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The Economic and
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To order a copy of this paper, please contact Marianne Taillon at Coop.Centre@usask.ca or write to: Centre for the Study of Co-operatives, 101 Diefenbaker Centre, University of Saskatchewan, Saskatoon SK S7N 5B8 Phone: (306) 966-8507; Fax: (306) 966-8517. If you have comments on the paper, please contact Murray
Fulton at
Murray.Fulton@usask.ca. |
As the province of Saskatchewan prepares to enter the 21st century, a critical question for the provincial government is its role in the development of co-operatives and in encouraging other forms of collective action. The underlying thesis of this paper is that the Saskatchewan government can and should play an important role in collective action and co-op development. Although government cannot pick winners, it can ensure, via an appropriate umbrella policy, that the processes are in place that will allow organizations to emerge that will create and capture value in the economic and technological environment of the future.
The key elements of this umbrella policy are: (1) a sound knowledge of the economic and technological environment in which future economic and co-operative development will be carried out; (2) a strategy to develop the human, organizational, and social capital in the province necessary for collective action; and (3) a focus on particular areas of the provincial economy in which identifiable problems exist that urgently need addressing.
The remainder of this paper examines the three elements of the
umbrella policy. The next section &endash; Section I &endash;
presents an overview of the economic and technological environment in
which future economic and co-operative development will be carried
out in this province. By its nature, this overview is very broad. The
focus of this overview is the so-called information age the world has
now entered. Section II outlines a strategy for the development of
the human, organizational, and social capital necessary for
collective action and co-operative development to occur in the
information age. Section III highlights a number of areas of the
provincial economy in which urgent problems exist. The solutions that
are found to these problems will not only assist the provincial
economy, but can be "exported" to other parts of the country and
world. 
Approximately 100 years ago, the basic organizational structure for industry was established. This structure was linear in nature and focused on a vertical market chain, each link of which was more or less separate from the ones above and below. The production of automobiles, for example, was organized into iron ore production, steel production, automobile manufacturing, and retailing. Similar structures were found in the food industry (farm input provision, farm-level production, first-level handling, processing, wholesaling, and finally retailing) and the oil and gas industry. This linear and vertical structure was replicated within organizations in hierarchical organizational charts.
The linear nature of this vertical structure coincided with the largely mechanical processes that formed the foundation of the technology used in each link of the chain and with a philosophical reductionist viewpoint that these mechanical processes could be best understood and controlled by breaking them down to a series of steps or stages. Technological breakthroughs usually consisted of better understanding the component steps.
The overwhelming dominance of this linear-vertical structure in all parts of the economy and society throughout most of this century is evidence that this structure allowed organizations, and the larger society of which they constitute the parts, to grow and prosper. Indeed, in a world where the technological foundation is largely mechanical, the superiority of this linear-vertical structure is to be expected, since this structure largely mimics the characteristics of the technology: in short, linear technology begets linear organizational structure. Put another way, in the industrial age, value is created &endash; costs are minimized, new products are developed &endash; by being better able to control the industrial process. A linear-vertical structure allows this control and this value creation.
There is substantial evidence that this mechanical and linear technology is being supplanted. The new technology foundation is often referred to as the "information age." In the information age, value is created not only by better controlling the production process, but also by combining ideas and concepts in new and innovative ways. While this latter element has always played a role in value creation, it has taken on increased importance in the information age where the underlying technology is concerned with the manipulation of computer and genetic code. Developments in computer science and biotechnology, of course, exemplify this pattern.
What kind of organizational structure will best create value in an information economy? The evidence to-date indicates a linear-vertical structure is not the most desirable. While a chain provides for close control of the production process, it does not easily allow for the synergies and complementarities that arise with exposure to other product areas. Instead, a much more open structure is required, such as a weave or a web or a network . Groups, firms or organizations located within this weave would operate relatively autonomously, but would share and combine ideas with other groups. Although the activities carried out by a group or firm may be highly specialized, standardization and/or customization will allow these activities to be used in a variety of industries. This web or weave structure will also be replicated within organizations and firms. A weave or network structure, of course, reflects the technological foundation of the information age, which is one based on genes and objects in computer code rather than mechanical processes.
