Cooperatives As a Community Development Strategy: Linking Theory and Practice

JRAP (2005)35:1

Cooperatives as a Community Development Strategy: Linking Theory and Practice

Kimberly Zeuli and Jamie Radel University of Wisconsin – Madison USA

Abstract. The evolution of community development theory has not yet generated a parallel ad- vancement in implementation strategies. In this paper we introduce a strategy—cooperative development—that compliments contemporary community development paradigms (self-help, asset-based, and self-development theories); thus providing communities and practitioners with an effective (and perhaps unfamiliar) vehicle for development. Although cooperative leaders, cooperative developers, and cooperative scholars consider cooperatives an important vehicle for community development, most have stopped short of prescribing how cooperatives can be incorporated into community development paradigms. Our objective is to motivate community development scholars and practitioners to start thinking about cooperatives in new ways, as part of their theory and strategies.

1. Introduction Cooperatives are viewed as important vehicles for community development because they mobilize local The evolution of community development theory resources into a critical mass and their structure allows has not yet generated a parallel advance in implemen- them to be more community-oriented (Fairbairn et al. tation strategies. The traditional paradigm, with its 1991; Wilkinson and Quarter 1996).1 Cooperative busi- focus on helping communities regain their past glory, nesses can be found in nearly all countries, existing in was associated with business attraction, retention, and numerous and varied sectors of the economy. In the expansion strategies (Shaffer, Deller, and Marcouiller U.S. they are most prevalent in agriculture and con- 2004). Practical approaches to implementing contem- sumer sectors (especially natural food stores and pur- porary paradigms are less clear. Part of the issue is chasing), finance (credit unions), health care, housing, that self-help, asset-based, and self-development theo- and utilities, although successful cooperative busi- ries focus as much on process (building community nesses can be found in virtually every industry. About efficacy) as on outcomes. In addition, the outcomes are 48,000 cooperatives serve 120 million members, or no longer concrete effects such as jobs and income, but roughly 4 out of 10 Americans (NCBA 2005).2 rather nebulous concepts like innovation and entre- This paper fills an important gap in both theory preneurial activities. The more important dynamic, and practice. Although cooperative leaders, coopera- however, is the underlying tenet of contemporary the- tive developers, and cooperative scholars consider ory that communities need to find their own strategies; identifying generic, one-size fits all strategies 1 Although the word “cooperative” can be applied to many different seems antithetical to the individualistic, self-help types of group activities, the term is used here to describe a locally models. In this essay we expound a strategy— owned and controlled business model. In the U.S., and many other countries, cooperatives are legally defined as a special type of cor- cooperative development—that compliments contem- poration. As such, they are subject to state and federal cooperative porary community development paradigms and thus, statutes. provide communities and practitioners with an effec- 2 It should be noted that the membership statistic represents the total tive (and perhaps unfamiliar) vehicle for development. number of memberships and not actual persons. Many people hold memberships in more than one cooperative. 44 Zeuli and Radel

cooperatives an important vehicle for community de- The following section provides more details about velopment, most have stopped short of prescribing the cooperative model, including a comparison of tra- how cooperatives can be incorporated into community ditional and new structures, and a very brief overview development paradigms.3 Their perspective, that co- of the cooperative development process. In section operatives are businesses first and foremost, seems to three we examine the potential for cooperatives as a be informed (and limited) by the general historic reali- strategy under three contemporary community devel- ties of cooperative development in the U.S. The social opment paradigms: self-help community develop- and economic contributions of cooperatives to their ment, asset-based community development, and self- communities are certainly acknowledged, but largely development. We then discuss the challenges associ- as unintentional outcomes, or “community external- ated with using cooperatives as a tool for community ities,” emerging from the process of organizing and development in the context of human, social, and fi- operating a cooperative (Egerstrom 2001; Nadeau and nancial capital considerations. Our conclusion pro- Wilson 2001). The credulity of believing that commu- vides a brief summary of the article’s main points and nities will look to cooperatives to achieve local devel- policy recommendations. opment objectives other than jobs and income is re- flected by Fairbairn (2004): “After all, how many citi- 2. The Cooperative Business Model zens…sit down and say, ‘What our town needs is more democracy: let’s form a co-op!’” (p. 19). A standard definition of cooperatives in the U.S., a Community development scholars and practitio- user-owned, user-controlled business that distributes ners, on the other hand, are now advocating that benefits based on use, combines the model’s three communities do just that. Although for the most part fundamental principles: user-ownership, user-control, they never mention cooperatives per se, they promote and the distribution of net income based on patronage locally owned and controlled businesses. The fact that rather than investment (Zeuli and Cropp 2004). A co- cooperatives, or any actual legal business structures, op’s user is a person that supplies its raw product are largely ignored in both community development (e.g., grain for processing) or purchases its goods and theory and practice may reflect either a lack of de- services. The “user-owner” principle implies that the tailed knowledge about business structures or an er- people who use the co-op help finance the co-op in roneous assumption that their differences (beyond return for ownership shares. Cooperative patrons (or local ownership and control) are trivial in a commu- users) become members by investing equity (either nity development context. When cooperatives are up-front or over time) in the cooperative. Members mentioned, their potential use is narrowly defined generally contribute thirty to fifty percent of the capi- (e.g., worker-ownership in Blakely 1994). tal required to finance the enterprise.4 The collective By providing relevant information about the dis- investment of equity creates joint ownership of the tinguishing traits of the cooperative model and exam- business. Cooperatives may receive grants and loans ples that reflect a more comprehensive function for (debt capital) from lending institutions (there are cooperatives in community development, we address banks that specialize in providing cooperative credit) a serious omission in the community development but there are limitations on receiving equity capital literature. The need for this type of information is from individuals or organizations that will not patron- timelier than ever. In the past decade, new cooperative ize the cooperative. Cooperatives may obtain equity models have evolved. As we will discuss, some of from non-members, but the investors may not be these models hold new promise for community devel- granted any voting rights and their returns from the opment initiatives, while others pose unique chal- investment are limited by state cooperative statutes (in lenges. Comprehensive guides for cooperative devel- most states dividends may not exceed eight percent opment already exist; our objective is to motivate annually). community development scholars and practitioners to The “user-control” concept means that cooperative start thinking about cooperatives in new ways, as part members govern their organization. They approve and of their theory and strategies. Our discussion, there- amend the co-op’s governing principles—the articles fore, is oriented towards praxis— the practical applica- of incorporation and bylaws. They also elect a board of tion of community development theory. directors and are required to approve all mergers and

