief or cancellations."

   Primary cooperative societies should be relieved of any
obligation to trade with intermediary cooperative
organizations: "Intermediary organizations must prove
themselves in competition; if they cannot provide competitive
services, they have no right to the loyalty of the primaries".

   Finally, the ICA report says, cooperatives should consider
reducing the size of primary societies. This would favour
transparent management and the society would reflect more
closely "existing lines of social affiliation".

-------------------------------------
FAO/ILO
Restoring confidence in cooperativism
-------------------------------------

   In spite of difficulties and setbacks, genuine agricultural
cooperatives - i.e. co-ops controlled by their members -
remain the best option available to small and medium farmers
seeking to remain competitive. "There is no other globally
tested system on the horizon," FAO says. "Given that small
farmers usually produce staple crops, efficient agricultural
cooperatives may well prove to be one of the key factors for
guaranteeing medium- and long-term food security in many
developing countries."

   A major task, therefore, is to help restore rural peoples'
confidence in cooperativism: "As government withdraws from
cooperatives," FAO says, "strategies will be needed to enhance
their viability."

   FAO assistance to this process is provided through its
AMSAC programme (for Appropriate Management Systems for
Agricultural Cooperatives). Prepared by FAO in collaboration
with the German Foundation for Development, AMSAC has five
components: 

*  Participation

Primary cooperatives should be voluntarily formed, financed,
managed and controlled by farmers themselves. In some cases,
the challenge is to transform existing institutions; in
others, new cooperatives should be created.

*  Integration  

Local co-ops can increase their bargaining power and benefit
from economies of scale by joining together. They may
affiliate with cooperative unions and federations, thus
becoming part of a potentially powerful network.

*  Diversification  

Economic viability can be enhanced through diversification -
broadening of the cooperative's objectives, introduction of
new services for members, and the search for new markets for
produce.

*  Management  

Skilled professional management is crucial. Acting for the
cooperatives who employ him, the manager's permanent task is
to seek new ways to enhance the incomes and level of services
to members.

*  Training  

The transition from state-controlled cooperatives to a network
of member-oriented self-help organizations requires
re-education and training for government officials involved in
cooperative promotion, for cooperative leaders, managers and
members.

   FAO support to cooperatives focuses on helping countries
"in transition" to reorient cooperative structures so that
they operate more effectively in an open market. It is
promoting women's participation in cooperatives and conducting
global research to identify successful strategies of capital
formation in agricultural co-ops.

A new approach

   Meanwhile, ILO and DANIDA have launched "a new approach to
cooperative development in rural areas". The programme's three
components offer information, advice and consultancy services:


*  COOPREFORM helps frame strategies for the transfer of
responsibilities from governments to cooperative movements and
laws to ensure cooperatives' autonomy. 

   ILO has helped draft a new cooperative policy in Malawi,
review cooperative legislation in Thailand, organize national
workshops on cooperatives and structural adjustment in
Zimbabwe and Zambia, and prepare campaigns to promote new
cooperative laws in Namibia, Swaziland and Fiji. 

*  COOPNET promotes networking among cooperative human
resources development institutions in Africa, Asia and Latin
America. Most activities - e.g. workshops, studies and
advisory services - are related to gender issues in
cooperative human resources development, cooperative
entrepreneurship, and training methods and materials.

*  INDISCO is an inter-regional programme to support the
self-reliance of indigenous and tribal communities through
cooperatives and other self-help organizations. 

   It is implementing four pilot projects to assist 10 000
tribal people in four states of India. Other projects to
assist tribal peoples are under way or planned in the
Philippines, Sri Lanka, in West Africa and Central America.

ACOPAM in action

  Through it programme Organizational and Cooperative Support
to Grass-roots Initiatives (ACOPAM), under way in Sahelian
countries, ILO has developed organizational strategies for
strengthening rural people's capacity to initiate or
consolidate equitable and sustainable development processes. 

  "ACOPAM sees organization as an evolutionary and
participatory process," ILO says. "It does not propose models
but rather assists producers in adapting their form of
organization to the needs, experience and capacities of
members."

------------------------------
External aid: handle with care
------------------------------

   The UN reports that international programmes to promote
cooperative enterprises "have accepted, as a guiding
principle, full respect for their autonomy". It was about time
- an ICA study laments that external aid channelled through
governments perpetuated the top-down development of
cooperatives.

