Modern Chinese history

Cooperatives in China

Modern Chinese history

Tim Zachernuk has been living in China since 1995 working on rural development and poverty alleviation projects. Starting in 2000 his projects started supporting farmers’ economic organizations and, since 2007, supporting farmer cooperatives. Since 2010 his work has solely been focused on training and support for cooperatives, working for international organizations, Chinese government organizations and Chinese NGO’s. These are two articles reprinted from China Eye magazine 52 and 53 (2016/7).

China’s blisteringly rapid pace of development, which has lifted it from the ranks of the world’s poor countries to a global economic powerhouse, started with the economic reforms beginning in the late 1970’s. At that time more than 80% of China’s population was rural and 85% of the population was living in poverty. One of the key reforms to improve the lives of rural people was the household responsibility system. Under this system land was allocated to households and farmers were allowed to keep income earned from any sales over and above required sales to the state. The key to this reform was that farmers were able to keep the rewards earned from using their own hard work and initiative. This incentive spurred farmers, and in the six years between 1978 and 1984 rural incomes grew by some 14% per year.

Forty years after the reforms began the country has been transformed. As a result of the rapid pace of urbanization by 2015 almost 56% of China’s people were living in urban areas. Incomes had increased, a new type of consumer had come into being. Traditional marketing chains for agricultural and food products have been disrupted. Urban consumer increasingly do their shopping in supermarkets, which operate as regional, national and even international chains. Demands for food quality, new products and assurances of food safety have grown. Moreover, with China’s entry to WTO in 2001 farmers began competing with imported agricultural and food products.

Marketing through supermarkets means that producers have to be able to deliver large volumes of produce of a consistently high quality to meet the demands of increasingly sophisticated consumers. Independent farmers cultivating as little as a 10th of a hectare and selling their produce through a long series of middlemen between producer and consumer, became a less and less viable model of production and trade. In the decade after 1999 the disparity between urban and rural incomes again started to grow. In the pursuit of economic equity the government made solving the “three rural problems” one of its top priorities.

Grappling with the problems of rural incomes, food safety, food security and stubbornly persistent high levels of rural poverty, farmer cooperatives were identified as a possible way forward. It was recognized that internationally cooperatives have made an important contribution to improving the lives of farmers. After careful study of Chinese and international experience in 2006 the Law on Specialized Farmer Cooperatives was passed by the National People’s Congress, coming into effect on July 1 2007. This was the first time since the establishment of the People’s Republic of China in 1949 that cooperatives were given a legal identity.

The law acknowledges international cooperative experience as codified in the cooperative principles formulated by the International Cooperative Alliance. The law states that cooperatives are independent and autonomous organizations, should be democratically managed, and that their primary aim is to serve the interests of their members. There are no contradictions between the ICA principles and the Chinese law. A cooperative adhering to ICA principles would be perfectly legitimate under the cooperative law.

However, the aim of the law was to create an enabling environment for the development of cooperatives, and as such it is flexible in the types of cooperatives it recognizes. Thus it is not necessarily the case that cooperatives complying with the cooperative law will observe the ICA principles. In recognition of prevailing conditions in rural China, and particularly the fact that poor farmers lack resources for investment, the law allows for investors, wealthy individuals, enterprises and even government agencies to invest in and become members of cooperatives. The law also allows for the distribution of a portion of a cooperative’s surplus (or profits) on the basis of investment shares.

After the law came into effect great efforts were made to promote cooperative development. Policies to encourage the establishment of cooperatives included providing financial support, making it easier for cooperatives to consolidate land holdings by transferring land use rights, providing low interest or interest free loans, and providing preferential tax policies. Administrative measures were also used to promote the creation of cooperatives, including setting targets for the numbers of cooperatives registered in a year.

Almost 10 years since the law was passed what has been the experience? As of the end of 2015 some 1.48 million cooperatives have been registered throughout the country, with 100 million households as members. This amounts to an average of just more than two cooperatives per each of China’s 680,000 villages. Other than the number of cooperatives registered it is difficult to say anything with certainty about the overall performance of cooperatives.

Cooperatives are required to register with the Ministry of Industry and Commerce, but once they are registered there are no mandatory requirements for any regular reporting. Thus there is very little data from which to get a complete picture of the status of cooperatives in the country. Describing cooperatives in China is rather like the tale of the blind men describing an elephant. How they are described depends entirely on how the observer approaches them.