3 Wilkinson and Quarter (1996) offer a theoretical framework that describes a community economic development process informed by 4 Lending institutions actually dictate the proportion of equity cooperative development, whereas we show how cooperatives can members need to provide in order to secure a loan. The equity capi- be used as a strategy to implement existing community develop- tal contribution of individual members should be in equal propor- ment theories. tion to their patronage of the co-op.

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any bankruptcy decisions. State statutes governing ence; (5) education, training, and information; (6) co- cooperatives and cooperative bylaws usually dictate operation among cooperatives; and (7) concern for that only active co-op members (those who use the co- community. The seventh principal, which proposes op) are eligible to become voting directors, although that “cooperatives work for the sustainable develop- non-members sometime serve on boards in a non- ment of their communities through policies approved voting, advisory capacity. Advisory directors are be- by their members,” was added in 1995 (ICA) in recog- coming more common in large agricultural coopera- nition of the link between cooperatives and commu- tives in the U.S., where complex financial and business nity development (Wilkinson and Quarter 1996). operations may require the expertise of financial and The cooperative business model, formally devel- industry experts. oped in 1844 in Rochdale, England, has never re- Voting rights are generally tied to membership mained static. New laws and applications have created status, usually one-member, one-vote, and not to the two distinct offshoots from the traditional structure level of investment in or patronage of the cooperative. outlined above (Table 1). New generation cooperatives Cooperative law in a number of states in the U.S. and (NGCs), which generated a lot of interest in the 1990s, in other countries, however, also permits voting rights have three characteristics that distinguish them from based on the volume of business the member trans- the traditional model (Zeuli and Cropp 2004). First, acted the previous year with the cooperative. Gener- they limit the number of members they allow based on ally, however, there is also a maximum number of the size of their business. Traditional cooperatives votes any member may cast to prevent control by a have always had open membership policies, allowing minority of members. Equitable voting, or democratic anyone who patronizes the cooperative to join. Sec- control, is a quintessential attribute of cooperatives. In ond, they tie membership shares to delivery rights. most cooperatives, the board of directors hires a (non- Members purchase shares that give them not only the member) manager to oversee business operations right, but the obligation to sell a certain quantity of (worker-owned cooperatives and collectives are excep- product to the cooperative. In traditional cooperatives, tions). The manager, the only employee that answers members have the opportunity to sell to the coopera- directly to the board, is responsible for carrying out tive but are usually under no legal obligation to do so the mission and vision of the cooperative as estab- unless they enter into some type of supply contract. lished by the board of directors. Third, the membership shares can be sold by members “Distribution of benefits on the basis of use” refers to other patrons, meaning member equity may in- to the allocation of a cooperative’s annual net profits, crease or decrease in value over time. In contrast, all or part of which are returned to members in pro- membership equity in traditional cooperatives does portion to their patronage (thus, they are aptly called not change in value. When members wish to leave, patronage refunds). Cooperatives can also return a they simply sell their shares back to the cooperative at portion of their profits as dividends on investment. In par value (the price they originally paid). the U.S., however, federal and most state statutes set Patron-investment cooperatives (PICs) are a more an eight-percent maximum on annual dividend pay- radical departure from the traditional model.6 This ments. The purpose of these limits is to assure that the type of cooperative allows non-patron investors (indi- benefits of a cooperative accrue to those who use it viduals who do not use the cooperative but invest eq- most rather than those who may have the most in- uity capital) to become members and bestows on them vested. all the rights of patron members (including voting). Unlike other business structures, cooperatives are The relatively new Canadian multiple stakeholder guided by a set of business principles and values.5 The model (also called a solidarity cooperative) allows International Cooperative Alliance, the organization three categories of members: users, workers, and “sus- that represents cooperatives worldwide, has adopted tainers,” the latter including any person or organiza- three sets of principles (in 1937, 1966, and most re- tion that has invested in the cooperative (Girard and cently, in 1995). The seven principals for cooperatives De Bortoli 2004). For example, community non-profits include the following: (1) voluntary and open membership; (2) democratic member control; (3) member economic participation; (4) autonomy and independ-