There is evidence this weave structure is beginning to emerge. Strategic alliances are increasingly commonplace. Companies are shedding all but their core activities and are relying on other companies for tasks that were once carried out inside the company. Within organizations, hierarchies are being flattened. Teams containing members with very different backgrounds and which routinely meet to interact and share ideas are increasingly being created to identify and solve problems.
Why is weave or a web structure more likely to produce innovation and value than a chain structure? The reason lies in the role of ideas, designs and concepts in the products and services produced in the economy. Ideas and designs play a very different role in the value creation process than do the traditional inputs such as labour, capital or materials. First, while increased production of a product or a service requires more of the traditional inputs, no additional ideas or designs are required. For instance, if a biotechnology company has developed a unique understanding of a particular biological process, this advancement can be used over and over again in the many development activities the firm undertakes. While the introduction of a new development activity will require additional lab and greenhouse space, labor, and materials, the expenditure on the technological advancement does not have to be made again. In economic terms, the value creation process is said to exhibit increasing returns to scale. The ramifications of ideas and designs creating increasing returns to scale will be explored further below.
Second, combining ideas and designs in a value creation process has effects on the process that combining traditional inputs does not. Combining ideas and designs gives rise to new ideas and designs, which in turn creates new value creation processes. The source of new value creation processes thus lies in new ideas and designs, not in greater amounts of the traditional inputs.
The advantage of the weave or web structure is that it facilitates the development of new ideas and designs, while at the same time making efficient use of existing ideas and designs. The openness of a weave or web means ideas and designs can be shared among the organizations and groups that are part of the weave. Since this sharing of ideas and designs is the source of new value creation processes, a weave or web contributes to a further growth in value creation processes. At the same time, the many interconnections implied by a weave &endash; or a network &endash; means firms can specialize and thus take full advantage of the economies of scale inherent in value creation processes.
Although the importance of ideas and designs in the production process has always been recognized &endash; Schumpeter's stress on innovation is a excellent case in point &endash; only recently have ideas and designs been the foundation for entire industries and sectors &endash; the computer industry and the biotechnology sector are cases in point. An important reason for the increased importance of ideas and designs is information technology. Advances in information technology have made it much easier for firms and organizations to organize themselves into a weave or network structure. For instance, improvements in the ability to collect, store and transfer information on the products sold in a store has made it possible for companies to move to Just-In-Time (JIT) inventory management systems. JIT systems mean two or more firms now carry out the activities previously carried out inside one firm. As well, the new firms created are now able to work with firms in other sectors or industries. As an example, American Express is positioning itself as a warehousing and delivery service for a wide range of companies &endash; the only thing these companies have in common is they all require products to be quickly delivered on short notice.
While a weave or web structure is likely to produce the highest level of innovation and value in an economy or society, this structure will not emerge as a matter of course. The reasons lies in the fact that ideas and designs can be used over and over again &endash; i.e., the presence of ideas and designs in a value creation process results in tremendous economies of scale. Because ideas are valuable and can be used over and over again, companies and individuals have an incentive not to share their them, but rather to try to exclude others from using them.
The fact that companies will try to retain ideas and designs for their own use, whether this be through trade secrets or intellectual property rights (IPRs), has at least two important ramifications. The first is the emergence of highly oligopolistic industrial structures as firms with intellectual property use it in more and more ways. The rise and dominance of Microsoft is perhaps the best example of this outcome; another example is the increasing consolidation of the biotechnology and agriculture seed sector where Monsanto appears to be emerging as one of the key players. The emergence of oligopolistic structures raises concerns about the pricing of the products and services produced by these companies. As will be discussed below, these concerns may be particularly acute for Saskatchewan in the area of agricultural biotechnology.
The second ramification of ideas being retained by companies for their own use is that these ideas are not freely circulated, which in turn means that innovation in other sectors of the economy may be slowed. As well, some ideas that create substantial value may not be pursued by these companies because the company has no way of capturing this value, whether it be through the use of intellectual property rights or by embodying the idea in a product (e.g., as is the case with hybrid plants).
In short, the industrial structure that will likely emerge from the economic and technological environment described above has one or both of the following characteristics. First, the value created in this new environment can be expected to be captured largely by the holders of the intellectual property rights or trade secrets that gave rise to this value. The users of the products and services created by the new ideas and designs will generally not benefit. Second, the maximum level of value creation may not be attained.