What can be said is that the flexibility of the cooperative law has been fully used. A huge variety can be found in the type of cooperatives formed and the way they operate. It is also clear that some cooperatives operate on behalf of their members to solve their problems, while some actually serve to exploit most their members for the benefit of a few. In the absence of any reporting requirements or oversight functions in the cooperative law, it is not possible to generalize or say which type of cooperative is the most common.

Many cooperatives resemble investor-owned enterprises in the way they are structured and operate. Companies, investors or wealthier farmers register cooperatives to take advantage of supporting policies, in particularly financial subsidies and ease of transfer of land use rights. Management decisions are made by the large investors and, contrary to the stipulations of the law, profits are mostly distributed in proportion to investment shares. Transactions with cooperative members are often on the basis of “market price” or a slightly preferential price.

A distinctive Chinese innovation has been land-shareholding cooperatives. In China, agricultural land belongs to the state. Farmers have been given land-use rights but not ownership, and therefore cannot sell their land or use it for collateral. Members of land-shareholding cooperatives transfer their land use rights to the cooperatives - in effect a land rental agreement - and are awarded shares in the cooperative. The cooperative then manages the land, and produce from the land belongs to the cooperative rather than the farmer. In this type of cooperative it is common for members to receive a fixed annual rent. Some farmers may also get an opportunity to earn wages working on the cooperative’s “production base” but farmers get no share of the profits. Another variation on this type of organization is farmers get a proportion of the profits related to their shareholding, but no income from land rental.

Some cooperatives exist in name only, having registered at the urging of local officials, and have done little or nothing since registering. Some cooperatives have been registered by as few as five farmers simply in the hopes of getting a government grant, but the founding members have no intention to run any type of cooperative enterprise.

There are also cooperatives formed by farmers who are not necessarily big investors, but who recognize that traditional production and marketing practices are no longer viable. They realize that, due to the changing market environment and increased market competition, they must seek economic strength through collective action. Many of these cooperatives have been successful in addressing the needs of their members and improving their incomes, often by supplying of lower-cost and better quality production inputs, providing members with technical training and guidance, and finding new channels for marketing produce.

A critical issue in all these cooperatives is how the benefits generated by the cooperative are shared between the large investors and the ordinary farmer members. It is clear that in many cases most of the benefits accrue to the wealthier investors, who also tend to have good standing in the local power structure: a phenomenon known as “elite capture”.

A weakness common to most cooperatives, regardless of the type, is a lack of business experience and weak management skills, especially in western China. Cooperative leaders tend to be older farmers who are either wealthy members of their community, and set up a cooperative as an investment, or who have acquired social capital in their community. These people, 40 or more years old, tend to have low levels of formal education. Many have only attended primary school. Even those who have been successful in trading or other business activities have generally operated only as a small private businesses, which is very different from running a cooperative business representing dozens or hundreds of members.

Cooperatives that acknowledge and follow international cooperative principals are rare. This is partly due to the types of incentives used to encourage cooperative development. The cooperative law states that the aim of cooperatives is to solve the problems of their members and cooperatives should be democratically managed. However, cooperatives have also been targeted with a wide range of additional policy objectives, including the modernization and mechanization of agriculture, maintaining food safety standards and achieving economies of scale in production. Cooperatives which operate as investor-owned enterprises are often very effective in meeting these objectives and hence are considered by many to be successful cooperatives, regardless of their internal governance practices. The lack of emphasis on international cooperative principals is also partly due to the claim of China’s unique historical and cultural heritage, and the position that there is a need to develop cooperatives “with Chinese characteristics”.

Despite China’s record of economic achievement there are still large numbers of poor in the country, an estimated 55 million in 2015. Most of the poor are now found in the rural and remote parts of central and western China. The central government has launched a program to eradicate poverty by 2020 and is devoting an increasingly large amount of resources to these efforts. In rural areas cooperatives are expected to play an important role in this effort. Cooperatives are seen as a way of enabling poor farmers to become involved in modern supply chains for agricultural products, thereby improving their incomes and livelihoods in a sustainable way.

Ensuring that cooperatives can effectively lift their members out of poverty will be a big challenge. It will require the development of cooperatives with competent management which can operate successfully, while at the same time avoiding elite capture and ensuring that ordinary members benefit from the success of their cooperative enterprises. Small scale, unorganized farming operations are no longer viable in China’s modern economy with its increasingly sophisticated agricultural supply chains. Cooperatives do have the potential to improve the livelihoods of their members and their communities.

