Professional Documents
Culture Documents
Zvi Galor
www.coopgalor.com
1991
Introduction
The second definition, taken from the Cooperative Law of I947, is:
Antoni found both these definitions lacking and felt they ignored the
main function of the production cooperative, that is, the development
ot a service oriented, rather than profile oriented, economy. Relying on
the example of a factory run in a democratic manner by, and on behalf
of, its members, he offers a less restrictive and more functional
definition:
a) Service Cooperatives
It can be claimed that this type of cooperative does not fall within the
traditional category of what is defined as a cooperative, whose
members are also its owners. But some countries have given legal
sanction to labour contracting cooperatives, the ICOM in Britain, for
example, which will be mentioned later. I believe their status as
cooperatives is legitimate, even if their equally capital is minimal.
We are familiar with the privately owned enterprise, which bas a large
or small number of owners who invest their capital in establishing and
operating the enterprise, and who hire workers. The workers do not
participate in the ownership or management in any way, and are just
paid wages. Trade unions endeavour to obtain the best possible wages
and conditions for the workers. The cooperative enterprise, by
contrast, features joint ownership, control, management and labour by
a single group, the worker- members.
In the United States, there are currently some 9000 ESOPS (Paz, I990)
employing around 7.5 million workers. The workers own the majority of
shares in approximately I,500 of these enterprises. The U.S.
Administration actively assists in transferring enterprises I0 worker
ownership and in 70 per cent of cases, the enterprises purchased by
the workers have proved a success.
Most of the basic principles laid down by Bûchez are still applied in
many production cooperatives today. Il should be noted in Buchez's
view, a member is some one who works in the cooperative. He was
opposed to hiring workers and to members who did not work in the
cooperative. He was in favour of distributing surpluses to members
according to their input of labour, rather than according to the amount
of capital which they have invested in the cooperative. In his view, the
members are responsible for the cooperative's capital.
The next problem is finding suitable staff to run the enterprise, and
who will be capable of handling the complex tasks facing them.
Louis (1983) supplements this list by noting the almost constant lack
of cooperative education and training among members, as well as a
lack of technical and management raining, among both the members
as a whole and their leaders. (Lassere, 1959) cites poor management,
lack of capital, an unsuitable marketing apparatus and hired labour as
reasons for the failure of production cooperatives.
The problem of insufficient capital is aiso mentioned by
Daniel (1986) and, more extensively, by Abel (1981), who
claims that production co-operatives suffer from under-
investment. That is, their members are unable to raise ail the
capital. This problem is compounded by the fact that the
members are not altogether willing to raise the necessary
capital from their own sources, because as far as they are
concerned, this capital is not liquid and there-fore cannot be
withdrawn on demand. Another reason cited by Abel for
capital insufficiency is the low interest paid on capital. The
low rate of interest (in line with the third international co-
operative principle) is a disincentive to members' raising
capital from their own sources. As a resuit, production co-
operatives tend to suffer from a lack of investment, and most
of their capital derives from outside sources
Not all production cooperatives have failed, and will examine the
reasons for their success. Industrial productions are very common in
India. In I975, India had I2,508 cooperative associations in the textile
branch alone (Dandapani, I979). Thirty percent of the Indian weavers'
associations took the form of production cooperatives, which
numbered I.2 million. The value of their combined production in I975
amounted to US$I40 million.
The first stage is the organization of all those rural residents who are
to some extent technologically competent into an industrial production
cooperative frame work. Initially, their efforts are to be directed at
agricultural production, and subsequently, at an entrepreneurial stage
midway between urban industry and rural agriculture.
Production cooperatives have been noted for both their success and
failure. The following sections will help us construct the optimum
model for a production cooperative.
Firstly, we will examine the right of control. This consists of the right to
use or to direct the use of the property. In a capitalist enterprise, ail
rights of control lie with those who have invested capital in the
enterprise, and the employees have no right of control whatsoever.
Benefit, the second right, is the right to receive ail the income deriving
from the use of the property. In a capitalist enterprise, the sole aim of
utilizing the factors of production is to create benefit (and profits) for
these who invested their money in the enterprise.
The investors hire workers and pay them for their work. The
remuneration from the enterprise for the work per-formed is limited,
while there is no limit to the remuneration for the capital invested (by
the capitalist entrepreneur). The remuneration on capital takes the
form of a dividend on shares and a rise in the value of the shares.
The third right, transfer, is the owners' right to sell, rent, lease,
transfer or bequeath their assets. In a capitalist enterprise, assets may
be transferred from one owner to another, usually at a price reflecting
the assets' real costs. But otherwise, the transfer of assets within the
cooperative in many countries is severely limited. According to
cooperative theory, the right of transfer is likely to encourage
members to liquidate their own enterprise. If this claim is justified, and
1 am far from certain that it is, it only applies to cases where the
enterprise is no longer able to supply the needs of its members. Wright
mentions two additional assumptions relevant to our discussion:
Here, the state keeps the right of transfer to itself while preserving, to
a vary-ing extent, the right of control and benefit to the workers, as is
the case in Yugoslavia.