5 In reality, cooperatives vary greatly in their adoption and interpre- 6 In 2001, Wyoming was the first state to adopt a cooperative statute tation of these principals. The degree to which they subscribe to that legalized this form; thus, it is often called the Wyoming model. them is sometimes used to classify forms of cooperatives (Barton To date, only Minnesota, Iowa, and Tennessee have passed similar 1989). In spite of this, the principles still play a role in the organiza- laws. For a more comprehensive overview of this model see Zeuli tion and operation of cooperatives. and Cropp (2004).

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Table 1: Comparison of Alternative Cooperative Types

Traditional New Generation Patron Investment Worker-Owned Cooperative Cooperative Cooperative Cooperatives

Membership Open membership Closed membership Open or closed Closed membership (Ownership) and generally no and ownership is membership; non limited to the number contractual use re- linked to product patrons may also of jobs in the coop- quirement. Only pa- delivery contract. become members. erative; only workers trons are members. Only patrons are are members. members.

Equity Membership certifi- Common stock, but Common stock with Membership certifi- cates or common membership shares two different mem- cates or common (par value) stock for have “market value”; bership classes: pa- stock. Equity in co- patrons; preferred members sell their tron and investor. operative is generally (non-voting) stock stock to other patrons generated through for non-patrons. when leaving co-op. sweat equity.

Investment & Generally low up- Generally high up- Low or high upfront Low or high upfront Risk front investment; front investment; in- investment; mixed investment; mixed relatively low finan- creased financial risk financial risk. financial risk. cial risk to members. for members.

employees an ownership stake in the company. Most and government agencies in Canada often invest in ESOPs are not completely employee-owned and they these cooperatives, which are concentrated in personal are usually not democratically governed. and home service sectors (Wall, Duguay, and Rohan Democratic governance and user-ownership 2004). Because of their multiple membership classes, makes the cooperative development process more the PIC and multiple stakeholder models offer new complex than is the case with other business models.8 opportunities for local governments and community The degree of difficulty depends on who initiates the residents to jointly meet community needs through a process, the diversity of the stakeholders, and the cooperative organization. complexity of their objectives. The cooperative devel- Worker-owned cooperatives are another prevalent opment process can be initiated by a group of people form of cooperative in the United States. Under this in a community who are interested in creating a coop- form of co-op, the employees own the business.7 Of- erative to meet a collective need or opportunity (a bot- ten, equity is paid to the co-op through “sweat eq- tom-up approach). Alternatively, the process can be uity,” meaning that the member (owner) must work a initiated by an external party, such as a community certain number of hours to fulfill their equity invest- development agent, who is interested in developing a ment requirement. Similarly, the co-op’s benefits may cooperative to meet a specified or general community also be distributed based on individual labor contribu- need or opportunity (a top-down approach). Or, in tions rather than patronage. Worker-owned coopera- contrast to either of these two approaches, the entire tives are often confused with Employee Stock Owner- cooperative development process can take place out- ship Plans (ESOPs), which are corporations that give side of the community, in what we call a peripheral approach. In this case, the community is chosen as a location for the co-op based on strategic business rea- 7 The term “worker-owned cooperative” is often erroneously used sons (e.g., market access or transportation infrastruc- interchangeably with the term “collective.” The latter refers to a non-hierarchical management style not an ownership or legal busi- 8 See Zeuli and Cropp 2004 for a more detailed description of the ness model. Not all worker-owned cooperatives are collectives. cooperative development process.