Well managed cooperative enterprises can raise members out of poverty and help build stronger communities. 10 years since the Cooperative Law was passed it is commonly acknowledged in China that cooperatives are still in their early stage of development. There is still a lot of work to be done before an appropriate and effective model or models of cooperative development, and of cooperative support, are developed. Ten years is not a long time when success requires not only improving the skills and knowledge of people, but also changing their habits, attitudes and perceptions.

Note: Agriculture, farmers and rural in Chinese are “nongye, nongmin and nongcun”. Hence the “san nong” problem.

Cooperatives have great potential for promoting rural development and ensuring China achieves its aim of eliminating poverty by 2020. However, cooperatives are a new form of organization in China, and still in an early stage of development. To realize the potential of cooperatives for lifting farmers out of poverty and developing rural communities, cooperatives must achieve the dual goals of being both successful enterprises and effective social organizations.

A previous article on cooperatives in China noted that the country has a wide variety of cooperatives, ranging from organizations which more closely resemble private shareholding enterprises than cooperatives, to cooperatives initiated by ordinary farmers who understand that working collectively is the only way for farmers to participate in modern supply chains.

Background

Farmers who recognize the need to work together in the form of a cooperative face two main challenges when trying to establish a cooperative enterprise. The first is learning what a cooperative is, how a cooperative enterprise differs from other types of enterprise and how it should be managed. Generally the only business model they are familiar with is an investor-owned business, in which control of the enterprise is exercised in proportion to shares of investment and which has, as its overall objective, the aim of maximizing profits. The idea of an enterprise which exists to serve its owner-members is not an intuitive concept. The aim of establishing a democratically controlled organization in which all members participate in decision making represents an even bigger challenge.

The second challenge is managing the business operations of a cooperative so as to generate a profit. While maximizing profits is not the main objective of a cooperative, a cooperative which doesn’t cover its operating costs cannot be sustainable. However most farmers are not familiar with basic business practices such as keeping complete and accurate accounts, calculating margins and making investment plans. Understanding markets, negotiating contracts and managing suppliers are new experiences for farmers who have traditionally cultivated crops or raised animals on the basis of habits and traditions, and who traditionally sell their products to middlemen or itinerant traders.

The new skills and concepts required to establish and operate a cooperative enterprise are daunting indeed, and it is no wonder that many farmers find it easier to fall into familiar management models or abrogate management control to outside investors or enterprises under an “enterprise + cooperative” model. And it is no wonder that there are so few profitable, well-managed cooperatives to be found.

Examples abound of cooperatives which have started with great promise only to either fail or struggle because of a lack of management skills and cooperative understanding. A cooperative growing black millet in Gansu which invested all its available cash in processing equipment, and subsequently found they had excess processing capacity but were unable to buy a sorely needed harvester. A bamboo handicraft cooperative in Anhui which failed to devise a succession plan to cultivate new managers and leaders, and subsequently floundered when the leader left the cooperative. A citrus cooperative in Sichuan in which the members relied on only one leader to fulfil all management tasks and subsequently encountered limits to their development reflecting the limited time and capacities of the cooperative leader.

Farmers hoping to establish a cooperative have few places to turn for guidance and support on managing a cooperative enterprise. While government agencies and officials may encourage farmers to establish cooperatives, the support provided generally doesn’t go beyond helping them register and perhaps providing small start-up funding. Organizations which have good connections or which have a demonstrated record of business success may receive government support in the form of cash grants and rewards, but government support most often takes the form of rewarding organizations which are already successful rather than supporting start-up or weaker organizations to make them strong.

The proposed approach

Chinese Industrial Cooperatives (CIC) and the International Committee to Support CIC (ICCIC) started working to support Chinese cooperatives in 1938. George Hogg and Rewi Alley were key players in the development and spread of cooperatives in northwestern China. The Bailie School in Shandan in Gansu Province, established by Hogg and Alley in 1944, was set up to be a training centre for both technical production skills and for cooperative management.

In 1952 ICCIC was disbanded when cooperative related activities were taken up by the government. In 1987 as part of China’s process of “reform and opening up”, ICCIC was re-established and once again began working to support the development of cooperatives. In addition to its head office in Beijing, ICCIC now has five offices based in Shandong (Qingdao), Shanxi (Datong), Shanghai, Sichuan and a Northwest branch working in the provinces of Shaanxi, Gansu, Qinghai and Ningxia. Each branch has adopted its own focus of activities. The focus of the north-western branch is delivering training for cooperative development.

