Can Coops Go Global?

Mondragón Is Trying

By Tim Huet

This article is from the November/December 1997 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org/archives/1997/1197huet.html

This article is from the November/December 1997 issue of Dollars & Sense magazine.

issue 214 cover

The Mondragón cooperatives in the Basque region of Spain form the best-known coop system anywhere, and have inspired emulators the world over. Launched in 1956, the Mondragón complex has grown from a single, five-member coop manufacturing kitchen appliances into a massive enterprise with over 30,000 workers and annual sales of $5 billion. For years its achievements have given many of us in the U.S. coop movement confidence that our enterprises can someday develop on a large scale in all fields of endeavor.

That faith has been shaken, however, by Mondragón's recent deviations from democratic cooperative principles in the name of global competitiveness. To prepare for competition within a unified European market, Mondrag›n's managers say they were forced to centralize decisionmaking in a new corporate structure placed above the individual coops, as well as hire more nonmembers, often in joint ventures with capitalist firms.

These changes bolster arguments of coop critics and stimulate fears among supporters that once a cooperative reaches the size and affluence of Mondragón, it loses its democratic character. It is inevitable, the critics charge, that large co-ops become unaccountable to a disorganized, complacent membership, moving away from worker control toward conventional capitalist practices.

As a promoter and participant in the relatively underdeveloped U.S. worker co-op movement, the dilemmas posed by size and the global economy are not just academic ones for me. Could Mondragón's managers be right? Is it impossible to remain true to cooperative principles in the face of intensified capitalist global competition? Last spring, I traveled to the Basque country, and to Italy, the home of an even stronger co-op movement, for some answers.

History of Mondragón

What is a Cooperative?

The Italian and Mondragón cooperatives share similar governance structures. Each co-op elects a board of directors at an annual meeting of its general assembly. Only members of the co-op are allowed to be members of the board. The board hires top management, who can participate in board discussions but have no voting rights. General assemblies adopt general policy which the board and management are charged with executing; in practice, general assemblies often debate and commonly accept proposals generated by the board and management.

But while Italian co-ops have unions, Mondragón deals with traditional labor issues such as wages, hours and working conditions within its social councils. While these councils occasionally serve as effective lobbying bodies to change management/board policies, critics increasingly say the councils have no real powers to counteract an increasingly aggressive and "capitalist" management agenda. Mondragón workers told me that this situation has prompted them to explore unionization.

When a priest named Jos‚ Marˇa Arizmendiarrieta first arrived at the Mondragón parish in 1941, he found a town devastated by the Spanish Civil War. Fascist forces under Franco had succeeded in deposing the democratically elected coalition government in the 1930s, leaving the Basque country, an antifascist stronghold, divided. Arizmendi (as the priest was known) set about rebuilding, establishing a vocational school for Mondragón's many working-class children who had no chance at education. Eventually, under his tutelage, five of the school's graduates went on to win engineering degrees and then, in 1956, start their own factory in Mondragón. This plant became the Fagor cooperative.

Because the Spanish economy was so isolated from the rest of the world during the Franco years, the co-ops' founders surmised that any high quality consumer product they could produce would find a ready market. They were right, and their domestic appliance company quickly generated strong profits. They reinvested these profits back into the business, reserving only a small portion for workers' own "capital accounts" which individuals could draw upon only when they left the co-op.

In 1958 the founders of Mondragón encountered a crisis when the Spanish government deemed the co-op members to be self-employed, and hence ineligible for government social security and unemployment benefits. The co-op turned this to their advantage by creating their own social security system that cost them less than the government one. They then used these benefits as seed money to start their own bank. Depositors flocked to the bank from the community, attracted by both its competitive interest rate and the knowledge that their deposits would be lent to the co-ops to create local jobs.

Over time, the bank's board of directors became the de facto governing body of the Mondragón co-op movement. The cooperative depositors and bank staff serving on its board ensured that the bank acted as both Mondragón's growth engine and linchpin of stability. They directed the bank's business division to help new co-ops form. Sometimes the bank did so by identifying a market opportunity and creating a new co-op from scratch. Other times its staff would help a larger co-op spin off a division to form a new, distinct cooperative in order to maintain its efficiency and democratic vigor. The bank encouraged these smaller co-ops to form groups that shared services in order to maximize economy of scale and marketing potential. In perhaps the most financially successful enterprise of this sort, the bank reorganized an assortment of consumer cooperatives into hybrid worker-consumer co-ops, and created a united retail chain which is now Spain's largest with annual sales amounting to $2.6 billion.

Because of such creative strategies, Mondragón's record of business creation is remarkable. Of the 103 cooperatives founded in the first three decades of the Mondragón Experience, from 1956 to 1986, only three closed. This is particularly impressive when you consider that the Basque region lost well over 100,000 jobs during Spain's deep ten-year recession that started in 1975. During that difficult time Mondragón co-ops actually added workers. In part, they were able to do this by retraining their workers and transferring them from depressed cooperatives to thriving ones. The bank also deserves credit for providing financial and managerial help to troubled co-ops that needed restructuring.

