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Corporate or cooperate?

Corporate or cooperate?
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First Published: Sun, Aug 29 2010. 08 57 PM IST
Chances are that a bright young economics student today will know a fair bit about John Maynard Keynes, Milton Friedman or Friedrich von Hayek, and about competition and markets. Ask about cooperative economics, producer companies or Elinor Ostrom, and the likely result would be a blank stare.
The corporate entity, particularly the limited liability company, has become such a dominant form of organization that it has crowded out other models and drowned the success stories of alternatives. The ubiquitous nature of the corporate model is evidence of its strength, but abdication of thinking about alternatives is not only suboptimal but also dangerous for a democratic society.
Consider cooperation and cooperatives.
Cooperation is exactly what you understand it to be—a voluntary agreement to share, for the mutual benefit of all parties. This principle, learnt in the toddler’s sandbox, can have broad and powerful implications for our economy. In simple terms, cooperation can make supply more effective, and meet demand more efficiently. An example of supply-side cooperation is an agreement among information technology (IT) companies to run a single bus service to the IT cluster, instead of each company running its own. On the demand side, cooperation may be an aggregation of papad-makers or wooden-toy producers who get together to sell their products on the Internet. The benefits are easy to see—cooperation reduces capital and operational expense and stretches the benefit of a rupee spent. And that doesn’t account for the benefits of being part of a social network. An organized cooperative extends the notion of cooperation to include co-ownership, and generally falls under the rubric of national cooperative society laws.
While small cooperatives date back to the 15th century, the Rochdale Pioneers are widely considered to have set up the first modern consumer cooperative, established in England under the so-called Rochdale Principles in 1844. These principles included voluntary membership, democratic control, economic contribution from members, and cooperation with other cooperatives. Today, updated versions of these make up the framework for most cooperative movements around the world. In India, they were adapted and codified into a Cooperative Societies Bill in 1904. The popularity of the legislation was such that several thousand cooperatives were registered within a few years, necessitating continual legislative action over the next two-three decades.
In 1946, inspired by Vallabhbhai Patel and led by Morarji Desai and Tribhuvandas Patel, milk producers in Gujarat’s Kaira district went on strike, forcing the Bombay government to withdraw monopoly procurement rights conferred on a private diary. Later that year, the Kaira District Cooperative Milk Producers’ Union was registered, leading to the creation of the brand we know today as Amul.
Since then, Amul has become a household name in India. It is managed by the Gujarat Cooperative Milk Marketing Federation (GCMMF), which is jointly owned by nearly 2.8 million dairy farmers. In turn, GCMMF is an aggregation of over 13,000 village dairy cooperative societies and 13 district cooperatives, including Kaira. The brand is an unqualified success, with an annual revenue of Rs8,000 crore in 2009-10, and a daily milk procurement exceeding 9 million litres. The National Dairy Development Board has exported the GCMMF model to other states. Today, over 100,000 village dairy cooperatives federated in 177 milk unions and 15 federations lend substance to the term “operation flood”, which revolutionized milk production and distribution in India over 25 years.
But this unique success has been, well, unique. The May 2009 report of the high-powered committee on cooperatives organized by the ministry of agriculture discusses in exhaustive detail the dismal story of most other cooperatives in India. Building on excellent earlier studies such as the 2005 Vaidyanathan committee report on rural cooperative credit institutions, it offers some common characteristics of these failures: passive membership, lack of clear economic focus and accessibility of capital. But the most important one, in my view, is the “politicization of cooperatives and control/interference by government”.
A raft of legislation has been passed in the last 10 years to stem the rot in the cooperative sector. The most important of these is the Multi-state Cooperative Societies Act, 2002, which facilitates inter-state organization; and an amendment in the Companies Act, which allows producers to organize as a “producer company”. Gradually, cooperatives are reinventing themselves. The vision for them to be self-sustaining, bottom-up organizations that are governed in a democratic and free manner is consistent with the idea of India as a vibrant, plural, decentralized economic society.
So the next time your ninth grade daughter asks you about different forms of companies, don’t just talk to her about sole proprietorships, partnerships and corporations. Talk, in addition, about producer companies and cooperatives. India’s aspiration for inclusive and equitable growth may well depend on it.
PS: Elinor Ostrom shared the 2009 Nobel Memorial Prize in Economic Sciences with Oliver Williamson for her “analysis of economic governance, especially the commons”.
Narayan Ramachandran is an investor and entrepreneur based in Bangalore. He writes on the interaction between society, government and markets. Comments are welcome at narayan@livemint.com
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First Published: Sun, Aug 29 2010. 08 57 PM IST