To return to Wright's distinction between shareholders' equity and loan
capital, he claims that those who invest in an enterprise (in its equity)
are, therefore, its owners, and obtain the right of control. They are also
entitled to receive any dividends that are issued, and any capital gains
deriving from the rise in the value of an enterprise's assets.
When an enterprise needs more capital, it borrows it. The loan capital
does not confer any right of ownership or transfer, but does confer the
right of benefit, regardless of whether or not the enterprise is making a
profit. Both these types of capital, that is, capital raised from among
the members and loan capital, are found in most cooperatives. Here,
we come to the main topic of this paper: the relationship between
member-ship and ownership.
This leads to the question of to whom loan capital belongs and who is
responsible for it.
Once again, we see a lack of any relationship between the real value
of a share holding and the funds required from the member. This is
also mentioned by Daniel (1986). Knowing that a new member of a
cooperative lacks resources, he suggests that the value of the share
should be limited to the equivalent of three months' wages. The share
would give the member the right to be a full member. A similar
approach could be found in Israel at the end of the 1980s, at a time
when solutions were being sought for the problems of the country's
production cooperatives. Russel (1991) proposes that a distinction be
made between members' shares, which would be of a low monetary
value and would confer voting rights, and ownership shares, which
would have a higher value.
Daniel (1989) says that the member should pay for his monetary
participation in the cooperative by purchasing additional shares, until
the sum of his investment amounts to the "value of his place of work"
in the cooperative. In other words, we see here a version of the above-
mentioned definition, which says that the combined value of members'
shares will be equal to the cooperative's share capital or, alternately,
the value of the total number of work places in the cooperative.
Daniels idea conforms to the actual structure of Mondragon
cooperatives. Daniel also proposes the any sums required over and
above the value of the work place should be deducted from the
worker's wages.
On the one hand, the cooperative does the utmost to ensure that
"Heaven Forbid!", the member will not earn on his investment. But on
the other hand, it will have to pay out large sums of money in the form
of interest on external sources of finance. So we have a situation
where is seems to be quite acceptable for the cooperative to help its
external financiers get rich, while a member is prohibited from earning
a fair recompense for his own investment in the cooperative. This is
illogical, not to mention incomprehensible.
What good will mis do the cooperative? Naturally, the cooperative will
be paying interest at a rate higher than that offered on saving
schemes. Yet this interest rate is still low when compared with the
rates which cooperatives usually pay on loans from commercial banks.
So the cooperative will save on its financing expenses. We can
therefore claim that a change in the cooperative principle will save the
cooperatives a lot of money, providing them with a sounder economic
base. But this will not be the Only benefit.
Another reason for adopting this approach is that the member invested
will have an incentive to pay for the full value of his share, since he will
be adequately remunerated for so doing, and mis remuneration will be
competitive with other forms of saving. The cooperative will save
money and will itself benefit from the higher level of participation and
economic awareness by its members.
Jones (1979) found that one of the main problems which has led to the
break-up of production cooperatives is their inability to provide an
adequate re-tum on the share capital raised from their members. In
many cooperatives, he observes, members' share capital is owned by
the cooperative, meaning that the member cannot get his investment
back. When a cooperative is disbanded, Jones points out, the laws of
the country in question often stipulate that investment capital is not to
be returned to the members. Moreover, if a member leaves a
cooperative, he may only be entitled to receive a small amount of the
capital which he in the cooperative. This is because it is feared that
members will want their investment capital returned to them, leading
to the break-up of the cooperative.
The member earns his living from his employment in the cooperative.
Here we come to the question of exactly what remuneration the
member should receive for working in the cooperative. Another
question to be asked is whether the cooperative should be done with
these surpluses. In practice, unfortunately, the answers provided to
these questions by most cooperatives throughout the world are highly
inappropriate.
(2) Finance for the cooperative's operating costs. The later is also
provided by the members, although never on an equal basis, but
according to the extent of each member's purchase of services from
the cooperative. A member who buys more from his consumer
cooperative participates to a large extent in its operating expenses.
Now, the surplus must be added to the purchase price and the second
component - direct operating costs.
Why should the surplus not be used for any purpose apart from
repaying money to the members? We will use the following example to
explain why.
The third proposal discussed by the Histadrut, in April 1991, was that
members' income should be divided into three components:
remuneration for labour, remuneration for investment capital, and
remuneration in the form of social benefits ("fringe benefits").
