Co-operatives in China are on the rise, especially in the agricultural sector. As Chinese new year (19 February) approaches, Zhang Xiaoshan takes a closer look at what is prompting such growth – and what the outcome will be …
Within the past decade, the Chinese government has opened up the market for farmer co-ops, allowing them to become legal entities and trade with other bodies across the country.
The law on farmers’ specialised co-operatives (FSCs) went into effect in July 2007, allowing the sector to work in the wider economy.
As of the end of March 2013, there were more than 730,000 FSCs registered in China, made up of over 54 million rural households. Recently, more than 10,000 co-operatives have been joining up each month – meaning more than 20% of all rural households are now enrolled in FSCs.
But some of these FSCs are only loosely established. Although they are registered with the local Bureau of Industry and Commerce, they do not have established offices and some have yet to come up with a brand name. Some FSCs are simply intermediary organisations, engaged in technical services or logistics, and do not have the economic capabilities to engage in business.
There are other FSCs, which have the necessary economic capabilities and are led by agriculture-related companies, large-scale specialised farming households or big shareholders. The development of co-ops is showing signs of diversity, with variations in their quality.
Data relating to the development of FSCs should be analysed and judged realistically, as it is important not to overestimate the true driving force co-ops provide to farmers. In the future, FSCs need to gradually become more standardised as they develop, and emphasis needs to be shifted from quantitative expansion to improving quality.
A desirable growth model?
Among the core values of co-ops are self-empowerment, democracy, equality, fairness and unity; it is a basic principle that the ownership, control and benefits should belong to members.
In China’s villages, the people who are enthusiastically organising and developing co-ops are large-scale, specialised farming households who are often part of a disadvantaged group, struggling amid market competition. They have certain economies of scale and relatively highly commercialised agricultural products. It should be said that these people represent the advanced productive forces in Chinese agriculture.
They have decided to join other producers to establish co-operatives on the basis of their own specialised production.
But without entrepreneurs, we’ve found that co-operatives fail – leaving entrepreneurial, large-scale, specialised farming households in charge of specialised co-operatives.
The question here is, how can these entrepreneurs be encouraged to stick to the democratic principle? Will they create a coordinated collective benefit mechanism for the small-scale farmers in the co-op?
And how can the development of FSCs help farming those who are engaged in small-scale, part-time farming work, or vulnerable groups living in villages? For example, how could they develop shared services which will benefit such groups?
The role of co-operatives
In accordance with the law on farmers’ specialised co-operatives, FSCs are voluntary associations – democratically managed, mutually beneficial economic organisations. They are made up of producers of similar agricultural products, or providers or users of similar agricultural production and operation services.
Members of co-operatives include individuals as well as enterprises, institutions or community groups involved in production and operation activities.
Inevitably, there is a conflict of interest among a co-op’s members. The law permits companies (leading enterprises) to join co-ops – and this puts service providers and service users in one organisation.
There are two sides: the farmers, who produce and sell agricultural products, are the beneficiaries of services. And the companies that process or market agricultural products are providers of those services. The result is that these co-ops have become heterogeneous organisations with mutual interests.
This begs the question: when leading enterprises are allowed to join, or lead, co-operatives in the process of their development, does this harm small farmers – or does it benefit both sides and create a community of benefits?
Allowing leading enterprises to join a co-op essentially places the external relations of leading enterprises, co-ops and farming households within a co-operative. In other words, it internalises the relations and conflicts between different stakeholders. Does this improve things? Or does it constrain a company’s ability to maximise profits? Such questions need to be answered through practice.
Farmers who are co-operative members should run their own companies. They need to expand their economic activities into the distribution of agricultural products and processing. They could then benefit from the added value of their primary agricultural products entering the secondary and tertiary industries, and eventually become both service users and service providers. This is the desirable growth model and the right direction in which we should encourage and promote development.
Rural credit co-operatives
The practice of developing rural finance in every country around the world shows that co-operative finance is an important part of a diversified and competitive rural financial system.
