David and Goliath—Cooperatives and the Global Crisis

This is part of a series of think pieces by scholars and practitioners working on a broad range of issues within the field of Social and Solidarity Economy. The series is being published in conjunction with the UNRISD conference “Potential and Limits of Social and Solidarity Economy”. The conference took place on 6-8 May 2013 in collaboration with the International Labour Organization and the UN Non-Governmental Liaison Service.

We have been through a global crisis for the last six years with dramatic consequences. In the face of the crisis, cooperatives have shown not only potential but have actually demonstrated a higher degree of resilience in terms of jobs and activity. This UNRISD think piece gives details on how cooperative enterprises show resilience during the crisis and how they implement management practices based on solidarity, efficiency and innovation, based on four case studies and grounded research.

Claudia Sanchez Bajo is the Chair of Cooperative Enterprises at the Business and Administration Department of the University of Winnipeg and from August 2013 lecturer at Pavia University, Italy.

Epochal shift through a global crisis

We have been going through a global crisis since 2007 when the US housing bubble burst. The bubble had thrived on the international sale of financial products called Collateralized Debt Obligations, and the earliest trigger came from a change in accounting standards. This crisis is different, not because of a hypothetical debt ceiling in public finance, but for other reasons. In the run-up to the crisis, both the financial and the real economy had been functioning on the basis of debt and liabilities, using little equity and savings. Thus, multiple actors in advanced economies are now highly indebted: households, public authorities from local to national levels, firms and financial institutions. But why is there so much debt? There are two basic reasons: debt served a number of purposes, and it is facilitated by the fact that control does not match or mirror ownership. The growing use of debt and leverage, including the substitution of equity with debt through so-called hybrid capital, became unsustainable once the financial system linked up globally and began working as a circular loop.

The US Financial Services Modernization Act of 1999 allowed various elements of the financial sector, such as firms, stock markets and computers to integrate, link up and consolidate. The 1999 Act removed the last restrictions of the Glass-Steagall Act of 1933 and brought with it a technological shift towards a service economy functioning on access streaming (explained by Jeremy Rifkin in The Age of Access) accompanied by high-frequency computer-based and algorithmic trading in finance. This computerized global chain functions as a circular loop, programmed not only by market data but also by news feeds and audio obtained from telephone calls and videos (Foresight 2012).

Similar to “ecological overshoot”, a term used to explain the use of our planet’s resources and ecosystem in a way that exceeds its carrying capacity, we now have “debt overshoot”. In the new globally connected computerized system, interlinked leverage and high indebtedness bring about instability and implosion. This epochal crisis has left us with a system of disorder that goes through different phases, with sub-crises springing up. In March 2013, the Bank of England warned of a systemic threat posed by private equity buyouts as from 2014, given the “need…to refinance firms subject to heavily leveraged buyouts” (Elliot 2013; see also Bank of England 2013). Indeed, enterprises are bought and paid with the enterprise itself as collateral. However, now refinancing enterprise buyouts is hard, and banks have said they will not do it.

The book Capital and the Debt Trap, Learning from Cooperatives in the Global Crisis (Sanchez Bajo and Roelants 2011) explains in detail the mechanisms that have led us to the crisis and its consequences. The book does not declare that capitalism is on its knees. Rather, it explains a system that is being restructured and asks whether such a system can still be defined by its capitalism or should instead be characterized by its “debtism”. Explaining failures at both micro and macro levels as well as in terms of values and intellectual thinking, the book talks of this crisis as a systemic debt trap rather than a debt crisis or a public debt issue. Its consequences, as we all know, have been disastrous.

The cooperative model

Cooperatives and cooperative members have a dual role as stakeholders and owners or controllers. In terms of capital, “members contribute equitably to, and democratically control, the capital of their cooperative. At least part of that capital is usually the common property of the cooperative”, according to the third cooperative principle in the Statement on the Cooperative Identity adopted by the General Assembly of the International Co-operative Alliance in 1995 and included as an Annex to ILO Recommendation 193 concerning the Promotion of Cooperatives, 2002. ¹

Diverse studies show that those organized and behaving according to cooperative principles, by which democratic control goes together with joint ownership, have weathered the brunt of the crisis, and are even increasing employment and restructuring. Amid the crisis, cooperatives offer hope, resilience and innovation (Birchall and Ketilson 2009, Commissariat général au développement durable 2012, CICOPA 2012).

But why is this? Drawing on four case studies Sociedad Cooperativa de Producción Pesquera Buzos y Pescadores in Mexico; Ceralep in France; the Desjardins Group in Canada; and the Mondragon Group in Spain) we can suggest some explanations.