   In its proposed strategy for assistance to co-ops, the
study recommends, as a basic principle, that "funds should not
be channelled through government accounts". The World Bank
seems to agree: "Past efforts to promote rural organizations
through government departments have often been ineffective and
contradict the objective of developing member-controlled
organizations."

   The Bank suggests "assistance to the cooperative movement
go directly to cooperatives themselves." It urges donors to
coordinate their funding strategies - one donor's decision to
make assistance contingent on changes in government policy
remains insignificant if another provides assistance without
conditions.

   The Bank proposes greater use of "movement-to-movement"
assistance - i.e., between a cooperative organization in an
industrial country and one in a developing country. 

   The ICA report recommends donor support focus on
development of primary cooperative societies with economic
potential and avoid maintaining non-viable cooperatives. 

  Grants should not go to activities that have a direct impact
on a co-op's profit and loss. However, where cooperatives
suffer from a shortage of working capital, a donor may
consider opening a credit guarantee fund with a financial
institution.

--------------------------------
EASTERN/CENTRAL EUROPE
Reform process "long, difficult"
--------------------------------

   Following the collapse of socialism in Eastern and Central
Europe, most governments have recognized the shortcomings of
their cooperative structures. But reforming them, or replacing
them with new forms of enterprise, is proving a long,
difficult process.

   While several countries have enacted or are drafting laws
promoting voluntary, self-reliant cooperative societies,
others have had to re-think their strategies. 

   Poland and Hungary enacted cooperative reforms in the early
days of transition but have recently revised them, partly
because they were unsuited to local conditions. The sudden
withdrawal of subsidies created dramatic problems for farm
families who, until recently, depended on cooperatives for
everything from farm inputs to pensions.

   Cooperative restructuring is also complicated by a number
of other issues. Among them: whether cooperatives' land should
revert to dispossessed owners, and how to share out  buildings
and equipment among former co-op members.

   FAO says legislation in some countries encourages private
family farms. But the average size of such farms will usually
not exceed two hectares. "The new class of small-scale farmers
will face harsh market conditions and will have difficulty
buying seeds and fertilizer, gaining access to farm machinery,
and processing and finding markets for their products," FAO
says. "All of these functions were, until recently, the
responsibility of government institutions now in varying
states of dissolution. 

   "In order to become competitive under market conditions,
farmers will have to work together, through service
cooperatives or some other form of cooperation," FAO says.
"Otherwise they will not survive economically."

   In fact, FAO sees the difficult transition years as an
opportunity for farmers to build true cooperative networks.

--------------------------------------------
SOUTHEAST ASIA
Economically marginal "but getting strong"
--------------------------------------------

   FAO says Indonesia, Thailand and the Philippines are at
different stages in a process of freeing agricultural
cooperatives from tight state control, reducing or eliminating
state subsidies and encouraging their self-sufficiency as
economic enterprises.  

   "Cooperative movements in all three countries still lack
unity and integration," a recent study found. "This prevents
the cooperatives from realizing their full potential for
economies of scale, efficient processing systems, and greater
competitiveness and leverage in marketing members' produce."

   The study cited the marginal economic role of the
Philippines' 8 500 primary cooperatives. Local commodity
markets are dominated by big traders and middlemen, the flow
of credit to the countryside is declining, and the cooperative
movement is plagued by mismanagement.

   But the study also found a number of positive trends.
First, new legislation on cooperatives emphasizes the
principle of "subsidiarity" - that cooperatives must organize,
regulate and help themselves. 

   This, FAO says, is a healthy development for Philippines
cooperatives which, until recently, were heavily dependent on
government assistance.

   Meanwhile, the country's three largest cooperative
federations have launched a "market grid" project aimed at
creating an alternative marketing system to link producer and
consumer cooperatives.  The system would provide farm inputs
at low prices and give producers competitive prices for their
produce. 

   Innovative schemes to finance the activities of
cooperatives have yielded some good results. Bangladesh's
Grameen Bank model is being replicated in several provinces,
with cooperatives serving as the implementing institutions.
These programmes target rural poor not reached by existing
banks.

