Spokespeople for the co-operative movement make much these days of the fact that, as a sector, it survived the financial crisis of 2008 in much better shape than many of its private sector counterparts. The reason is that, with few exceptions, co-operatives did not speculate with the assets of their owners as private sector financial institutions did.
The fact they did not has to do with the ownership structure of the co-operative model, which is spread among the customers rather than in the hands of profit-maximising private investors. The not-too-subtle subtext is that the global economy could do worse than pattern itself on this alternative economic model.
Co-operatives are already a hugely important component of the global economy
More than 800 million people are members of co-ops, and another 100 million are employed by them. In 1994 the United Nations estimated that co-operatives "secured the livelihoods" of more than three billion people, or fully half of the world's population.
Even in the United States, arguably one of the most capitalistic economies in the world, one in every four citizens is a member of a co-operative.
As an economic model, co-operatives work equally well in the productive, social, and service sectors.
One of the most attractive features of the co-operative model from the perspective of the average consumer is its focus on member service and ethical behaviour toward its customers. While not a big player in the US market, co-operatives in Europe and Japan are major players in the insurance industry. Imagine dealing with an insurance company whose business model was not to gouge its customers on premiums and cheat them on payouts. Co-operative insurers don't need to gouge and cheat their customers not only because they don't have to generate high returns to investors but also because they have real ethical standards they adhere to based on their founding principles.
Perhaps the most promising aspect of co-operatives, in the context of their potential as an alternative economic model, is that they function effectively in both developed and developing countries.
Significant as their outreach is, there are reasons why co-operatives are unlikely to ever fully dominate the global economy
In developing economies, once thought of as a potential solution to poverty, co-operatives have exhibited two important limitations. First, if they are a truly democratic organisation, run for and by the membership, they quickly move up the economic ladder and away from the very poor.
In the case of democratically run co-operatives in other sectors – housing, consumer, agricultural services – in order to be a member you need a certain minimum income, whether it be from salaried wages or self-employment. This is because the co-operative enterprise itself needs a certain level of sales to operate above breakeven.
While co-operatives in the developed world tend not to suffer from these same limitations as their counterparts in developing countries, there are other constraints on their growth. First, like other democratic institutions, in order to function properly they require an investment of time and energy on the part of their members. The fact that most co-operatives are small means that, in order to prevent bad things from happening to their shares and the services they receive, members need to be more involved.
The social enterprise model offers the same advantages as the co-operative model in terms of social mission, risk aversion, and ethical behaviour
But minus the constraints of a self-limiting capital structure and without burdening the customers and management with the inefficiencies of a member-owned governance model. Customers and even investors might not be aware that the business was being operated as a social enterprise.
Its ethical, fair treatment of its customers could power its growth beyond that of its profit-maximising competitors. As such, the outreach of the social enterprise sector, limited only by the richness and variety of its business models, could be vast
Where will the capital come from?
A logical source for capital would be the existing players in the non-profit sector. Unfortunately, most non-profits are so occupied with their own financial survival, it would take a great leap of courage and faith for them to divert a significant portion of their resources to something so untested. If the movement is to truly gain importance in [the US], the money will have to come from the government, in the form of subsidies, loans, and perhaps even short-term capital investments, until the social enterprises become sustainable and attractive investments in their own right. Once that occurs, as is happening in microfinance, the capital markets can take over.
Rupert Scofield is president of the microfinance organisation Finca International, and author of The Social Entrepreneur's Handbook: How to Start, Build, and Run, published by Mcgraw-Hill at £19.99. To order a copy for the special price of £15.99, including UK p&p, click here or call 0330 333 6846
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