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Cooperatives in Bhutan-Fumbly Play

Imagine that you are a potato farmer – your livelihood is entirely dependent on that crop. And a manufacturing industrialist who makes potato chips buys most of your products. The value that is added to the finished potato chips isn’t as great as the differential between the profits from your potatoes and the finish potato chips. You realize this fact and also learn that starting a potato chips factory doesn’t have as many barriers as you thought it did (at the start, it is a relatively low investment venture that requires little technical knowledge). So, you get together with other potato farmers in your village and propose that the group start your own potato chips factory.

By that core idea, you have just started a cooperative. The fundamental principle behind a cooperative like yours is that there is a huge differential in the profits between selling a primary product like potatoes and a secondary, manufactured product like potato chips. Pooling together resources and remaining democratic in your approach (meaning that each member of the cooperative gets a say in how the business is run) transfers that profit differential to the farmers from the capitalist middlemen.

Of course, a majority of cooperatives in the world are more complicated than that. But the fundamental principle is very similar: a cooperative is a group that has taken to symbiotic living. There are even agricultural cooperatives, which recognize that small farmers don’t have too much power in the market because of their small volume. These cooperatives bring together all these small farmers, thereby, improving their market power.

In general, each member of a cooperative offers his or her skills and time to whatever business the cooperative is involved in. Relatedly, registered members conduct whatever business a cooperative ventures into. Not all participants in a business need to be members of the cooperative but a majority of functions should remain within the group.

Cooperatives offer two very important things to Bhutan. First, it is a model of economics that rises above the rent-seeking behaviors of the capitalist class (by rent here, I mean interests, dividends, etc. and not necessarily house rent). The second benefit is that it offers a model of groups pooling their resources and capital for the collective good. And the vision of collective good is maintained by the democratic structure of a cooperative. For a small economy like Bhutan, a big problem to the development of the economy is the lack of adequate resources and capital. When groups pool these necessities, the economy suddenly has adequate resources and capital to invest in larger ventures.

Therefore, it is no wonder that Bhutan has seen a drastic increase in the number of cooperatives. As of July 2016, there were 338 farmer groups and 47 cooperatives registered with the Department of Agricultural Marketing and Cooperatives (DAMC – the government department in charge of registering cooperatives). From more prominent ones like the Happy Green Cooperative (contributors to Happy Chips) and B-Coop to smaller, less popular ones like the Sarpang Layers Cooperative, there is a cooperative in virtually every sector.

When done correctly, cooperatives are beneficial not just to their own members but also to the economy as a whole. They can help stabilize prices when for some reason they go up too fast – like the recent case of hike in chili prices. Even after the Bhutanese government intervened by airlifting chemical-free chilies from India, prices in Bhutan refused to fall. Youth Business Cooperatives (YBC) helped stabilize the prices by selling chilies at the price mandated by the government, which at the time was about 1/3rd of market prices.

But when cooperatives go wrong, they are dangerous to the economy. Like labor unions that hold out rights and privileges from non-members, cooperatives can force non-members to join them through market measures. Imagine a poultry farmer who doesn’t join the local poultry cooperative for whatever reason. The cooperative can afford to lower its prices because it trades in such great volumes that even with small margins, they still remain profitable. But the lowered prices can be almost fatal to a small business. This sort of practice can even be classified as predatory pricing, since the cooperative can raise its prices once it has nullified other farmers.

Moreover, since the Bhutanese government is trying to incentivize the growth of more cooperatives, it has provided incentives. These incentives, like government funded/subsidized trainings and workshop, can by themselves cause some businesses that don’t actually qualify as a cooperative to claim that they are. There is also the benefit of social goodwill that comes with starting cooperatives – in a market as small as Bhutan, such a social enterprise may use that soft power to raise its own profits. There is also the benefit that comes to these cooperatives as a result of vagueness in the definition of “cooperative activities.”

Once a cooperative has been registered, it may play around with what their main activities are and instead indulge in profiteering business schemes. All the while, the cooperative enjoys goodwill (that may translate into donations or funds) and government incentives. Since their activities have become traditional business-like, Co-ops enjoying such benefits places them at an unfair advantage over other companies.

There have been no documented cases of lawsuits or complaints of such nature in Bhutan, but that doesn’t mean such practices do not exist. Keeping private the names of some of these cooperatives – only for the fact that proving their wrongdoing would require court dates and time that non-entities like I, cannot spend – we should take notice of the various business ventures of cooperatives operating in Bhutan. As a hypothetical example, imagine a cooperative that buys local agricultural produce at market prices and sells them to foreign markets at a markup. For this practice to be a cooperative, the local suppliers of this produce should either be members to the cooperative or enjoy a significant share of the markup. Otherwise, the cooperative is acting as mere rent-seeking middlemen who’ve sold their products with the aesthetic tagline of being a “cooperative.”

A cooperative is meant to be a profit sharing, social capital building, and democratic body. When these principles go missing, they are worse than mere middlemen, they are fraudulent middlemen, who’ve managed to con the country, the suppliers, the consumers, and the economy. Under the current regulations, it can be difficult to dissolve cooperatives like the one in our example. Of the clauses that lead to involuntary dissolution, the only one that may be used is that of “violating its primary purpose.” But constitutions and bylaws of cooperatives, where the primary purposes are written, are meant to be general and generic. The government, especially the DAMC, has to be stricter in its enforcement of cooperative law. It has to maintain the sanctity that is associated with that “cooperative” tag. And perpetrators of such misconduct should themselves show more ethics.

As the world becomes disillusioned with the capitalist system, alternatives need to be found. And the cooperative model is a very viable option. If such actions dissuade public interest or worse, turn the public against the model, then Bhutan will miss out on a great tool of economic growth. Therefore, the risk of not implementing high standards to cooperatives is great.

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