Cooperatives as Development Strategy 47 ture) at the end of the cooperative development proc- general (Walzer and Merrett 2002; Zeuli et al. 2005). ess. Other cooperatives are developed by individuals The initiators and goals of the cooperative devel- within a community (e.g., community development opment process, as well as the cooperative structure, agents and civic leaders) to realize a larger community have important implications for community develop- development objective; these cooperatives have a dual ment, as will be discussed in greater detail in the fol- bottom-line, financial and social (Fairbairn et al. 1991). lowing section. There are certainly other factors that They are sometimes called community cooperatives distinguish the cooperative model from other legal (Zeuli et al. 2005) or community business corporations businesses structures (e.g., unique tax treatment) and (MacLeod 1997). determine whether the cooperative model is the ap- Perhaps the most well known example of such a propriate choice for any community development ini- cooperative is Mondragon in the Basque region of tiative. We do not provide a comprehensive compari- Spain. The Mondragon “experiment” in community son since it is beyond the scope of this article and can economic reform has grown into a complex of coop- be found elsewhere in the literature (e.g., Zeuli and eratives that comprise over 100 individual businesses Cropp 2004). Cooperatives also have unique chal- (MacLeod 1997). Other notable cases include the lenges, which will be covered in section four. Evangeline region in Prince Edward Island, Cheti- camp in Nova Scotia, Emilia Romagna in Italy, and the 3. The Potential Contribution of Coopera- kibbutz of Israel.9 The more recent innovation of “so- tives to Community Development cial cooperatives,” first founded in northern Italy in the early 1980s, is also receiving a lot of attention, es- In this section we more explicitly examine the pecially in Canada. They were initially developed to ways cooperatives can be used as a strategy under provide jobs for people with disabilities but now also three contemporary community development para- deliver general social services (health care, social ser- digms: self-help, asset-based, and self-development. vices, education, recreation, etc.) in many communities Since these approaches overlap in many areas, the dis- in northern Italy (Wall, Duguay, and Rohan 2004). cussion of each paradigm and the potential role for Each of these cases represents an integrated system of cooperatives will be additive rather than comprehen- co-ops working together to meet collectively the needs sive. Therefore, some of the cooperative examples we of the community (Wilkinson and Quarter 1996). use to illuminate one strategy could also be included Independent community cooperatives, single co- in the other strategies, but we avoid doing so for the operatives designed by individual communities to sake of clarity. Instead, we choose to highlight differ- meet diverse social and economic community objec- ent cooperative cases for each strategy to maximize the tives, are less well known, but more ubiquitous. In reader’s exposure to the various roles cooperatives Great Britain, Canada (the solidarity cooperatives), play in communities. Given the objectives of this arti- and Sweden, each cooperative often has multiple ob- 10 cle, we focus on successful cooperative cases from the jectives (Lorendahl 1996; Storey 1982); while in the U.S. and Canada. U.S., the cooperative typically only offers a single primary service (Zeuli et al. 2005). Housing cooperatives, Self-help community development for example, have been developed in urban and rural The self-help model places community members areas across the U.S. to provide affordable housing for at the core of a development process with two goals: to low-income populations, including the elderly. In improve the quality of life within the community and housing cooperatives, which can be single family to increase the community’s internal capacity to create homes, apartment buildings, mobile homes or virtu- further change by institutionalizing the community ally any other structure, the cooperative owns the development process (Christenson 1989; Flora, Flora, buildings and land (Zigas 2000). Members own a share and Fey 2004; Green and Haines 2002; Littrall and in the cooperative (the business), which gives them the Hobbs 1989). It advocates creating enterprises that have a broad-base of community support and serve 9 The Antigonish Movement in Canada, which promoted the forma- the interest of many in the community (in contrast to tion of cooperatives as a means for community residents to create projects that serve the interest of a small sector of the their own local development, is a well-known historical example community). connecting cooperatives and community development (MacPherson 1979). Some cooperatives are established by a group of 10 A similar type of cooperative, called Emerging Cooperatives, were people in a community primarily to meet their own created in the U.S. during the 1960s by communities to serve the needs (e.g., affordable housing or health care services), needs of the economically, politically, and educationally disadvan- but the cooperatives also benefit the community in taged (Williams 1974).

