How is the co-operative model coping with the recession?

All in this together

Co-operatives - All in this together | Business | The Economist

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THESE are difficult times for the Fagor appliance factory in Mondragón, in northern Spain. Sales have seized up, as at many other white-goods companies. Workers had four weeks' pay docked at Christmas. Some have been laid off. Now salaries are about to be cut by 8%. Time for Spain's mighty unions to call a strike? Not at Fagor—for here the decisions are taken by the workers themselves.

 Fagor is a workers' co-operative, one of dozens that dot the valleys of Spain's hilly northern Basque country. Most belong to the world's biggest group of co-operatives, the Mondragón Corporation. It is Spain's seventh-largest industrial group, with interests ranging from supermarkets and finance to white goods and car parts. It accounts for 4% of GDP in the Basque country, a region of 2m people. All this has made Mondragón a model for co-operatives from California to Queensland. How will co-ops, with their ideals of equity and democracy, cope in the recession?

Workers' co-ops are often seen as hotbeds of radical, anti-capitalist thought. Images of hippies, earnest vegetarians or executives in blue overalls could not, however, be further from reality. “We are private companies that work in the same market as everybody else,” says Mikel Zabala, Mondragón's human-resources chief. “We are exposed to the same conditions as our competitors.”

Problems may be shared with competitors, but solutions are not. A workers' co-op has its hands tied. It cannot make members redundant or, in Mondragón's case, sell companies or divisions. Losses in one unit are covered by the others. “It can be painful at times, when you are earning, to give to the rest,” Mr Zabala admits. Lossmaking co-ops can be closed, but members must be re-employed within a 50km (30-mile) radius. That may sound like a nightmare for managers battling recession. But co-ops also have their advantages. Lay-offs, short hours and wage cuts can be achieved without strikes, and agreements are reached faster than in companies that must negotiate with unions and government bodies under Spanish labour law.

The 13,000 members of Eroski, another co-operative in the Mondragón group and Spain's second-largest retailer, have not just frozen their salaries this year. They have also given up their annual dividend on their individual stakes in the company. A constant flow of information to worker-owners, says Mr Zabala, makes them ready to take painful decisions.

It sounds conflict-free, but that is misleading. One of Mondragón's many paradoxes is that worker-owners are also the bosses of other workers. People have been hired in far-flung places, from America to China, as the group has expanded. It now has more subsidiary companies than co-operatives. Mondragón has two employees for every co-op member. The result is a two-tier system. And when recession bites, non-member employees suffer most. They are already losing jobs as temporary contracts are not renewed. Like capitalist bosses, the Mondragón co-operativists must, indeed, occasionally handle strikes and trade-union trouble.

Some worry that Mondragón-style success kills the idealism on which most co-ops are based. Those within the Mondragón group are aware of the danger. Eroski wants to offer co-op membership to its 38,500 salaried employees.

The most successful co-ops, however, are those least shackled by ideology. Mondragón used to cap managers' pay at three times that of the lowest-paid co-operativist, for example. But it realised it was losing its best managers, and that some non-member managers were earning more than member managers. The cap was raised to eight times. But this is still 30% below market rates, and some managers are still tempted away. “Frankly, it would be a bad sign if nobody was,” says Adrián Celaya, Mondragón's general secretary.

Lately Mondragón has had trouble keeping successful co-operatives locked in. Irizar, a maker of luxury coaches, split off last year, reportedly because it no longer wanted to support lossmaking co-ops elsewhere in the group. 

Henry Hansmann, a professor at Yale Law School, says co-ops often fall apart when worker-owners become too diverse. He points to United Airlines—not a co-operative, but once mainly owned by workers from competing trade unions—as an example of how clashing interests can kill worker ownership. By bringing in tens of thousands of new members at Eroski, many far from the Basque country, Mondragón risks falling into that trap. The group's bosses believe, however, that the way forward is to promote the idea that co-operativism brings advantages. The global downturn may strengthen the group internally. As unemployment sweeps the globe, after all, there is no greater social glue than the fight to keep jobs. 

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All in this together

How is the co-operative model coping with the recession?

Business March 28th 2009

From the March 28th 2009 edition

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