What is the role of government in an economy with these characteristics? The following are some of the areas in which government must play a role.
(1) Government needs to ensure that the people of Saskatchewan have a high level of education and, more generally, a high level of human capital. New ideas and designs can only be used and created by well educated people who are comfortable dealing with these relatively abstract entities.
(2) Government must ensure that collective action can occur more easily and efficiently than has been the case. As a small player in the international market, Saskatchewan will not obtain the benefits of innovations developed for use in this market unless people in this province have ownership of, or relatively free access to, at least some of these innovations. Since the distinguishing feature of a co-op is that it is a group of people that produce the product or service that they also use, one role of government is to ensure the development of co-operatives.
As individuals, most people do not have the ability to use the ideas that will result from being part of a web. Instead, individuals need to be associated with a group &endash; as was outlined above, groups are expected play an important role in the information age. However, groups are costly to form. An important role for government is to reduce the transactions costs associated with forming groups. As well, governments must ensure that groups have the social capital necessary for new ideas to emerge and be taken up.
(3) Governments must continue to ensure the creation of innovations that can be shared. Particular attention must be paid to innovations that create value not easily captured by the private sector. Governments have long played this role. The best example is the land grant institution system established in the United States roughly 100 years ago. Research innovations in agriculture have been both funded and widely shared as a result of land grant universities funded by the government and through direct funding by the Department of Agriculture. A similar system has operated in Canada. While the form of government's role in the creation of innovations might be different today (e.g., government might ensure that farmers have control of and access to research groups), governments must remain active in this area.
(4) Government regulation must focus on making sure weaves or webs can form and be sustained. Part of government regulation needs to be focused on the development of "standards" that allow networking and sharing to take place. Government must also ensure the entry of new firms. A good model for the type of regulation required in the future is found in the telecommunications industry. Entry of new firms is ensured by requiring the existing firms to share their infrastructure, albeit for a fee. This infrastructure sharing can occur because a number of de facto standards are in place that allows lines and equipment to be used by all parties.
The remainder of this paper examines the first three roles of
government in greater detail. The last role identified for government
is left for future discussion.
Much of the development activity undertaken in the province in the future will be done by people who live and work in Saskatchewan. The reasons these people invest in Saskatchewan are many fold, but key aspects are that they do so because they wish to remain in the province and/or because they have some particular knowledge of Saskatchewan and its people that they can use as the basis for a business investment. For instance, in agriculture, people may wish to remain on the land or in a rural setting and/or they may have developed a particular expertise (e.g., in building or inventing machinery or in the growing of crops or livestock) they can exploit.
Three elements are required for the people of Saskatchewan to participate fully in development activities in the economic and technological environment of the next century. First, individuals need to be provided with the skills and expertise required for the information age &endash; in short, people's human capital needs to be developed. Second, individuals need to be associated with one or more groups, since it is within groups that information and ideas are shared and connections are made; group formation &endash; collective action &endash; requires organizational capital. Third, forming groups is not enough. Groups must possess the social capital that allows new ideas within a group to emerge, be brought forward, and be acted upon.
Human Capital
The ideas and designs that will be the currency of the economy in the next century cannot be used and created without the appropriate human capital in place. Although the development of human capital is relatively straightforward, much effort is required in this area. Development of human capital ranges from education in the K-12 system, technical post-secondary education and training, university education and research, publicly-funded skills retraining, general adult education, and private-sector funded internal education and training programs.
As an input, human capital falls into the same category as materials &endash; if more ideas and designs are to be produced, more human capital is required. Moreover, developing human capital is an ongoing activity. Providing one person with greater human capital does not provide another person with human capital; as well, providing one person with human capital today does not ensure that the person will retain the human capital in the future.
Organizational Capital
Individuals need to be associated with one or more groups, since it is within groups that information and ideas are shared, connections are made, and value is created and captured. Groups require an organizational structure, however, particularly when the group consists of both the users and producers of a product or service. This structure will address such things as asset ownership, decision making power, and the claims on any value created by the group. Knowledge of organizational structures and the strengths and weaknesses of these structures is organizational capital.
Organizational models share some of the characteristics of ideas or designs. In particular, an organizational model can be used over and over again in many different situations. The standard business corporation is an excellent case in point; this basic model has been used for roughly the last 150 years in literally millions of situations. The co-operative model established in Rochdale in 1844 has played a similar, although lesser, role.