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right to occupy a particular unit in the cooperative. Asset-based community development Cooperatives often restrict appreciation on units and Asset-based development starts from an assess- strive to keep costs low for their members (Zigas ment of a community’s resources and thinking about 2000). In addition, since the cooperative, not the indi- how to mobilize those resources for the benefit of the vidual member, obtains financing, the members do not community (Green and Haines 2002; Shaffer, Deller, have to meet the credit requirements of the lender. The and Marcouiller 2004). A community’s assets include transfer of membership shares is also cheaper and the human, social, physical, financial, and environ- more straightforward than real estate transactions. mental, or taken together what Green and Haines The three cooperative development processes (2002) call “community capital.” By virtue of being (bottom-up, top-down, and peripheral) described in locally developed, locally owned and locally con- the previous section have different impacts on com- trolled, cooperatives clearly build on a community’s munity efficacy, the ability of community members to human capital, social capital, and financial capital. engage in collective action to pursue a common objec- The cooperative contribution to human capital de- tive (Parisi et al. 2002). The first of these three proc- velopment (education, skills, and experience) may be esses (bottom-up) has the greatest potential for com- its most substantial community development impact. munity residents to learn a development process that According to Richardson (2000), the value of leader- could be replicated for other enterprises because it ship training cannot be overestimated: “If I were requires the greatest degree of individual involve- pressed to select only one from a list of the ten most ment. The impact of the second process depends on important components needed for sustainable rural the extent of the involvement of the external agent. If community development, it would have to be leader- the agent is primarily acting as a facilitator and guid- ship training” (p. 87). Cooperatives build local human ing a group through the process, the impact would be capital through member education and leadership op- similar to the group acting on their own. If the external portunities on the board of directors. Educational op- agent is acting as the sole or primary cooperative or- portunities are often extended to directors, employees, ganizer, the opportunity for the community to gain and members who do not serve on the board, and are additional internal capacity decreases. The third proc- provided in areas beyond the core business (Torgerson ess, which involves a cooperative development proc- 1990); a duty to educate members is a traditional co- ess outside of the community in which it is eventually operative principle. For example, some cooperatives located, generally falls outside of the self-help model. pay for members to attend leadership conferences or Instead, it reflects a more traditional community de- industry meetings or they organize their own work- velopment strategy (business attraction or recruit- shops. Annual meetings are another educational opment). portunity and often cooperatives invite speakers who The choice of a cooperative model is an equally will discuss national policies and trends or leadership important consideration. The development of NGCs issues. Other types of businesses may provide similar and PICs may have less “broad-based” support than opportunities for their employees but not for their en- traditional cooperatives because of their closed mem- tire customer base. bership policies (NGCs) and the inclusion of investors Individuals who serve on any corporate board de- who may not be located in the community (PICs). The velop skills in business management, communication, non-local investors may be more concerned about the and group problem-solving that can be used in other return on their investment than the welfare of a com- organizations. In the case of cooperatives, these skills munity in which they do not reside. If the investors are are being developed by community residents, many of local residents, however, the PIC model may comprise whom may not have similar opportunities. Thus, co- a more diverse set of community supporters than ei- operatives play an important role in developing local ther the NGC or traditional cooperatives, which are leadership. As Fairbairn et al. (1991) succinctly sum- limited to patron members. Whether or not the coop- marize: “Without ever forgetting that a cooperative is erative continues to serve the community at large also an economic enterprise that follows certain clear and depends on its internal structure. For example, pro- highly evolved rules, a cooperative is also adult educa- portional voting rights may allow a small, coalition of tion of a most compelling kind” (p. 44). Richardson members to effectively control the cooperative. Their (2000) tells community development practitioners that interests may not represent the entire cooperative they urgently need to persuade local citizens to pre- membership (and by extension a broad base in the pare themselves for leadership roles. Cooperative community). members will have their own incentives to prepare for leadership and thus, will need less persuasion.

