III. Research Methodology and Country Findings

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  This document has been made available in electronic format
         by the Committee for the Promotion and
            Advancement of Cooperatives (COPAC)
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                     REPORT OF THE MEETING
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III.   RESEARCH METHODOLOGY AND COUNTRY FINDINGS 

The COPAC studies were designed to test several hypotheses on
cooperative capital.   Many cooperatives in developing
countries have low levels of member financing.  Yet with
government and donor-financing to the cooperative sector
declining and with commercial bank financing of rural
cooperatives still in its infancy, it is clear that most
capital for investment in the near future will have to come
from the members themselves.  The problem is that, at least in
the agricultural cooperative sector, there is little tradition
or desire for member financing of cooperatives' business
activities.  Accustomed to decades of government financial and
technical support and guidance, many cooperative leaders and
members are not ready to make the change. To change attitudes,
these same individuals have to be shown, empirically, that
member-based cooperative financing strategies are essential to
survival under the new, rapidly liberalizing market
conditions. 
 
Is it possible to demonstrate a positive correlation between
member support in the form of capital contributed, member
control and participation on the one hand, and improved
cooperative business performance in the market, greater member
satisfaction, and growth on the other?   If so, it would then
be much easier to convince skeptics of the positive value of
member-based cooperative financing schemes. 
 
The main hypothesis advanced by FAO and the key architect of
the research effort, Mr. Von Pischke, is that cooperative
capital has an important "quality dimension" and that higher
proportions of member capital (including indivisible reserves,
share capital, loan-deposit ratios, etc.) are positively
correlated with higher levels of member commitment,
participation and control and with improved cooperative
business performance and growth. 
 
This main hypothesis is elaborated into a series of working
sub-hypotheses. The methodology for the research exercise
design involved the collection of quantitative and qualitative
data (cooperative records going back for 10 years, for
example), precise quantitative treatment of data wherever
possible, supplemented by interviews, and the consideration of
a large number of business indicators.  Case studies were
carried out in Guatemala, Kenya and India to test these
hypotheses. 
 
The overall results of the three country studies are
synthesized by Mr. Von Pischke in his paper  "Capital
Formation in Agricultural Cooperatives in Developing
Countries; Research Issues, Findings and Policy Implications
for Cooperatives and Donors" (see Annex 3).   Mr. Von Pischke
summarized the main findings of this paper at the beginning of
the meeting, providing an overall analytical framework for the
subsequent presentations by the authors of the country case
studies and the discussions of the main issues raised. 
 
The original sub-hypotheses were found most likely to apply in
mixed economic/policy environments characterized by a degree
of free market and some government intervention in
cooperatives. For example, in India, a country which exhibits
characteristics of such a mixed environment, the hypothesized
relationships generally seemed to apply.  As a bonus from the
Indian study, the important dimension of federal relations
(between primaries and unions) was also explored. 

In Kenya, where government intervention and control of
cooperative product markets and financing was more extensive,
however, the findings showed that member control and growth of
the cooperative did not seem to have a clear positive
association with increased members' financial stake in the
cooperative.  According to the report, "government control and
guidance with good intentions" was the distinguishing feature
of the cooperatives studied.  Economic motivations based on
free market forces appeared to play a less important role. 
Government tutelage seemed to have replaced the need for
active member control.  Cooperatives were considered to be
public property. 
 
The Guatemalan study of two cooperatives with contrasting
capital formation strategies showed a very different
environment - a free market without any government involvement
with cooperatives.  Amongst other valuable lessons, the paper
showed that in certain markets a high degree of leverage was
possible, and, arguably, could be advantageous for the
business and for the members. 
 
The Guatemalan study showed that a totally different
relationship from that hypothesized could and did exist.  A
high degree of member finance was associated with stagnation
in one cooperative, while conversely, a low proportion of
member equity compared with non-member debt capital in the
other cooperative was related to an aggressive growth-oriented
strategy in the market. While pursuit of the latter strategy
entailed certain risks and the cooperative studied had become
over-leveraged, pursuit of a more moderate degree might have
been a winning strategy. The growth-oriented strategy was
associated with a high degree of member control, participation
and satisfaction as well as with growth of the enterprise.
Conversely, the other cooperative, showing a higher degree of
member-owned capital, was less dynamic, perhaps opening up the
possibility of a reverse relationship in certain (perhaps
temporary) cases: the association of stagnation with high
quality capital. 
 
Importantly, the research also demonstrated that beyond a
certain point more capital in the form of unallocated reserves
can easily work against cooperative performance and
principles. Members may restrict new entrants and may try to
capture the unallocated value through pricing strategies, for
example, and possibly ultimately through liquidation of the
cooperative.