While some organizational forms are easy to replicate, others are not. The relative cost of replicating an organizational form determines the economies of scale in creating and recreating a particular form of economic entity. For instance, collective action in general and co-operative formation in particular are costly to undertake; this is one of the reasons the co-op model has not been replicated to the degree the corporate model has been replicated.
The reasons why collective action is costly are well understood. Getting group members to identify the problems or opportunities they face is costly. Having a group research and agree on a solution to a problem or a strategy to exploit an opportunity is costly. Linking a problem or opportunity with the organizational structure (ownership structure and incentives) that can address the problem or opportunity is costly. Accessing funds for feasibility studies is costly. Providing each member with the assurance that the other members are thinking about the problem or opportunity and the appropriate solution or strategy in a similar fashion is costly.
The costs associated with the activities outlined above are the costs of providing the collective entity with the organizational capital it requires to operate effectively. Because this capital is owned by the collective entity, the property rights to this organizational capital are not well defined. The result of these ill-defined property rights is that no individual has the incentive to provide this organizational capital. The result is that outside agents such as the government or other collective entities must provide this knowledge.
The importance of outside agents in group formation is evidenced in co-operative formation, and more generally in industry development. Virtually all co-operatives the world over have been formed with the help of external agents &endash; people that are outside the co-operative (for example, development officers from government or from existing co-ops) but who have played a key role in assisting the co-op to form. In Saskatchewan, credit union and retail co-operative formation in the 1930s and the 1940s was aided by assistance from an established co-op (the Saskatchewan Wheat Pool) and the government. Evidence from North Dakota and Minnesota indicates that organizational assistance from co-operative development officers and co-operative and local financial institutions has been critical in the development of New Generation Co-operatives (NGCs). The importance of development assistance is not unique to co-ops, but is something that is common to all situations requiring some degree of collective action. For instance, industry development requires external agents working to solve industry problems on a collective basis. The successful development of the potato industry in Alberta is a case in point.
Since the goal of economic and co-operative development is the formation of organizations that can create and capture value, a major policy thrust must be to ensure that the costs of replicating these organizational forms are as low as possible. For Saskatchewan, organizational forms that embody collective action must be encouraged and developed. Thus, an umbrella policy for economic and co-operative development must include provision for external agents that would work with groups of people to encourage and facilitate collective action.
The assistance required for effective group formation must be provided by an organization or agent that is seen as independent and objective. The agents could be employed directly by government or by industry groups, such as agricultural producers or a group of co-ops. If development agents are employed by government, they should not be given any programs to administer. Instead, their sole focus should be to identify groups and work with them. The agents could work directly for the Department of Economic and Co-operative Development, they could work for the REDAs, or some new home for them could be found. Whichever configuration is chosen, the development agents need to recognize the many geographical and sectoral focuses that are possible.
Having the development agents work directly for the government may not give them the arms length position they need to be effective at facilitating collective action. Thus, consideration should be given to moving the development agents outside government, providing the government is still responsible for financing their activities. This strategy also has potential problems, however. In particular, political support for the development agents may wane if government is not controlling their activities.
The development agent must be able to clearly identify the specific problems or opportunities a group is facing and to design an organizational structure to address these problems or opportunities. The role of the development agent is to reduce the options to the most feasible ones based on a sound knowledge of the industry and the skills of the members.
To undertake these activities, the development agents need to have a combination of adult education knowledge, business skills, and networking expertise. Adult education knowledge is required to allow the problems and solutions to emerge from the members themselves. Business skills are required because ultimately businesses must be created that can be sustained on a commercial basis for many years. Networking expertise is required because a key reason for the formation of the co-ops is to create networking opportunities both inside the co-op and between the co-op and other organizations. The development agents will also need detailed knowledge of local communities and an extensive knowledge of the sector in which the group is operating.
While the development agent needs to work closely with the group it is assisting, the agent must remain outside the group. The group must determine its own direction and make its own decisions; the role of the outside agent is simply to facilitate the group in its efforts. As well, the agent needs to reduce its assistance as the group begins to take form.
