CIAP Talk Tok

Advantages of Comprehensive Agricultural Cooperatives and Strategy for the Development of Cooperatives in Developing Countries

Seongjae Park
Senior Economist, Korea Rural Economic Institute

Although it has been a century since cooperatives spread to developing countries, cooperatives have not taken deep root yet in many countries. Due to the sluggish economic growth and under-developed market economy along with the small-scale farming structure, the environment is not favorable to the development of cooperatives.
A cooperative is an enterprise founded voluntarily to meet members’ common economic, social, and cultural needs. In order for a cooperative to be developed, it is required to meet the requisites for lasting as an enterprise. It is particularly difficult to establish large-scale cooperatives for those countries where majority of the farmers are peasants and market is under-developed.
In order to develop agricultural cooperatives, Laos organizes Farmers’ Groups (FGs) that represent farmers producing the same agricultural goods and provide basic training, information, and extension services on cooperatives. A part of the farmers expect that they will have the same agricultural cooperatives as other developed countries that ensure their income and profitability. Farms mainly producing vegetables jointly built fertilizer producing facilities and a farmers’ group feeding livestock such as cows hired managers that negotiate conditions with merchants representing the FG members. In addition, rice producing cooperatives have prepared to sell rice that is contained in a small (700g) container provided by the government. There was an interesting point that although their desired cooperatives were varied depending on FGs, most villages created a joint fund to provide villagers with credit services. Credit services that provide people who need financial support with the money from depositors are common basic needs among the rural people.
The efforts of FGs are surely in the right direction facing the markets. However, it is uncertain how the efforts would turn out in terms of efficiency and sustainability. The current activities are very limited in terms of creating collaborative activities and businesses. For example, farmers in the region still produce and sell their own goods separately, which limits the creation of joint businesses due to the uncertainty on the performance after the joint purchase and sales.
Another problem is that most farming households will be excluded if the development of cooperatives is relatively focused on more commercialized crops. Villages already specialized and well grouped can survive with little support from the government developing themselves. On the other hand, small farmers still face a variety of difficulties such as little market information, poor negotiation with merchants, and under-developed joint responsiveness. From the policy perspective, it is advisable to focus more on small farmers in grouping and developing their capacity than on leading farms that are able to stand on their own.
To develop cooperatives, it is essential to find out ways of ensuring the appropriate environment and conditions for the cooperatives. One of the ways is to create incentives to constantly use cooperatives by bringing significant profits to members through businesses in the cooperatives. For countries like Laos where most farmers are small-scale, the most feasible business in cooperatives is credit services. On the contrary, organizing specialized cooperatives by types of products covers only a small portion of agriculture. Then, what is the proper approach to the rest of the farms?
The alternative is making comprehensive agricultural cooperatives combining credit services and other businesses. The biggest advantage of the comprehensive cooperatives is to offset the market failure by combining core businesses keeping the cooperatives with other businesses that farmers need. Credit services are considered the core business in this context. Regardless of types of products, credit services are critical to all the farmers. Accordingly, economies of scale can be expected as the scope of members and businesses is large. Besides, members can receive technical, institutional services with more useful information compared to those from conventional money lenders and credit groups. Namely, there is no more competitive business than credit services in rural businesses. On the contrary, there remain risks for small-scale farmers as it is difficult to expect that the farmers can achieve economies of scale competing against market merchants and dealing with agricultural goods sales and production in such small-scale businesses. Therefore, comprehensive agricultural cooperatives managing various businesses such as credit services, agricultural products sales, equipment purchases, and cooperative insurance are more feasible than specialized agricultural cooperatives by types of products in achieving economies of scope and scale.
Comprehensive agricultural cooperatives cover farm households across the country as their core business is credit services which all the farmers need. This leads farmers to develop and get adjusted to the market economy through joint responsiveness. Also, specialized agricultural cooperatives by specific products should be permitted so that they can be developed by their own efforts.
In order to establish cooperatives nationwide, it is significantly important to complete the nationwide system of cooperatives by establishing the agricultural cooperative federation at regional and national level. The agricultural cooperative federation develops the entire agricultural cooperatives through implementing research, advertising, policies, monitoring, extension services and conducting businesses that primary cooperatives cannot implement.
Once the nationwide system of agricultural cooperatives is completed, even if some cooperatives fail and are liquidated, other neighboring cooperatives can take over them and keep providing services to the existing members. It means that the entire cooperative members will be protected receiving the promised services. So far a number of countries have remained without cooperatives for a long time once cooperatives failed. The failure made cooperative movements shrunk increasing negative cognitions on cooperatives.
Besides, there are various challenges to be overcome to adhere to the development model of comprehensive cooperatives. Firstly, the will of the government is critical. Generally, the ministry of finance considers credit services a part of its duties and does not want to combine credit services with other businesses that have higher potentials of risks. It will be a big challenge to institutionalize the comprehensive cooperative unless those who insist the strategy of specialized agricultural cooperatives (the separation of credit cooperatives and specialized supply and marketing business cooperatives) are convinced. Secondly, the possibility of a conflict of interests between members should be minimized. There is a high possibility that a core business which is credit services assists other businesses with its profits and those who are mainly users of credit services may react against the businesses. For this issue, the members should be aware of the point that economies of scope from the credit services and other supply and marketing businesses promote the development of cooperatives. Also the members should understand that the effect of the money flow does not clearly appear even though credit services can be developed through all the money flows related to production and sale of agricultural products.
It is worthwhile for developing countries to refer to the cases of South Korea that was in the same situation half a century ago developing countries are currently facing. South Korea also underwent a number of trials and errors in establishing policies and still has room for improvement. Nevertheless, South Korea was right to promote the establishment of comprehensive agricultural cooperatives with successful results considering the situation and development phase comprehensively.

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