   Other welcome trends include greater vertical and
horizontal linkage among co-ops, several innovative programmes
for education, training, finance and women's participation,
and growing involvement of cooperatives in environmental
protection and sustainable development.

----------------------------
LATIN AMERICA
Agents for local development
----------------------------

  Autonomous small farmer cooperatives in Latin America might
play a lead role in efforts to improve food security, generate
employment and protect the environment.

   A recent FAO reports suggests: "Cooperatives could be the
basis for national and regional people-sustained rural
development strategies. There is insufficient awareness of
their potential within the international community."

   FAO drew its conclusions from case studies of small farmer
co-ops in Argentina, Brazil, Colombia, Costa Rica, Guatemala,
Panama, Peru and El Salvador. "Most were agriculture service
cooperatives catering to members who produce one or a few sets
of products, such as vegetables," the report says. "They
provide members with input supplies, production credit,
technical assistance, marketing and, in some cases, consumer
goods."

   While the consolidation of these cooperatives had been a
slow process - requiring an average of 15 years - once
established they were able to "function and thrive even in the
midst of mounting economic difficulties".

   Established cooperatives often invested their dividends in
strengthening and expanding their range of services - for
example, by providing production credit, extension and
veterinary assistance - and in improving community facilities. 

   "Typically, they organize and finance local literacy and
health programmes, and the construction or improvement of
communal infrastructure such as schools, churches, meeting
centres and aqueducts," FAO says. "Thus, they become foci for
local people-controlled integrated rural development."

   Since they produce mainly staple crops, small farmer co-ops
had a clear role to play in food security, FAO says. They also
provide employment by hiring outside labour. Some cooperatives
- for example, in the Brazilian Amazon - were very active in
protecting the environment.

---------------------------
CHINA
Private co-ops are blooming
---------------------------

   In China, the only centrally planned economy of any
significance remaining today, cooperatives continue to be a
doctrinally prescribed form of business organization.

   But, COPAC says, the growing network of supply and
marketing cooperatives (SMC) is China's largest
non-governmental collective organization, embracing more than
700,000 business and service units. By the end of 1989, total
accumulated SMC funds reached almost $6 000 million and total
turnover was $25 000 million. 

   The number of individual members is estimated at around 140
million, or 83% of the total rural households. 

   Due to their widespread existence in rural areas, and being
in direct contact with the rural people, they have started
playing a leading role in implementing the major restructuring
policies of the Government.

   Meanwhile, COPAC reports, rural credit cooperatives are
becoming increasingly popular among farmers - some 60 000 head
offices with  330 000 branches provide loans for agricultural
and sideline production and for private use. 

---------------------------
ZAMBIA
Declaration of independence
---------------------------

After a change of government in Zambia in 1991, the country's
cooperative movement seized the opportunity to declare its
independence. The annual meeting of the Zambia Cooperative
Federation (ZCF) asserted that:

*  all cooperatives in Zambia were owned and controlled by
cooperative members; their apex body, ZCF, represented the
interests of all cooperative members.

*  the cooperative movement as a whole was non-partisan and
politically neutral.

*  during single party rule, the government had directly and
regularly interfered in the operations of cooperatives; in
future, the role of the government should be strictly limited
to matters ensuring adherence to the Cooperative Societies
Act. 

*  cooperatives' participation in agricultural marketing would
be purely on commercial grounds and primarily directed at
serving the needs of their members.

*  cooperatives would not accept responsibility for government
regulated activities, such as serving as a "buyer of last
resort" and maintaining national strategic reserves.

*  ZFC's structure should be re-examined to establish the most
economically rational and democratically feasible cooperative
structure in each province.


---------------------------------------
International Day of Cooperatives, 1995
---------------------------------------

In December 1994, the UN General Assembly voted to observe
annually an International Day of Cooperatives, to held on the
first Saturday of July, beginning in 1995. The Assembly asked
the Secretary General to increase UN support to the programmes
and objectives of the international cooperative movement and
to report back to the Assembly on progress.



For more information, please contact Oscar Monteza, Editor,
Rural Development, Rural Development and Agrarian Reform
Division, FAO, Viale delle Terme di Caracalla, Rome 00100,
Italy.  Tel +39 6 5225 1; fax +39 6 5225 3152.  Email
<oscar.montezy@fao.org>