Finally, the development of organizational capital will be greatly facilitated if a source of outside equity funds is readily available. Although co-op members must be prepared to put up some of their own money as capital, there are limits to how much capital can be accessed in this fashion. A moderate source of outside equity capital can also serve to facilitate group development by allowing research or small-scale production to be undertaken at the correct time.
Social Capital
Evidence from the community development literature indicates that successful communities not only possess high levels of human capital and physical infrastructure, they also possess high levels of entrepreneurial social infrastructure, or what will be termed social capital. Social capital allows new ideas within a group to emerge, be brought forward, and be acted upon. Social capital has three major components: symbolic diversity; resource mobilization; and quality of linkages.
Symbolic diversity is the alignment of a group or community toward inclusiveness rather than exclusiveness. Communities and groups with high levels of symbolic diversity have the following characteristics: (1) they are better able to accept controversy &endash; rather than sweeping contentious issues under the rug or allowing them to erupt in conflict, communities with symbolic diversity are able to engage in constructive debate and discussion; (2) they depersonalize politics, which in turn leads to a greater willingness for people to take leadership position and to bring forth new ideas; (3) they focus on the process rather than simply on winning; and (4) they define the boundaries of their group widely rather than narrowly.
Resource mobilization focuses on how groups are able to mobilize resources from within. Innovation and investment are usually higher in communities where resources are relatively equitably distributed than in communities where they are not. People will not take the risk of trying or creating new ideas if they are not provided with some share of the expected outcome. Resource mobilization in a community also addresses the degree to which the community is willing to tax itself to ensure that physical infrastructure and human and organizational capital are provided.
Quality of linkages addresses the state of the networks that have been established and of which the community is part. Diversity of network participants, strong linkages with other communities from which they can learn, and the development of vertical linkages with a two-way flow of information are important in creating quality linkages. Quality linkages are critical in allowing new ideas to form and flow.
The development of social capital is difficult, but it can be
done. The development of some degree of social capital is likely one
of the activities carried out by the development agents described
above. The first step for a group wishing to develop social capital
is to take stock of its existing capital.
Historically, collective action has been undertaken to address two distinct, but nonetheless related, problems: (1) the so-called market failures that stem from a lack of reasonably competitive markets; and (2) the need for an organizational structure to allocate common pool resources. The formation of co-ops has largely been in response to the first problem.
Examples of market failures in Western Canada include the failure of the existing line elevator companies at the beginning of the 20th century to provide grain handling services at competitive prices, the failure of the chartered banks to provide financial services to rural Saskatchewan during the Depression, and the failure of existing retail outlets to provide adequate service to rural areas during the Depression. Co-operatives that have been formed to stem the oversupply of product through orderly marketing have generally not been successful; the failure of co-ops formed for these reasons lead to the pressure for supply management.
The market failures which gave rise to the major co-ops in Western Canada not only resulted in low prices and/or insufficient service; they also created a rallying force around which people could gather. Co-op leaders characterized the members' relationship with existing firms as David versus Goliath and extolled the members to join the co-op as part of a crusade or mission. While such an appeal did not work for all members, it did work for a portion of the membership.
The organizational structure chosen by co-ops historically has been one of open membership, with membership often requiring very little initial investment. Patronage payments were used as a way whereby the co-op could match its competitors' prices during the year without risking a price war, but still provide members with a cost-based price &endash; service at cost &endash; at year end. The combination of open membership and patronage dividends were attractive to members and provided an ongoing incentive to patronize the co-op.
The examples outlined above indicate successful co-operative development involves the combination of three elements. The three elements are:
(1) the co-operative must address a problem facing its members;
(2) the co-operative must be structured so as to provide a personal benefit to the members; and
(3) a portion of the members must see the formation of the co-operative as part of a mission or crusade they have to undertake
A similar set of elements apply to most forms of collective action.
Although these elements remain the same, the structure and raison d'être of many of the co-operatives being formed today is quite different from that sketched out above. The changing structure and raison d'être stem from changes in the technology underlying the economy.
The formation of NGCs in North Dakota and Minnesota provide a good example. The problem NGCs have been formed to address is no longer a concern over a lack of competition per se. The notion of competition is typically associated with spot markets and spot markets are increasingly being replaced by contractual relationships between producers and processors and producers and input suppliers (see discussion below). Market failure is still an issue in NGC formation, however. The market failure is now one of how farmers can obtain some of the value that is being created by the use of specialized inputs (e.g., specific genetics), by the production of uniform quality product, or by the production of products that can be sold into niche markets.