In the past four decades China has made remarkable achievements reducing poverty nation-wide, but much of the remaining rural poor are still found North-western China, which is very distant from both markets and the centers of economic activity. The work of the ICCIC NW branch is therefore aimed at supporting cooperatives as a way to help farmers in poor areas escape from poverty.

The ICCIC Northwest Office is launching a training programme to support the development of effective cooperatives. The programme will be led by a team of two specialists, each with more than 10 years of experience supporting cooperative development in rural China through projects funded by a variety of international sources. Trainers will also be drawn from the Lanzhou City University, the successor to the original Bailie School, and from the agriculture department in the locations in which the programme will be implemented. The strategy involves building the capacity and understanding of cooperative leaders and members by providing training and creating the opportunity to network with other cooperatives. The strategy can best be described with the adage “Give a man a fish and feed him for a day, teach a man to fish and feed him for his life”(1) .

The Coop Adopt programme will identify existing cooperatives, or groups of farmers who are interested in forming a cooperative, which aim to use their cooperatives to develop their communities rather than to enrich a group of investors. The programme will provide a series of workshops, training sessions and advisory support for participating cooperatives. The training sessions will be delivered systematically, over the course of one year to provide participants with skills and knowledge appropriate to different development stages of a cooperative. The training will not be done in a lecture-style format, but rather be delivered using participatory training and adult education methods, making extensive use of case studies and drawing on the knowledge and experience of participants. These training methods have proven effective working with groups of farmers who have a wealth of relevant personal experience but a limited level of formal education.

The aim of the training will be to give participants the skills and knowledge necessary to manage a true democratically controlled cooperative. Participants will be taught to use analytical tools to assess their current situation and their prospects for development; analyse opportunities that exist in the supply chains for their products; assess market demand and develop a marketing plan. Management training will include strategic planning, budgeting, financial analysis and financial management, market analysis and the development of marketing strategies. The training will expose participants to cooperative business models and highlight ways in which cooperative operations differ from the operations of profit-oriented investor-owned businesses. Cooperative practices such as succession planning, building member solidarity, member engagement will be stressed.

Supporting the Programme

ICCIC is seeking financial support for the Coop Adopt programme. It is looking for organizations, cooperatives, companies or individuals who may be interested in supporting the development of a cooperative in the poor areas of China. Support for one cooperative to participate in the training programme will require a contribution of CNY 55,000 (about £6,500). This will entitle the cooperative to:

The ICCIC(*) Northwest Office will identify cooperatives or groups of farmers interested in participating in the programme. The cooperatives will be from the north-western provinces of Gansu, Qinghai, Shaanxi and Ningxia. Participation in the programme will be free for cooperatives, although they will be expected to pay for the travel costs of participants attending the group training sessions.

Potential supporters will be identified who will be asked to specify the types of cooperatives they would be interested in supporting. Individuals or organizations might be interested in supporting cooperatives involving certain target groups such as women, youth, handicapped or the elderly. Enterprises wishing to support a cooperative might be interested in supporting cooperatives engaged in sectors which align with the business interests of the enterprise, such as wool, vegetables, fruit, machinery cooperatives or tourism cooperatives. Supporters may also have an interest in supporting cooperatives from a particular geographic area.

Interested donors and cooperatives will be paired so that each donor will know specifically which cooperative is benefiting from the support provided and cooperatives will know from where their support originates. Cooperatives will be required to provide regular reports to donors on the progress and achievements of their cooperative. This will give supporting individuals or organizations an opportunity not only to see the results derived from their contribution, but also to get insights and a deeper understanding of lives of people in rural China.

To make a donation to the George Hogg Education Fund go to our George Hogg page.

*ICICC stands for International Committee on the promotion of Industrial Cooperatives in China.
(1) This saying has an equivalent in ancient Chinese which pre-dates its first appearance in English: 授人以鱼不如授人以渔 shòu rén yǐ yú bù rú shòu rén yǐ yú

© Copyright Society for Anglo-Chinese Understanding (SACU) 2017, reprinted from SACU's China Eye magazine Issue 52 (2016) and 53 (2017)

The views expressed in this article are those of the author and do not necessarily represent the view of SACU.
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