THE INSTITUTIONAL STRUCTURE AND ECONOMIC RATIONALE OF CO-OPERATIVE ORGANISATION IN CYPRUS by Andreas Hadjixenophontos London School of Economics and Political Science Dissertation submitted to the University of London for the Degree of Doctor of Philosophy l UMI Number: U615809 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Dissertation Publishing UMI U615809 Published by ProQuest LLC 2014. Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 7525 690£i2- Abstract Title: The institutional structure and economic rationale of co-operative organisation in Cyprus This thesis presents an examination of the role of co-operatives in the economic development of pre-independent Cyprus and also in the economic reconstruction effort following the war events of 1974. The provision of credit is a key element of the contribution made by the co-operative movement during these two different phases of the island’s modern economic history; first agricultural credit and then housing credit. Government involvement is treated as a very important variable in the co-operative function and various types of such involvement are examined in the course of the thesis, ranging from zero to maximum government input. This maximum type relates to a situation where the initiation, financing and control of co-operatives are tightly in the hands of state agents. In this respect various aspects of institutional theory are applied in order to explain empirical findings. Another important variable of the co-operative function relates to political party involvement. Existing beliefs about the ill-effects of politicisation are put to the test using highly sensitive empirical evidence from Cyprus, available to the author only due to his special relationship with the co-operative movement. The effects of such politicisation are also studied in relation to member participation. 2 Contents Table of contents List of tables List of figures 1 INTRODUCTION 1.1 Objectives/hypothesis testing 1.2 Methodology 1.3 Theoretical framework/Literature review 1.3.1 Co-operative Principles 1.3.2 Economic functions 1.3.3 Co-operatives and class structure 1.3.4 Co-operatives and theory of collective action 1.3.5 Theories of competition and co-operation 1.3.6 Theoretical reasons for emergence of co-operatives 1.3.7 Empirical evidence on emergence of co-operatives 1.3.8 Theoretical reasons for success or failure 1.4 Cyprus 1.4.1 Brief historical background 1.5 Thesis Layout 2 THE ECONOMIC RATIONALE OF AGRICULTURAL CO­ OPERATION IN A SMALL PEASANT ECONOMY 2.1 Introduction 2.2 Why agricultural co-operation 2.2.1 Occupational distribution 2.2.2 Production by Sector 2.2.3 Foreign Trade 2.3 Land tenure and size of peasant operations 3 2.4 Theoretical perspective of the peasant economy 2 .5 The economics of usury 2.5.1 Lender’s Risk Hypothesis 2.5.2 Exclusion of peasants from the organised credit market 2.5.3 Inelastic demand curve for agricultural credit 2.5.3.1 Forces of nature 2.5.3.2 International market situation 2.5.4 Causes of excessive indebtedness and usury 2.5.5 The time-lag factor 2.6 Alternative intermediaries 2.7 Conclusion 3 PERFORMANCE EVALUATION 3.1 Introduction 3.2 Defining co-operative success 3.3 The first experiments 3.4 Need for a specific legal framework 3.5 State-help: The Agricultural Bank 3.6 Long-term Vs short-term loan advances 3.7 Achieving self-help 3.8 A State Catalyst 3.9 The socio-biological theory and ethnicity 3.9.1 Membership base 3.10 Transition to Self-help 3.10.1 Mutual Aid 3.10.2 Limited Vs Unlimited liability 3.10.3 The Central Co-operative Bank (CCB) 3.11 Contribution of co-operative credit to agriculture 3.12 Test-case 1: Wholesale and Retail Trade 3.13 Test-case 2: Pooling and marketing of agricultural products 3.14 Conclusion 4 4 CO-OPERATION AS AN ECONOMIC RECOVERY MECHANISM AND THE RATIONALE OF URBAN CO-OPERATIVE RESIDENTIAL CREDIT 4.1 Introduction 4.2 Crisis and economic recovery 4.3 Economic transition 4 .4 Co-operative banking as a mechanism of economic reconstruction 4.5 The economic rationale of co-operative banking in an urban environment 4.6 The state as a fall-back agent 4.7 Conclusion 5 CO-OPERATIVE SUCCESS AS A FUNCTION OF STATE INVOLVEMENT 5.1 Introduction 5.2 Institutional considerations 5.3 Empirical background 5.4 Inter-sectoral and intra-sectoral linkage 5.5 The legal environment 5.6 The Registrar 5.7 The theory of state bureaucracy Vs types of membership 5.8 The political economy of corruption 5.8.1 Co-operation as a function of accountability 5.9 Conclusion 6 PARTISAN POLITICS AND THE CO-OPERATIVE FUNCTION 6.1 Introduction 