The organizational form chosen by the NGCs is designed to address this particular problem. Closed membership, tradable shares, the investment of substantial amounts of money by the member, and the signing of delivery contracts are all designed to provide the co-op with a structure that will allow it to operate successfully in markets where value creation is of the utmost importance. The NGC structure also provides members with an incentive to join the co-op. The incentive to join the co-op is no longer a desire to obtain a better price for the product produced by the member. Instead, members join the co-op because it is a way for them as individuals to participate in processing and value-added activities. Concerns over community viability are also part of the rallying cry during the formation of these co-ops.
If collective action is to become a focal point for economic development in Saskatchewan during the next 20 years, the groups that are formed will have to contain the three elements outline above. The remainder of this section outlines a number of the areas in the provincial economy in which problems and/or opportunities exist. The identification of problems is not enough: consideration will also have to be given to identifying organizational structures that will address these problems and create incentives for members to participate. Development of organizational structures can only proceed when an in-depth analysis of these problem areas is undertaken. Rallying cries will also have to be found.
The areas that are examined include agriculture, telecommunications, transportation, municipal services, credit unions, rural employment, health and education, and the Aboriginal and Metis communities. Given time limitations, only agriculture is examined in depth, while some of the more traditional areas of co-operative formation, such as housing, daycare and other social services, are not examined.
Agriculture
Saskatchewan agriculture is in the process of a major transformation. Some of the forces behind this transformation are technological in nature while others reflect changes in the attitude of government to agriculture.
On the technology side, agriculture is undergoing a process of industrialization. The industrialization of agriculture has been defined as "the application of modern industrial manufacturing, production, procurement, distribution, and coordination concepts to the food and industrial product chain" (Boehlje). Table 1 shows a comparison of traditional agriculture with the new industrialized agriculture. Key elements of this transformation are that markets are less commodity driven and more product driven, production is more capital intensive, decisions made by firms at all levels of the market are increasingly interdependent, price and production risk are replaced with risks surrounding relationships and food health and safety, and information becomes a prime source of control and power. These changes are resulting in increased vertical coordination and integration; in addition, farmers and agri-business firms are more and more being asked to deliver products of a consistent quality at the appropriate time.
Table 1 Comparison of Traditional Agriculture with Industrialized Agriculture
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A major reason for this industrialization is the greater control that is able to be exerted over the agricultural production process. Much of this greater control derives from developments in information and genetic technology. A good example is the hog industry where these two developments are interacting to control and monitor hog carcass quality which in turn reduces processing costs. As discussed in Section I, developments in information and genetic technology are subject to substantial economies of scale; the increased use of these technologies is thus likely to lead to further consolidation in the agricultural industry.
The other part of the transformation of agriculture is a major change in the role of government. Government is withdrawing from agriculture, whether it be in the removal of price support programs and production-based subsidies (e.g., the removal of the WGTA and the loss of stabilization programs such as GRIP or the WGSA), the deregulation of industries such as grain transportation (the removal of the WGTA has transformed rail transportation from a highly administered system to a much more market based system), or the withdrawal of government from agricultural research. There is also a loss of support for marketing boards and government marketing agencies, both within and outside of government, as is evidenced by the changes made to hog marketing systems in Manitoba and Alberta and the debate surrounding the Canadian Wheat Board. The view that agriculture deserves special treatment no longer holds sway. The change in the role of government is due to a loss of political power by farmers, a focus by governments on balancing budgets and withdrawing from the economy, and the industrialization described above which makes agriculture appear like any other sector of the economy.
Ramifications for Farmers
The transformation described above has significant ramifications for farmers. The most immediate impact of the WGTA removal and the loss of government support programs is less expected income from grain and oilseed production. Although the development of new value-added processing opportunities on the Prairies (e.g., canola crushing plants, hog production) will provide some economic activity in rural Saskatchewan, these activities will not enhance the price of grain at the farm gate. The farm gate price will continue to be set by the world price less transportation costs. At the same time, the loss of government support means that farmers will have to deal with the full impact of future downturns in agricultural commodity prices.
