THE MALAYSIAN CO-OPERATIVE MOVEMENT: AN EMPIRICAL ANALYSIS by Juliawati Janius A thesis submitted to the University of Sheffield for the degree of Doctor of Philosophy in the Department of Economics June 2007 ABSTRACT The Malaysian co-operative sector, even after almost a century of its existence, remains a movement that has not made a significant contribution to the Malaysian economy. The usual problems associated with the weaknesses of co-operatives, such as issues related to management, finance, leadership, and members' participation have been raised, over and over again, in Malaysia. This thesis, therefore, contributes to our knowledge and understanding of co-operatives in Malaysia by presenting original empirical analysis of a unique primary data source. As such, to our knowledge, the thesis presents the first econometric study of co-operatives in Malaysia based on co­ operative level data. In countries where co-operatives have made a significant economic impact, it appears to be related to the work of secondary co-operatives, which are organisations of the primary co-operatives. Not one of the 35 secondary co-operatives in Malaysia has been noted, however, for any significant economic contribution. The possible cause of this may lie in the kind of primary co-operatives, which have individuals as members, that exist in the Malaysian co-operative movement, which may have contributed to the weakness of secondary co-operatives. The existing literature suggests that secondary co-operatives function better if primary co-operatives are small and if the primary co­ operative's activity reflects the members' business. The empirical analysis presented in this thesis explores the relationship between primary co-operatives and secondary co­ operatives in Malaysia, focusing on issues such as the benefits received by primary co- I operatives from secondary co-operatives. The findings suggest that increased primary co-operative membership represents an important source of benefits to primary co­ operatives. A related issue explored in this thesis concerns the determinants of the level of trust in co-operatives among Malaysian co-operators. Finally, we present analysis of the relationship between the level of trust in the co-operative and co-operative size. The findings support an inverse relationship between co-operative size and trust, which may be the result of the institutional framework in Malaysia, which specifies that a minimum of 100 individuals are required to form a co-operative in Malaysia. Contents Acknowledgements v List of Tables vi List of Abbreviations ix Definitions x Chapter 1 - Introduction 1 1.1. Introduction 1 1.2. Organisation of the Thesis 7 Chapter 2 - Overview of the Emergence and Expansion of Co-operatives 11 2.1. Introduction 11 2.2. The Origins and Foundations of Co-operatives 12 2.2.1. The Development ofCo-operative Thought 12 2.2.2. The Meaning ofCo-operation 13 2.2.3. The Idea ofCo-operation 14 2.2.4. From Co-operation to Co-operatives 15 2.2.5. The Foundation ofCo-operatives 17 2.2.6. The Spirit ofSelf-Help 18 2.3. The Expansion of the Co-operative Movement 19 2.4. Specific Case Studies: UK, Germany and India 24 2.4.1. The Development ofConsumer Co-operatives in the UK 25 2.4.2. The Development ofCo-operatives in Germany 29 2.4.3. The Development ofCo-operatives in India 31 2.5. Summary 34 Chapter 3 - The Operation of Co-operatives 35 3.1. Introduction 35 3.2. The Definition and the Concept of Co-operatives 36 3.3. The Organizational and Operational Aspects of Co-operatives 40 3.3.1. The Co-operative Principles 41 3.3.2. Co-operatives' Capital, Income and Assets 42 3.3.3. Authority and Control in Co-operatives 45 3.3.4. The Common Interest 47 3.3.5. The System Structure ofthe Co-operative Movement 48 3.3.6. The Legal Frameworkfor Co-operatives 52 3.4. Co-operative Performance 54 3.5. Summary 58 Chapter 4 - The Co-operative Movement in Malaysia 59 4.1. Introduction 59 4.2. Malaysia, The Country 60 4.3. Growth and Development of the Co-operative Movement 62 4.3.1. The Movement's Early Days 62 4.3.2. The Transplant ofthe Co-operative Institution in Malaysia 65 4.3.3. The Early Impact ofCo-operatives 66 4.3.4. The Expansion Phase 67 4.3.5. The Movement's Structural Expansion 70 4.3.6. The Co-operative Legislature 73 4.4. Support for Co-operative Development 75 4.4.1. The Ministry 75 4.4.2. The Department ofCo-operative Development (DCD) 75 4.4.3. The Co-operative College ofMalaysia (CCM) 79 4.5. Economic Statistics on the Co-operative Movement 80 4.5.1. The Growth ofCo-operatives 80 4.5.2. The Distribution ofCo-operatives 82 4.5.3. The