Finance

Does the institutional environment support or impede the development of cooperatives?

December 10, 2015
We have developed an analytical framework to identify relevant factors that lead to or hinder success of the cooperative as an organization. It all starts with the basic question: is there a need for – a particular type of – cooperatives in individual countries? Indeed, a fundamental reason for cooperation lies in the existence of unmet needs in the eyes of members, and also in a certain level of cohesion between these members. 

If there is a societal need and/or the economic situation would justify the existence of cooperatives in a country, ‘institutions’, historical, social and cultural factors define the availability or eligibility of the cooperative model for members. Provided that a need for cooperatives exists and that the whole institutional environment is conducive for the establishment and growth of cooperatives, the preconditions for a well-functioning internal governance of cooperatives are met. The actual number, market position, performance and types of cooperatives are determined by the long standing institutional environment in combination with the functioning of their internal governance and the quality of the products and services provided to members.

To verify whether the environment enables or obstructs the prospering of cooperatives, we have carried out micro and macro research. We have assessed important elements in the Cooperative Laws in 33 countries. However, we could not discover a common thread, since countless differences between countries prevailed. We also encountered a considerable gap between our de jure judgement and de facto situation in discussion with national experts. What seems right and good on paper (e.g. co-operative law) may not work in practice and vice versa. 

Regarding data on co-operatives, we have used a so-called Cooperative Economy Index as a rough approximation for the overall cooperative performance in an individual country. Concerning data on the enabling environment, we gathered quantitative proxies for ‘institutions’ and institutional factors Some salient conclusions from our empirical analysis are as follows:
- A favourable general business environment (e.g. a higher General Doing Business Indicator according to the World Bank) goes hand in hand with a better co-operative performance. If a country exhibits an improvement in this indicator, this can be interpreted as a sign that the conditions for co-operatives have ameliorated as well;
- The perceived level of corruption (e.g. a low value of the Corruption Perceptions Index of Transparency International) is negatively correlated with co-operative performance. A rise in perceived corruption points to a deteriorating constellation for co-operatives;
- Income inequality (according to the Gini Coefficient) is significantly and negatively correlated with co-operative performance. A rise in income inequality thus hints at a worsening co-operative conditions;
- A positive relationship exists between the overall state of democracy (according to the overall Democracy Index of the Economist Intelligence Unit) and co-operative performance in individual countries. In other words, it seems that the more democratic a society, the more fertile the situation for co-operatives will be.
 
View the presentation 'Roadmap to Doing Co-operative Business Reports'
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