The changing structure of agriculture also has implications. In traditional agriculture, farm production was seen as a distinct stage in the product chain and farmers could concentrate exclusively on farm production. The movement towards specialized production and much greater integration with input suppliers or processors means farmers can no longer view themselves as independent. For instance, the emergence of niche markets not only creates a need for specialized inputs, both by processors and by farmers, it also demands that decisions at the farm input level, farm production level, and processing level be coordinated to achieve economies of scale. As long as these activities are independent, all players fail to achieve an optimal scale. The result is that farmers can expect increasing levels of contracting and vertical integration.
The emergence of greater contracting and vertical integration, however, raises questions about control and power. Farmers can expect to increasingly give up control over farm level production decisions. Because of the information agribusiness firms possess about product quality and its importance, these firms are likely to have the power to set contract terms. With greater contracting, farmers also face new risks, such as the possibility that a processor, for instance, will change the contract terms once farm production has occurred or that a seed supplier, for example, will price a new seed so as to leave for the farmer very little of the extra value created by the seed. This risk increases as the assets needed for agricultural production have become more and more specific to a particular product.
These risks are made greater because of the withdrawal of government from agriculture. Of particular importance is the decreased expenditure on research and development. Historically, government-funded research has provided a source of innovations for agriculture that were readily and freely available to all industry participants. Government withdrawal will mean that innovations will essentially become private. Although private companies will continue to undertake research, some ideas that create substantial value may not be pursued by these companies because the company has no way of capturing this value. As well, the private companies will be oligopolistic in nature; this structure raises concerns about whether the products and services that result from R&D will be priced so farmers obtain the benefits.
The Farmers' Response
The changes and ramifications outlined above suggest farmers need to become more involved in the provision of agricultural inputs &endash; particularly those involving genetics and information technology &endash; and the processing of agricultural products than they have been to date. Lower prices for grain and oilseed products, for instance, mean that farmers that continue to be involved only in farm level production will face reduced profit margins. As well, farmers that concentrate only on farm level production will find themselves being increasingly subject to control from input suppliers or agricultural processors.
The involvement of farmers in the provision of agricultural inputs and the processing of agricultural products is difficult. Only the very largest of farmers have the financial ability to invest in processing or input activities, and even then only at a fairly modest level. The large-scale involvement in these activities takes much more capital, time and expertise than is available to any single farmer.
One way for farmers to become involved in processing or input activities is through some sort of joint activity. Although farmer involvement in processing can take many forms &endash; co-operatives and government mandated marketing boards are but two examples &endash; the formation of co-operatives must be given special attention. Support for government ownership and control has waned. As well, co-operatives have historically been the natural response of farmers to rapid economic and social change. By allowing farmers to retain ownership and control, co-operatives have proven themselves capable of retaining political and economic power for their members. Only by acting together can farmers address problems of market power imbalance, undertake processing activities and vertical integration on a significant scale, or provide sufficient levels of products meeting closely specified characteristics.
Specific areas where co-operative formation or collective action by farmers is likely to be desirable include:
Telecommunications
Like agriculture, the telecommunications sector faces increased industry concentration, extremely rapid technical change, and significant alterations in the institutional structure in which decisions are made. Although the future of this industry is unknown, there are some indications further deregulation will be introduced by allowing competition and joint carrier rights at the local level. Deregulating the local telephone market &endash; or allowing Telcos to determine which market they will serve &endash; raises the possibility that areas with low demand may be without telecommunication service, much as parts of Saskatchewan were without adequate telephone, power, credit and retail services in the first half of this century. Given the importance of telecommunications in the information age, the loss of telecommunication service in parts of Saskatchewan would have significant repercussions on the provincial economy and on the quality of life in these areas.
The presence of a major market failure of this kind suggests a role for co-operatives, or other forms of collective action such as community or municipal corporations, to develop local telecommunications services. However, co-operative formation will be difficult given the capital and technological requirements inherent in telecommunications. As a consequence, a significant degree of collective action facilitation will be required.
If local market deregulation proceeds, a role may emerge for SaskTel as a facilitator of collective action at the local level, as the supplier of the services that will be jointly required by all the local organizations, and as the key node in a network of organizations involved in sharing information about telecommunications services. In effect, SaskTel could play the role of the apex organization in a federated structure. To play this role effectively, SaskTel would have to effectively become a co-operative itself, owned and controlled at least in part by the member organizations. Since deregulation in Saskatchewan implies deregulation elsewhere in Canada and around the world, opportunities for the "export" of this institutional form may be present.