Distribution ofCo-operative Members 84 4.5.4. Share Capital and Assets 85 4.5.5. The Composition ofCo-operative Members according to Social and Economic Groups 86 4.5.6. The Business Performance ofCo-operatives 88 4.5.7. Employment in Co-operatives 89 4.6. The Secondary Co-operatives 90 4.6.1. Distribution and Group Size ofSecondary Co-operatives 90 4.6.2. The Active and the Inactive Secondary Co-operatives 91 4.6.3. Secondary Co-operatives in Government Development Schemes 92 4.6.4. Trends in the Establishment ofSecondary Co-operatives 93 4.6.5. Secondary Co-operatives' Performance 94 4.7. Summary 95 Appendix A4.1: The States of Malaysia 99 Appendix A4.2: The Bank Rakyat 100 Appendix A4.3: Tables Relating to the Analysis of the Malaysian Co- 101 operative Movement Chapter 5 - The Sunrey of Co-operatives in Malaysia 113 5.1. Introduction 113 5.2. The Mail Survey Questionnaire 114 5.2.1. The Questionnaire 115 5.2.2. The Population and the Sample 118 5.2.3. The Data 120 5.3. Profile of the Primary Co-operatives: Summary Statistics 123 5.3.1. The Number ofMembers, Share Capital and Assets 123 5.3.2. The Composition ofMembers by Occupation and by Race; the 124 Distribution ofthe Co-operative's Members; and the Co- operative's Area ofOperation 5.3.3. The Co-operative 's Area ofActivity 125 5.3.4. Membership and the Tenure ofMembership in Secondary Co- 127 operatives 5.4. The Perceived Roles of Secondary Co-operatives 129 5.5. Summary 130 Appendix A5.1: The Questionnaire 132 Appendix A5.2: Letter 1 - Translated Version of the Researcher's Letter to 138 Members of the Co-operative Board, which accompanied the Questionnaire ii Appendix AS.3: Letter 2 - Translated Version of the DCD's Letter to the Co- 139 operatives Appendix AS.4: List of Primary Co-operatives in the Sample 140 Appendix AS.S: Summary Statistics for the Co-operatives in the Sample 144 Chapter 6 - The Relationship between Primary and Secondary Co- 151 operatives: An Empirical Analysis 6.1. Introduction 151 6.2. A Review of the Literature on Secondary Co-operatives 154 6.3. Data and Methodology for the Analysis of the Primary-Secondary Co- 160 operative Relationship 6.4. The Results 165 6.4.1. The Primary Co-operatives' Membership and Secondary Co- operatives 165 6.4.2. The Primary Co-operatives' Share Capital and Secondary Co- operatives 172 6.4.3. The Primary Co-operatives' Assets and Secondary Co- operatives 175 6.4.4. An Aggregate Measure ofPrimary Co-operative Size 177 6.4.5. Summary 182 6.S. Analysis of the Relevance of Secondary Co-operatives 183 6.5.1. Satisfaction with Secondary Co-operatives 185 6.5.2. The Perception ofthe Need/or Secondary Co-operatives 193 6.6. Summary 197 Appendix A6: Results Table 200 Chapter 7 - An Empirical Analysis of the Determinants of the Level 216 of Trust among Malaysian Co-operators 7.1. Introduction 216 7.2. Trust in the Formation of Co-operative Groups 219 7.3. Trust 222 7.3.1. The Definition of Trust 222 7.3.2. The Measurement of Trust 224 7.3.3. The Determinants of Trust 226 7.4. Empirical Analysis of the Determinants of Co-operators' Trust 228 7.4.1. Co-operators' Trust in the Co-operative Institution 228 7.4.2. Empirical Analysis ofthe Relationship between Co-operators' Trust in Co-operatives and Other Types o/Trust 238 7.4.3. Empirical Analysis of Willingness to Invest in a Co-operative Business and Trust in Co-operatives 242 7.4.4. Comparing the General Level ofand Pattern of Trust ofCo- operators with a General Sample ofIndividuals 246 7.5. Summary 251 Appendix A 7.1: Results Tables 254 Appendix A7.2: Summary of the vast literature exploring the determinants 265 of trust iii Appendix A7.2: Translation of the e-mail introducing the survey and the 266 attached e-mail questionnaire Chapter 8 - Co-operative Size and Trust in the Co-operative 270 8.1. Introduction 270 8.2. Trust in the Co-operative and the Size of a Co-operative Group 272 8.3. Empirical Analysis of the Relationship between Trust in the Co- 275 operative and Co-operative Size 8.3.1. The Effect olCo-operative Size on Trust in the Co-operative 275 8.3.2. The Level olTrust in Co-operatives and Different Categories 01 Co-operative Size 278 8.3.3. Trust in the Co-operative and Membership Size: Bivariate Probit Analysis 280 8.4. Trust in the Co-operative and Co-operative Performance 282 8.5. Summary 287 Appendix AS.l: Results Tables 289 Appendix A8.2: Co-operative's Income and Profit/Loss for Year ending 291 31.12.2003 Chapter 9 - Conclusion 294 References 303 lV ACKNOWLEDGEMENTS Throughout this study period, I have received support and encouragement from many individuals and organisations.