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The cooperative development process, cooperative must feed back into the social capital and, membership, and leadership all build social capital as more financial capital is developed, so- (norms, relationships, reputation, etc.) and in turn, cial capital will be reinforced” (p. 310). social cohesion (the ability to function as a unit) within the community (Fairbairn 2004; Putnam 2000; Walzer This connection is important when considering alter- and Merrett 2001). Social capital, like financial capital, native cooperative models. Successful NGCs, by virtue is a resource individuals and a community can use to of their structure and their ability to compete in value- build or strengthen organizations. An individual’s added agriculture, generate greater financial returns ability to “trust” others is an important outcome, or than traditional cooperatives, which makes them a one measure, of social capital; if you build social capi- popular model in agriculture (Walzer and Merrett tal you build trust. Trust, in turn, lowers the transac- 2001; Zeuli and Cropp 2004). With closed membership tion costs of collective action (Putnam 2000). Co-ops not everyone in the community has the opportunity to build social capital by providing opportunities for in- reap the benefits, creating a potential rift in the com- creased community interaction (Green and Haines munity or an exacerbation of income divisions. NGCs 2002; Putnam 2000; Tolbert et al. 2002). Members in- typically require high up-front membership fees (in teract at cooperative meetings, educational events, and order to raise enough capital to support building their through board service. Further, cooperative buildings business enterprise), meaning some community resi- (e.g., community rooms at cooperative groceries or the dents may not be able to afford membership. The fi- local farm supply store) often serve as a vital connec- nancial capital built by NGCs, therefore, may not cre- tion point for the community, providing a physical ate greater social capital. The same situation holds for place for members and non-members to informally the PIC model (or with large traditional cooperatives), come together and interact (Fulton and Ketilson 1992; but for different reasons. In both situations a signifi- Wilkinson 1991). Cooperatives have the potential to cant portion of the cooperative’s benefits could flow engage diverse segments of a community; sub- outside the community. populations that may have no other reason or oppor- Many cooperatives are established to strengthen a tunity to interact. Cooperatives provide an efficient specific community asset. For example, a local eco- vehicle for community members to realize the returns nomic development organization in California decided on their social capital investment (Fairbairn 2004). to create a cooperative (the Foodworks Culinary Cen- Cooperatives also generate financial returns on lo- ter) with an incubator for small food processing com- cal financial capital. Cooperatives help communities panies and a community kitchen to add value to their overcome a significant barrier to business develop- primary resource—a variety of locally grown fruits ment—lack of equity capital—by mobilizing and ag- and vegetables (Zeuli et al. 2005). In Canada’s remote gregating local financial capital. If successful, coopera- Artic north, cooperatives have been developed to tives increase a community’s financial capital since the promote the production and sale of Inuit art (Wall, cooperative owners are generally local residents. Duguay, and Rohan 2004). The process used to de- Therefore, the community retains a greater share of velop these cooperatives mirrors the type of asset- the business profits than would be the case with a mapping advocated in asset-based development. publicly traded firm (whose shareholders may be scat- tered across the country) and the wealth is distributed Self-development among more residents than would be the case with a Perhaps the most radical of the three approaches, smaller partnership or sole proprietorship, with profit self-development opposes the notion that local devel- sharing limited to only a few. Cooperatives may also opment is predetermined by resource endowments or challenge local monopolies by offering competitively exogenous factors (Shaffer, Deller, and Marcouiller priced products and services, thereby increasing con- 2004). In contrast to the other two approaches, it spe- sumers’ purchasing power (Fulton and Ketilson 1992). cifically calls on community residents to use local fi- Financial capital and social capital are inter- nancial resources to create businesses that are locally related. As MacLeod (2004) summarizes: owned and controlled (Blakely 1994; Green et al. 1990; Sharp and Flora 1999). It seeks to completely internal- “True financial capital is built upon social ize community development by diminishing and ul- capital, depends upon it, and has its timately eliminating the role of external agents: “The source in it. If financial capital is mobile, objective of self-development efforts is to gain control then it absorbs and uses social capital and of the local economy by the community…Self devel- moves on, leaving behind a depleted soci- opment efforts operate for the benefit of the whole ety. To be sustainable, financial capital community while promoting the collective manage-

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ment and ownership of the enterprises” (Shaffer, Del- sufficiency. For example, purchasing cooperatives (a ler and Marcouiller 2004, p. 228). Conceptually, it is large cooperative owned by smaller businesses) are closely related to the social economy model, which often used to help small, local businesses compete advances collectively-owned enterprises: “…actors in more efficiently against large-scale “big box” retailers. the social economy endeavor to organize citizens to The small businesses would be unable to achieve the become agents of their own development, primarily same purchasing power on their own. Some well- through enterprises that embed social goals in their known examples include ACE Hardware (owned by business operations” (Lewis 2004, p. 7).11 4,800 retailers) and Wakefern Food Corporation Cooperatives, by definition, are an obvious vehicle (owned by 43 grocery retailers who operate the for achieving these objectives. In general, since coop- ShopRite grocery stores) (NCBA 2005). erative owners are also community residents, they are Consumers are also banding together to keep local acting rationally when they choose to accept lower grocery stores in their neighborhoods or towns. For profits or decreased benefits from their co-op invest- example, in a small mill town in Quebec, a few resi- ment if the tradeoff provides an important service or dents started a local co-op that restored the grocery, product in the community (Enke 1945; Fulton and fuel, and postal services that were lost when the mill Ketilson 1992; Fairbairn et al. 1991). In contrast, non- closure lead to the only local store going out of busi- cooperatives and enterprises owned by non-local in- ness (Wall, Duguay, and Rohan 2004). Some inner-city vestors are likely to be guided by shareholder profits.12 neighborhoods underserved by grocery stores are also This premise explains why cooperatives were histori- turning to cooperatives. Although consumer co-ops in cally the major providers of electricity and telephone urban areas are generally located in higher income service to sparsely populated rural areas in the U.S. neighborhoods, Co-op Markets in Chicago, Cass Cor- Empirical research by Bhuyan and Leistritz (2000) and ridor Cooperative in Detroit, and Flatbush Food Co-op Fulton and Ketilson (1992) further support this prem- in Brooklyn all serve low income urban neighbor- ise. Both studies found various types of cooperative hoods (Nadeau 2001). More than a convenient place to businesses that were created because other types of shop, these stores give consumers control over their firms were unwilling to provide the goods and ser- food choices and offer lower cost products, as well as vices. Zeuli et al. (2005) highlight the case of a coop- help stop the economic decline of their communities. erative internet service provider. A community college Local cooperatives, especially those that depend in Maryland realized that its students and the com- on local demand, also frequently invest in their community at large needed improved local Internet access, munities (Stafford 1990; Trechter 1996). For example, but national service providers were not interested in rural electric and utility cooperatives sponsor dis- investing in their small community; they created a co- tance-learning technologies in rural schools, finance operative to solve their problem. the building of physical infrastructure, and make di- Cooperatives are often developed in response to a rect equity investments in local businesses (Stafford small town or urban neighborhood’s desire for self- 1990; Thompson 2002). Many rural electric cooperatives also operate community economic development programs (e.g., industrial parks) and even manage 11 The social economy is distinguished from asset-based and other community development centers (e.g., the Keystone community development paradigms by two main precepts: its focus Development Center in Pennsylvania that has a coop- on the enterprise rather than the community (Lewis) and a stricter (or more socialistic) set of guiding values for the enterprise (e.g., erative-oriented development mission). Consumer solidarity and democratic decision-making). grocery stores are another example; they also invest in 12 Tolbert et al. (2002) offer an interesting alternative premise. They community development programs (e.g., managing argue that a firm’s local orientation, a function of size, scope, and community development funds) and local agriculture longevity rather than legal business structure, determines its com- (Zeuli et al. 2005). mitment to communities. Locally oriented firms (owners, managers, Cooperatives also invest in their communities in and other employees) will make decisions that benefit the community as well as their own interests because they are socially and fi- reaction to a crisis. For example, local agricultural co- nancially invested in the community. Their argument is valid for operatives frequently purchase non-related (and often locally owned firms, but not for firms owned by non-local share- not very profitable) stores (e.g., bakeries, car washes, holders. The latter will demand decisions that maximize their and auto parts) in their towns (Stafford 1990; Trechter shareholder value. 1996). Typically, they are the buyers of last resort;