6.2 The search for patronage power 6.3 Partisan politics Vs personal patronage power 6.3.1 Emi Savings Bank 6.4 Power distribution as a function of patronage and partisan politics 6.4.1 Partisan politics and the electoral system 6.4.1.1 Solos Co-operative Credit Society(SCCS) 6.4.1.2 The Liol Co-operative Savings Bank(LCSB) 5 6.4.1.3 Pas Co-operative Savings Bank 6.4.2 Comparative analysis 6.4.2.1 Gera co-operative credit society 6 .5 The rationale of varying degrees of political party involvement 6.6 Member participation 6.7 Further advantages of political party involvement 6.7.1 Partisan politics and accountability 6.7.1.1 Agla Co-operative Credit Society 6.7.2 Partisan politics and member loyalty 6.7.3 The co-operative movement as a national pressure group 6.8 Further disadvantages of political party involvement: The ESEL case-study 6.9 Conclusion 7 THE CO-OPERATIVE FUNCTION IN PERSPECTIVE 7.1 Introduction 7.2 Valenti and Emelianoff revisited 7.2.1 Redefining the co-operative function 7.3 Co-operation as a mechanism for macro-economic development 7 .4 The role of the State 7.4.1 The transition from literacy substitute to control 7.5 The principle of political neutrality 7.5.1 Control structures 7.5.2 Exit, voice and loyalty 7.5.3 Member participation 8 CONCLUSION 6 List of tables 2.1 Adult male occupational distribution, 1911-1960 2.2 Visible exports, 1880-1946 2.3 Large holdings of land 2.4 Agricultural census of 1946 2.5 Annual rainfall and production of cereals, 1882-1903 2.6 Price of wheat and bread, 1920-1933 3.1 Number of co-operative societies and membership, 1921-1930 3 .2 The initial growth of the Agricultural Co-operative Credit Movement 3.3 Rural population distribution 3.4 Agricultural Credit Societies and Saving Bank deposits in relation to Commercial Bank deposits 3.5 Loan advances to agriculture 3.6 Importance of credit to agriculture and other economic indicators 4.1 Lost assets by displaced societies in 1974 5.1 Effect of the Azinas affair on the co-operative retail and wholesale sectors 7 List of figures 2.1 Visible exports 2 .2 Annual rainfall and production of cereals 2.3 Annual rainfall and production of cereals as adjusted for one-year time-lag 2.4 Local price of wheat per bushel 2.5 Most important export income earners 3.1 The growth of agricultural co-operative credit movement 3.2 Agricultural output Vs agricultural co-operative credit deposits 3.3 Ratio of co-operative to commercial bank deposits 3.4 Limited Vs unlimited liability 3.5 Central Co-operative Bank finance of the co-operative credit movement 3.6 Outside finance of CCB 3.7 Commercial Banks loan advances to agriculture and other economic sectors 3.8 Percentage share of co-operation in wholesale and retail trade 4.1 Near collapse and recovery of the economy of Cyprus 4 .2 Percentage of Public Surplus/Deficit to GNP 4 .3 Share of exports to Arab countries 4.4 Share of exports by area of destination and by type 4.5 Labour disputes: Man-days lost 4.6 Tourism income as compared to visible and invisible export income 4 .7 Percentage distribution of gainfully employed population in Agriculture and Manufacturing 4.8 Distribution of GDP by sector 4.9 Co-operative Credit Societies Loans Vs Savings Banks 4.10 Housing loans 4.11 Self-sufficiency of the co-operative movement 4.12 Commercial & Co-operative Bank Deposits Vs GNP 4.13 Loans o/s by co-ops & commercial banks Vs GNP 4.14 Percentage of Co-operative to total Loans & Deposits 5 .1 Effect of the Azinas affair in 1980 on co-operative deposits 8 CHAPTER ONE: INTRODUCTION The great number of failures recorded in co-operative endeavours in many developing parts of the world have cast doubts on the appropriateness of co-operation as an effective instrument of economic development and as a vehicle of economic transformation and integration, especially in rural areas. Chambers, for example, notes that many social scientists who have studied co-operatives in Africa have found them to be inefficient, captured by the local elite to the exclusion or exploitation of smaller farmers, poorer people and women, suffering from poor repayment records, failing to pay their members, and having a high turnover of both staff and funds which tended to disappear simultaneously.1 Braverman and Guasch cite empirical evidence which suggests that co-operative failures greatly outnumber successes.2 Yet national governments and international relief organisations continue to divert scarce resources into co-operative projects which they consider to be the only real hope for the deprived rural masses of the developing world.