Even though the cooperatives emerged from the recession stronger than ever, the crisis provoked a process of reflection and restructuring that marked a new phase in the Mondragón Experience. Changes in Europe stimulated that process too. Spain signed on to the European Economic Community in 1986, which would open the country to a flood of capitalist companies many times the co-ops' size. To gear up for the new competitive environment (and for other reasons), Mondragón halted the creation of new co-ops and directed all of its resources to help existing enterprises expand. The network of co-ops was retooling to cope with their first brush with globalization. Was there anything co-ops could do to survive the global onslaught?

To address this urgent question—and the changing economic environment the co-ops faced—Mondragón convened a series of Cooperative Congresses. Planning change through the Congresses rather than the bank was itself a significant development, flowing at least in part from a perception that the industrial cooperatives were overly dependent on the bank during the recession. But the shift also reflected the fact that the bank had changed; it had grown past the co-ops and by 1985 invested less than a quarter of its resources in them.

Co-ops and Growth

It is something of a mystery why the Italian and Basque co-ops have grown so large, since co-ops, unlike capitalist enterprises, are not usually expansionist. For capitalist enterprises, profits tend to grow as the companies do, and as they concentrate ownership. Because capitalist companies would rather rake in the profits produced by 50 workers instead of 10, they have an incentive to invest their profits into expansion. But the 10 workers in the typical worker co-op must allow their profitsharing for the year to drop if they were to use it to expand their enterprise. And they tend to have less capital to invest at the outset than capitalist firms. They also have a harder time securing capital from outside sources without giving up shares or decisionmaking to outsiders.

There are also noneconomic reasons why worker co-ops may not grow. As they increase size, they tend to lose a sense of community and democratic involvement. Workers cannot sit together every month and make all the major business decisions. And as the jobs become more specialized and the businesses more complex or dispersed in many locations, it becomes more difficult to communicate and ensure everyone is participating equally in decisions. It also can be hard to acculturate new workers into old decisionmaking processes when a co-op's workforce suddenly doubles with growth.

Perhaps the most crucial gathering for reorienting Mondragón was held in 1988 with the theme "Facing Up to the European Community." There co-op managers agreed that their enterprises were on a collision course with multinationals because of the type of products they made and considered how to get out of the way. "[W]hen we established our companies we paid no heed to multinational consortiums, nor the Single European Market," the Congress reported. The statement continued,

The fact is that the products most important to the Group, domestic appliances, machine tools... etc., are in most cases also those favored by the big multinationals, and now, in the new entrepreneurial confrontation which is on the horizon, we shall have to measure up to a completely different scenario requiring us to at least pause and ask the following questions. Are there any specific products not favored by large capitalist countries? Is it possible to find a market segment more accessible to worker cooperatives due to their capacity to adapt, taking advantage of their singular nature as community-based companies? Would it in any case be possible to adapt...?

The Point of No Return?

The Mondragón managers concluded that most of their key industrial companies had "passed... the point of no return." In other words, they had invested too much in their current products and plants to radically change course.

Having committed themselves to competing with the multinationals, the co-ops adopted characteristics of their rivals. Those gathered decided that they needed a quick, centralized system of decision-making to compete in a rapidly changing and complex global market. So by 1990 co-op leaders formed the Mondragón Cooperative Corporation (MCC).

MCC operates in a much more centralized manner than co-op complex had under the bank's leadership. Its management structure makes important decisions on, and coordinates, distribution and marketing for all three types of cooperative enterprise—financial, industrial, and retail/distribution. Its trademark, "MCC" is plastered on Mondragón products going out into the global marketplace so they are easily identifiable.

Most controversial is the new multinational supply and distribution network MCC built. MCC became a traditional capitalist employer operating its own plants in low-wage countries like Egypt, Morocco, Mexico, Argentina, Thailand and China. Its employees in these countries are not co-op members. But even within Spain, MCC developed non-co-op businesses, many as joint ventures with capitalist partners, and has been using an increasing number of nonmember workers within their core co-ops as well. Now about one-third of Mondragón workers are nonmembers, far exceeding the original Mondragón commitment to never employ more than 10% nonmembers. The director of MCC's temporary services cooperative informed me that a co-op can now apply to MCC for permission to employ up to 40% nonmember workers. The managers justify this change by arguing that the increased volatility of the global market requires a more dispensible sector of the workforce.

MCC can provide many valid reasons—cultural, legal, financial and organizational—why it cannot easily establish a sizable cooperative in Thailand or even central Spain. But what most disturbs critics is that MCC seems not to be establishing them without a plan for future conversion into a co-op. Indeed, those established with capitalist partners may preclude conversion from ever happening.

MCC's direction has stimulated considerable criticism from within the ranks. In March, the Social Council for Fagor—the first and largest co-op in MCC—criticized MCC policy. "Bringing the cooperatives up-to-date in competitiveness is one thing," it claimed. "The unnecessary loss of their fundamental character—economic democracy and member participation—is another."