without their purchase the stores would close and community residents would be forced to find the same services in another town (Fairbairn et al. 1991; Stafford 1990). The co-op members may recognize not only a

Cooperatives as Development Strategy 51 personal inconvenience if they fail to act, but also the quiring more training than in other areas (Darby 2000; long-term negative economic and social impacts that Richardson 2000). Urban communities may also lack failed businesses impose on their community. In all of experience with the cooperative model. Some con- the cases mentioned above, the cooperatives are tradi- sumer and worker-owned cooperatives also require tional cooperatives. It is unlikely that NGCs or PICs, members to provide sweat equity as well as a financial with their concern for investment returns, would in- investment in order to become a member. The oppor- vest in non-profitable community businesses. tunity costs associated with the human capital invest- Worker-owned cooperatives, in contrast, embody ment balanced against the returns provided by the co- many of the self-development concepts. They differ op may tip the scale against a community member slightly in that they are usually not designed to serve participating in the cooperative. Therefore, the time geographically defined communities, but rather a individuals in the community have to contribute to the group of workers (Kreiner 2003). They are established development and running of a cooperative is one of to provide stable employment opportunities and to the limiting factors in using cooperatives as a commu- improve job quality (work conditions, higher wages, nity development strategy. more benefits and career development opportunities) While cooperatives initiated through a top-down (DiMarcello 1998). For example, Cooperative Home approach may demand less human capital than those Care Associates, a worker-owned cooperative training organized through a bottom-up approach, they are program that provides home health aide services in less likely to “institutionalize” a community develop- New York City was started to improve working condi- ment process and are more prone to failure (Zeuli et tions in the industry and create job opportunities for al. 2005). Since the members are not involved in the low-income women (Kreiner 2003). Net profits are recreation of the cooperative, they may never feel a true invested in the company and its workers or paid out sense of ownership and loyalty. This estrangement as dividends to the members rather than shareholders means that once the co-op is no longer needed or (DiMarcello 1998). Management costs can be lower when the returns from individual efforts outweigh the because of lower salaries (less than industry averages common good (e.g., the business profits they can and hence, more inline with employee salaries) and achieve individually exceed what they would earn fewer management positions. acting cooperatively), the cooperative will have difficulty retaining its member support. 4. Challenges of Co-op Development Social Capital Issues Contemporary community development para- The willingness of people to cooperate and trust is digms encourage communities to rely on their internal a fundamental building block in a cooperative devel- resources (human, social, environmental, financial, opment strategy. Communities with established net- and physical) to solve community problems. As dis- works and relationships (civic communities) build cussed in section three, cooperative businesses can be trust and make organizing efforts easier (Tolbert et al. adapted and used in a number of self-reliant strate- 2002). In distressed rural areas networks may be se- gies, including self-help, asset-based community de- verely eroded due to diminishing access to local insti- velopment, and self-development community devel- tutions, such as schools, churches, or service organiza- opment. Yet, cooperative development and govern- tions. Further, residents may not have had positive ance can strain the community capital resources it mo- experiences working together; local rural community bilizes, especially in limited-resource or declining ur- meetings (e.g., land-use planning, zoning, or closures) ban and rural areas. can often be contentious rather than collaborative (Darby 2000; Richardson 2000). In urban areas, trust- Human Capital Issues ing relationships may be harder to establish because Often under these conditions community mem- housing tenure is generally shorter and there is a bers are struggling to meet their basic needs and do greater diversity of people within the community. In not have the time or energy to engage in activities that both types of communities the ability to organize a do not contribute to their immediate well being. Co- cooperative becomes more difficult and time consum- operatives generally require a significant dedication of ing because basic community organizing activities time by the initial community organizers (especially if must take place first in order to begin to build com- it is truly a grass-root, bottom-up effort) and future munity relationships. Cooperative leadership may also leaders (as directors and active members). In limited- be more challenging if members wind up spending a resource communities, the cooperative members may lot of time arriving at group consensus (Darby 2000). have limited business and leadership experience, re-