In the short term

1. Cooperatives are member based so rather than shedding labour they think of new activities (productivity, exports, restructuring) in order to make up for a loss of activity.
2. Cooperatives have an internal division of power (democratic assemblies and consultative and decision-making bodies are independent from executive powers, in addition to internal and/or external monitoring bodies) that, provided it works well, leads to widely circulated information on a real time basis. This means members are aware of an imminent crisis and can prepare for it.
3. Cooperatives have democratic participatory decision-making mechanisms, and, in general, their internal income gaps are nonexistent or at least significantly smaller than in conventional enterprises. They are also more equitable and less prone to leverage that could endanger their resources and activity. Thus, when in crisis mode, they can make hard decisions that are seen as legitimate. The cost of control is minimal, and implementation is faster and more effective. Members know they are all in it together and can survive only by working together. For this reason, Elinor Ostrom, a Nobel laureate in Economics, included cooperatives as one example of self-organization that could safeguard common resources and the sustainability of the planet (Ostrom 1990).
4. Cooperatives can build further cooperative mechanisms for shared flexibility while saving jobs (in terms of time, type of post, management, deployment to other units, compensation, and so on). They also build various safety and support funds that with time become significant, and function as an anchor against the brunt of a systemic crisis, improving guarantees and loan conditions.
5. Cooperatives build common reserves that are, in part, an indivisible, sui generis type of property, distinct from both ordinary private property and public property. Dedicated to the long-term development of the cooperative, they guarantee financial stability. Inaccessible to cooperative members when they democratically decide—for whatever reason—to wind up the business, these reserves are thus built for the development of cooperatives and a social and solidarity economy (SSE) present in any given country. These reserves serve as a transmission to future generations in the real economy.

In the long term

1. Cooperatives tend to have a more complex approach and build pension and education mechanisms for members and others, targeting community needs with a long-term vision.
2. Restructuring and entering new activities are part of their standard practice, in order to maintain the capital built so far—social capital, assets and business, natural resources—as they respond to the needs and aspirations of their members.
3. While conventional enterprises try to delocalise or close in times of crises, the management of cooperatives may differ not only because costs are seen in a different light, in the sense that democracy and meetings costs as well as territorial embeddedness are naturally taken into account but also because the search for efficiency must come from other aspects. Delocalization of member-based enterprises is out of the question.

Social and Solidarity Economy as a trajectory

SSE should not be understood as a sector or inclusion policy. SSE can be thought of as an evolving field of practices, testing new types of behaviours, organization and management that are non-predatory, sustainable, equitable, democratic and accountable. Whether SSE can be an alternative to current predominantly predatory practices of human beings, time will tell through its trajectory.

In time, SSE could potentially develop enough momentum and, like an arrow of time (Prigogine 1997, Prigogine and Stengers 1984), once it gathers a sufficient mass of social experience and practice, it could exert a growing power of attraction. Other similar forms would then align with the arrow’s trajectory.

This understanding is probabilistic, not mechanistic, and the direction and force of such a trajectory could change. In the face of an epochal crisis that has left us amid a system of disorder, uncertainty and instability, an understanding of this trajectory should empower us to work together and coordinate in solidarity towards a sustainable and equitable future.

REFERENCES

Bank of England. 2013. Quarterly Bulletin 2013 Q1. Bank of England, London.
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb130104.pdf, accessed on 16 July 2013.

Birchall, Johnston and Lou Hammond Ketilson. 2009. Resilience of the Cooperative Business Model in Times of Crisis. Report for the Sustainable Enterprise Programme. International Labour Organization, Geneva.
http://www.ilo.org/wcmsp5/groups/public/---ed_emp/---emp_ent/documents/publication/wcms_108416.pdf, accessed on 16 July 2013.

CICOPA. 2012. How have Cooperatives Active in Industry and Services Performed at the Global Level? CICOPA (International Organisation of Industrial, Artisanal and Service Producers’ Cooperatives), Brussels.
http://www.cicopa.coop/IMG/pdf/raport_cicopa_2012_en_v06.pdf, accessed on 16 July 2013.

Commissariat général au développement durable. 2012. Le point sur “Territoire durable 2030” Une prospective de développement durable à l’échelle des territoires. Ministère de l’écologie, du développement durable et de l’énergie, Paris.
http://www.developpement-durable.gouv.fr/IMG/pdf/LPS124.pdf, accessed on 16 July 2013.

Elliot, Larry. 2013. Private Equity Crash could Trigger Next Wave of Financial Crisis, Bank Warns. The Guardian, 14 March 2013.
http://www.guardian.co.uk/business/2013/mar/14/private-equity-financial-crisis-bank-of-england, accessed on 16 July 2013.

Foresight. 2012. The Future of Computer Trading in Financial Markets. Final Project Report. The Government Office for Science, London.
http://www.cftc.gov/ucm/groups/public/@aboutcftc/documents/file/tacfuturecomputertrading1012.pdf, accessed on 16 July 2013.

Ostrom, Elinor. 1990. Governing the Commons. Cambridge University Press, Cambridge.

Prigogine, Ilya. 1977. The End of Certainty. Free Press, New York.

Prigogine, Ilya and Isabelle Stengers. 1984. Order out of Chaos. Bantam, New York.

Rifkin, Jeremy. 2001. The Age of Access: The New Culture of Hypercapitalism, Where all of Life is a Paid-For Experience. Tarcher/Putnam, New York.

Sanchez Bajo, Claudia and Bruno Roelants. 2011. Capital and the Debt Trap – Learning from Cooperatives in the Global Crisis. Palgrave-Macmillan, Basingstoke.

¹ The Statement on the Cooperative Identity includes the definition of what a cooperative is, as well as cooperative values and operational principles, the third of which is cited here.