One might ask why the transformation continues unabated if cooperatives are democratic enterprises and oppose the changes. One answer might be that the centralized and expedited MCC decision-making structure has removed meaningful opportunities for opposition and consideration of alternatives. But from my discussions with the opponents, I'd add that the opposition is not forceful because they are not confident that they can provide an alternative. They worry that the MCC managers are correct that survival in the global market requires compromises of critical cooperative principles. One social council member even said at a forum, "cooperativism doesn't work," and flat out denied that Mondragón could "flourish as a cooperative island in a capitalist world."

Yet even if one concedes that MCC must become a multinational, it could do so with a commitment to gradually convert its overseas factories into co-ops. This might involve seeking out partners for the enterprises in those countries who want to help adapt and encourage cooperative culture in their homelands. A cooperative approach to global development might mean hiring native managerial talent rather than coupling with a capitalist company. Or it may mean negotiating up front with your capitalist partner for buyout rights to allow for later cooperative conversion.

Government's Role in Co-op Growth

A key reason why Italian cooperatives are flourishing is their political support. The Italian constitution recognizes the social contribution of cooperatives and directs that legislation should promote them. Worker co-ops are nonprofits under Italian tax law, and are legally bound to invest their surplus for further job creation. So in exchange for favorable tax status, worker cooperatives are restricted from distributing profits among current members in favor of reinvesting towards new democratic employment. Another interesting aspect of Italian tax law is that it requires 3% of each cooperative's surplus to go into a fund to develop new cooperatives.

The Spanish Constitution also endorses the value of cooperatives, and the government's tax and other fiscal policy is starting to reflect this. The Basque government has embraced worker cooperatives with particular gusto: in July, it contributed $18.3 million to a fund specifically to develop MCC cooperatives and created additional funds for non-MCC cooperatives.

This outpouring of government support is at least as much a result of cooperative growth as a cause, however. The Mondragón pioneers managed to thrive despite initial opposition from the Franco regime and earned government backing through their independent success. This should provide a lesson to North America cooperators who feel we need legislative support and recognition before we can flourish.

It also may be possible for MCC co-ops to find a market niche for their traditional businesses threatened by global competition—without giving up on democratic decision-making. Here the experience of worker cooperatives in Italy's industrial sector is instructive. While less known in North America, the Italian co-op movement is even larger than the Basque, with about 250,000 worker co-op members alone. They also have taken advantage of their labor flexibility and dedication to quality work to serve the new niche markets created by the volatile global market. Rapid technological change, and the move toward just-in-time delivery systems, have created a demand for small orders of customized industrial parts. Small to medium-sized manufacturers with highly skilled workforces band together in "flexible manufacturing networks." While capitalist businesses also can do this, co-ops that manage to build collaborative cultures are even better able to foster the mutual relationships required for networks to work. One bonus of the networks for co-ops is that they preserve the small plants where robust democratic decision making is more likely.

Even in areas where Italian co-ops are market leaders and have thousands of members, such as construction, some are able to retain a good deal of democratic involvement. As Bruno Bruzagga, an officer of the largest Italian cooperative federation, explained to me, "it would be a mistake to make a generalization that the bigger the co-op the less participation." A 2,500 worker co-op in Bologna, he noted, "has more than a few branches and you can create smaller groups of members that then participate in meetings and are delegates who report on their findings." It is not, then, simply a matter of size, but how the numbers are organized. The challenge is to democratically coordinate the smaller bases of direct democracy.

Lessons for North America

If it is hard for an enterprise as developed as MCC to compete with multinationals in the industrial arena, then developing new worker co-ops in the realm of heavy industry is simply not an option still available to North Americans. It requires heavy capitalization at a large scale in an area capitalist firms are strong. Should we then concede that worker co-ops can only develop in the crevices unreached by global capital? Perhaps.

But the global industrial arena is not the only one worth fighting in. It is a post-industrial age and this provides new opportunities for cooperatives. Like the Italians, we can draw on the community orientation of co-ops to fill in the holes left by privatization and other byproducts of a decaying old order and state. Italian co-ops have taken advantage of their community-based nature to fill the vacuum left by privatization of social services. There are many other areas of the economy where quality service is at a premium as well and where small co-ops with community roots have an advantage, particularly if they are connected to a larger cooperative network. One true-life example is an emerging chain of co-op bakeries in California that thrives in part because the worker-owners care about the quality of their baked goods and service, and connect with their communities more than the poorly paid staff of capitalist chains.

We can also involve ourselves in the next wave of economic development—especially the computer/knowlege sector—where intelligent motivated workers often matter more than capital. (This is already happening at a small scale. As a lawyer, I have incorporated two internet/computer co-ops in recent months.)

I believe the sum of these small or niche cooperatives will be of the greatest importance. I harbor no illusions that cooperativism will gradually overtake capitalism in a "free market" competition. But when global capitalism falters under its own weight, costs and contradictions—and popular resistance—we must have working examples of economic democracy to point to, of local economies that continue to function and serve their communities. Purely theoretical arguments for economic democracy are easily drowned out by demagogic appeals to fear and hunger. History leads me to dread the consequences if, once crisis becomes collapse, we cannot offer tangible hope for a more democratic society and economy.

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