52 Zeuli and Radel

In addition, the type of cooperative structure that that would not be provided by purely profit-oriented is adopted can affect social capital within the commu- firms. nity. For example, NGC’s have closed membership Our overview points to the flexibility of coopera- and thus, not everyone in the community has the op- tives as an organizational form and illustrates how portunity to participate in the cooperative and reap cooperatives can be used within community self- the potential benefits generated through its develop- development initiatives as a way to create locally ment. If successful, this creates a chasm between the owned and controlled businesses, providing an alter- “haves” and “have nots” in the community, creating a native to the more traditional business recruitment new source of community tension. Community sup- strategy. Cooperatives can be (and have been) estab- port for cooperatives is essential to their viability and lished in virtually every sector in the economy. How- success (Zeuli et al. 2005; Fairbairn et al. 1991; Merrett ever, cooperatives can also strain the community capi- and Waltzer 2001; Wilkinson and Quarter 1996). tal resources they mobilize and build, especially in urban or rural areas that are in social or economic de- Financial Capital Issues cline. Therefore, as with any community development By definition, cooperative members are required strategy, the community needs to carefully consider to own a portion of their organization. Equity con- the co-op model’s potential benefits as well as costs. straints are a challenge for all cooperatives, but they Community development scholars and practitio- might be especially severe for cooperatives in limited- ners interested in learning more about cooperatives resource communities where members do not have the can avail themselves of a variety of resources: coopera- surplus financial resources to invest in a business ven- tive development organizations, cooperative councils, ture, cooperative or otherwise. Since cooperatives are university cooperative centers, and extension educa- often being created to provide necessary but not ex- tors are available in every state. Motivating them to tremely profitable businesses, they also can be consid- think about cooperatives as a community develop- ered risky by the lending community, making member ment strategy in the first place requires better educa- equity more of a necessity. Members may also have tion programs about cooperatives at the community limited access or be unable to acquire their own loans and regional level. Most cooperative programs, espe- to cover their equity investment. In addition, if the cially those used to generate revenue for their organiz- venture fails, a large portion of the community’s fi- ers, are focused on specific development strategies and nancial capital might be lost, thus jeopardizing exist- board training. Support from universities, extension, ing and future community enterprises. and government agencies is required for more general The challenges posed above are not insurmount- (and more geographically extensive) co-op education able; overcoming the seemingly impossible is a hall- programs. mark of cooperatives historically. Prior to setting forth on a cooperative development initiative, community References organizers (whether professional community development practitioners or community members them- Barton, D. G. 1989. “Principles.” in Cooperatives in Ag- selves) should consider these challenges and possible riculture. D. Cobia ed. Englewood Cliffs, New Jer- solutions. For example, they may have to find more sey: Prentice-Hall. training opportunities (and efficient ways to provide Bhuyan, S. and F. L. Leistritz. 2000. “Cooperatives in the training) for members or seek grants and/or spe- Non-agricultural Sectors: Examining a Potential cial loans to help meet their capital requirements. Community Development Tool.” Journal of the Community Development Society. 31: 89-109. 5. Conclusion Blakely, E. J. 1994. Planning Local Economic Develop- ment: Theory and Practice. Thousand Oaks, Califor- In this article we introduce cooperatives as a strat- nia: Sage Publications. egy that compliments contemporary community de- Christenson, J. A. 1989. “Themes of Community velopment paradigms. A better understanding of co- Development.” in Community Development in operatives is necessary to help community develop- Perspective. J. A. Christenson and J. W. Robinson Jr. ment practitioners explore this development option eds. Ames, Iowa: Iowa State University Press. and use it appropriately. By virtue of being locally Darby, P. 2000. “Can Value-added Agriculture Work owned and controlled, cooperatives can solve local in Limited-Resource Communities?” Journal of problems by mobilizing local resources into a critical Community Development. 2: 4-17. mass. In addition, they can pursue social objectives

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