Remuneration for labour will include the appropriate rate of payment
for the function in question, overtime hours and the appropriate
increment for productivity. Remuneration for investment capital will
include the following components:
- Distribution of surpluses (profits) after provision for development
fund and depreciation.
- Monthly remuneration for investment capital.
- Remuneration for own management.
- Remuneration for own labour.
- Remuneration in the form of social benefits, including annual
vacation, holiday pay, further study fund, welfare activities for the
member's family and pension fund.
Harari, who was the general secretary of the Egged public transport
cooperative in Israel, expresses what is more or less the standard
procedure in his cooperative. Where he is mistaken, in my opinion, is
in including remuneration for investment capital in the direct
remuneration system for the member's labour.
On two occasions, Daniel (1986 and 1989), also tried to deal with the
question of wages and the use of surpluses, deciding that wages
should be based on the scale used in enterprises working in the same
branch. He said that wages should be linked to changes mentioned in
collective agreements. The worker will be paid according to his
professional status (scale) and according to the number of hours which
he works.
Daniel's proposal differentiates between the worker and his wage, and
his enterprise's business results, and fails to provide any incentive for
working harder and earning more. But like Harari, Daniel claims that
the member's wages should include a component of remuneration for
participation in the cooperative's equity. In my opinion, Daniel is
mistaken in this respect, for a member should not be remunerated for
his investment via his wages.
Together with others, who like him are prepared to be less egoistic, he
will try to obtain for himself, whatever it was mat he could not obtain
when he was by himself and independent.
The most important right of all, naturally, is the right to work, the right
to be employed in the cooperative.
Managers' wages now appear to have risen and the differential has
grown as a result of pressure from managers to be more substantively
remunerated for their work. Today, the differential is in the region of
1:6 (Rosner, 1990).
cooperatives in Mondragon
The slogan of the first vocational high school set up by Don Jose Maria,
the founder, was devised by Garcia:
"Knowledge is power, socialization of knowledge means
democratization of power."
The vocational school does not teach cooperative studies, but puts
cooperation into action. It is organised on a cooperative basis. The
teachers are organized in cooperatives, the students work each day
four hours in various workshops. Their income is divided between
covering the study costs to cover then-living expenses, and the
remainder goes towards a special fund to finance the investments
necessary in the future.
Against the above impressive data, Regis thinks that the central
problem of production cooperatives in France is growth and expansion
(Regis 1986). In addition, he points out the problem of members as
against salaried employees. The writer foresaw that in the seven years
which preceded his research, the number of members, out of the total
employees in the cooperative, exceeded from 40 percent to 60
percent.
The artisans in the village regions in India are extremely poor. In 1971,
the value of the equipment of the average artisan was worth U.S. $50.
Their productivity was also very low and the wages for their work low
also. They were dependent completely on the local merchant when it
came to matters of credit, inputs and marketing. The artisan was
exploited to the extreme and his daily income was between 50 to 70
American Cents. In order to help him, it was necessary to set up an
independent system which would provide him, at reasonable prices,
with the following services.
At the end of the twenties, the Histadrut set up the cooperative centre
as a secondary society.
Production
So that the production can attain its objectives and succeed, we must
personally put into practice for everyone the education and training of
members, and also use techniques of production planning and
production economics - all this together with the process of setting up
the cooperative.
Credit
This element will provide us with a precise picture for the amount of
credit we need at each stage of the production plan throughout the
year. The price of this credit, which is a part of the direct production
expenses, is imposed upon all the members of the cooperative
according to the measure of their participation in the businesses of the
cooperative and this when we are talking about a regular cooperative.
In the event of a production cooperative, these expenses are to be
joined to the price of the production of each product, and in this, there
are also included the financial price for the work of the member.
Supply of Inputs
Marketing
The other is the possibility of reaching a cash flow which would allow
the cooperative to repay a loan which it receives and the payments
due to members. Marketing is a body of knowledge unto itself.
Marketing is a profession. A cooperative which wishes to succeed must
understand this fact. The cooperative must appoint a person to be
professionally in charge of the matter of marketing and which would
bring the cooperative the highest possible price.
In many cases, this middleman is also the person who lends money at
interest to manufacturers, and also the merchant who sells them the
inputs. The middleman always looks to pay the manufacturer or the
artisan or the cooperative the lowest price for his produce. In this
method naturally, the manufacturer and the cooperative always lose
(Galor 1989C).
One of the central reasons was that these cooperatives did not include
the necessary triangle elements of production, or included only some
of them. We know of cases in which the cooperative included the
element of supply of credits and inputs, but did not include marketing.
There were cases in which cooperatives included marketing but did not
give appropriate attention to credit and the supply of inputs. The result
which was obtained was that the triangle was not closed.
BIBLIOGRAPHICAL NOTES