But China still does not have a rural co-operative financial institution that provides financial services to farmers. Without the support of co-operative finance,
it will be very difficult to develop FSCs in China.
At the third plenary session of the seventeenth CPC central committee, it was decided that: “Farmers’ specialised co-ops that meet the necessary conditions are permitted to engage in credit co-operation.”
Since specialised co-operatives do not require verification, the conditions for registration are very lenient. Some companies are only interested in making a profit – for instance, some lenders have used the names of a co-operative’s departments to take and store money, or to lend it for profit. This blurs the line between co-operative finance and private lending, and disrupts the financial order.
The development of clear policies and regulations puts the various financial elements back in their rightful places and effectively prevents co-operative finance from being alienated.
It also encourages and promotes the development of genuine rural credit co-operation. This is what should be achieved by deeper reform of the rural financial system.
Supply, demand and distribution
In recent years, the price volatility of some agricultural products and sluggish sales have shown that small-scale farmers are unable to accurately grasp the balance between supply and demand.
Whether we are looking at primary-level farmers’ co-operatives or associations; township and town governments; and even county-level government departments, none are able to understand how demand works in the larger market.
As a result, they cannot effectively allocate their resources to match supply and demand.
This imbalance in supply and demand of agricultural products calls for the establishment of farmers’ co-operative associations at the regional level – and higher. The larger these associations are, the greater their ability to withstand natural and market risks, and to eliminate the effects of fluctuations in agricultural production.
The law on farmers’ specialised co-operatives did not mention the issue of co-operatives going on to establish associations. If we are pinning our hopes on specialised co-ops, which produce a wide range of agricultural products, gradually forming a complete system as policies are introduced, we will be waiting a long time.
Instead, we should make full use of the existing institutional framework and organisational system, and deepen the reform of the distribution system.
This would allow us to develop larger platforms, integrated to relevant parts of the existing rural distribution system – such as agriculture-related enterprises, supply and marketing co-operatives, agricultural trade associations, FSCs and farmers’ broker associations.
These platforms would be the fulcrum for effectively matching agricultural product supply and demand, allowing the government to regulate the market and, in the process, bring together primary-level FSCs at a higher level.
Some academics believe an effective way to develop co-operatives in East Asian societies that have large numbers of small farmers would be to develop multi-functional co-ops, similar to comprehensive agriculture co-operatives in Japan.
In rural China, the collective ownership of rural land, which includes agricultural land and rural collective construction land, provides the legal basis for village community organisations to carry out economic activities. It also means that Chinese rural community organisations are the mother and cradle of specialised co-operatives.
In the process of developing specialised co-operatives, the exchange of contracted land-use rights, and the allocation and use of resources such as water and electricity, are all inseparable from village community organisations.
After the law on farmers’ specialised co-ops was passed, and local governments began paying greater attention, the functions of specialised co-ops increased and their role was enhanced.
The more active specialised co-operatives are, the more economic ties they have with village community organisations. As a result, the conflicts and issues related to integration become more noticeable – we see them break out between market-oriented, trans-regional, specialised co-operatives and local village community organisations. This should be clarified in theory and in practice.
The development of co-operatives needs to be adapted to the stage of development of the local economy.
If this is the case, success will come naturally when conditions are ripe, so advice should be given that is appropriate to the situation. During this process, farmers should participate voluntarily and the government should encourage, guide and support the development of FSCs. The government should not interfere, but simply play the role of a catalyst, and should particularly avoid setting targets and tasks, or applying too much pressure while co-operatives develop.
But if they are to genuinely support and not interfere in co-ops, local governments need to remove institutional and structural obstacles.
If China’s specialised farming households in FSCs can genuinely become the main owners of the assets of co-operatives – controlling of the affairs of those co-ops and the benefiting from their services; and if they boldly explore the change in institutional framework – then they will be able to respond to the challenges they face and resolve the various confusing issues.
Their experience of success or failure will enrich the theory and practice of co-operatives and provide a much-needed contribution to the development of the international co-operative movement.
- This article has been edited from a report produced by CICOPA and the International Co-operative Alliance – Co-operative Growth for a 21st Century.