Transportation
As deregulation of the rail industry proceeds, questions are being raised about the potential market power of the railways and the future of branch lines. Both of these problem areas represent conditions where collective action and/or co-op formation may be desirable.
The abandonment of branch lines raises questions about rail service provision in some areas of the province. The establishment of short line railways has been suggested as one alternative to providing branchline service; indeed, one short line railway operates as a co-operative at the current time. Further co-operative ownership of branchlines should be actively considered in the future.
Regarding market power, fears have been expressed that in a deregulated environment railways may charge monopoly or near monopoly prices for shipping grain. One solution that has been proposed is to establish joint carrier rights on the rail lines, much as has been done in the telecommunications industry. If joint carrier rights are not established, farmers could ideally consider ownership in the rail industry to ensure some degree of competition and service provision. However, given the substantial barriers to entry in this industry, this strategy is not likely viable; in short, opportunities for co-op involvement will likely be limited if joint carrier rights are not established.
If joint carrier rights are established in the future, a number of opportunities for collective action and co-operative development arise. Under a joint carrier system, one or more groups must have ownership of the rail infrastructure &endash; railbeds, switches, stations and so on. Following the telecommunications model, one possibility is for the existing railway companies to continue to own the infrastructure; operating companies would then be given the right to operate trains on that track providing they pay an access fee. Another possibility is that a shippers' co-operative or coalition could own or operate the infrastructure. This co-operative or coalition could take the form of a centralized organization with direct membership by individual shippers and/or a federated organization with membership by various geographical and shipper groups. The advantage of shippers owning the infrastructure is they have an incentive to price the access fee at the cost of maintaining and investing in new infrastructure.
Farmers may also have to consider some form of collective action to ensure adequate competition and service. Even with joint running rights, farmers may need to form a rail operating company to ensure competition on the mainlines. In addition, as in the case of local deregulation in telecommunications, rail service provision to regions where transportation demand is low may be a problem. The development of locally-owned short line railways may be one way of providing service to low density areas; these short-lines may also provide potential competition for the larger railways operating on the mainlines. Numerous organizational arrangements for these short lines should be considered. For instance, a locally-owned group may own a branchline, but allow numerous rail operators to run trains on the line. Or a locally-owned group may both own the branchline and operate trains. These locally-owned groups would need to be linked together through a co-operative structure to provide networking links and economies of scale. The development of such a structure would, in fact, be one model for creating a shipper-owned organization that would own the rail infrastructure (see above).
Although the capital requirements for purchasing railbeds, locomotives and rail cars would be substantial, the development of co-operatives or other producer-owned organizations in the rail industry is feasible. As is the case with telecommunications, facilitation of this collective action would be required.
The provision of rail services is not the only transportation issue facing the province at the current time. The consolidation of the grain handling system and the abandonment of branch lines is resulting in more trucking. One of the consequences of the increased trucking is increased road damage. The problem of road damage is made more severe because provincial expenditures on road maintenance have declined and because road users are not paying for the cost of road maintenance.
As a result, an important issue facing the province is how to develop a road tax system that would cover road damage and provide the proper incentives to road users. One way of tackling this problem may be in the form of collective action to deal with what is effectively a common pool problem: in short, what constraints &endash; i.e., taxes &endash; do a group of people need to put on themselves to ensure that a collective good &endash; namely road beds &endash; is properly managed?
Finally, the province is facing a number of major issues in bus transportation. While STC is losing money, the Crown corporation is providing services to rural areas that might not otherwise be provided. At the same time, the losses in STC mean that people who do not use bus services are subsidizing those that do. The question that needs to be asked is whether some form of collective action might be able to fund and provide the appropriate bus service to rural areas.
Municipal Services
While the structure of municipal government has historically been extremely difficult to alter, considerable pressure is now building for change because of population consolidation, reduced tax bases, and increased expenditures in areas like road building and maintenance.
The issue in the provision of municipal services is this: What type of governance structure can provide an adequate degree of local control along with the economies of scale that result from larger jurisdictions? In the world of co-operatives, this question has been answered by the development of a federated structure. Local co-ops provide the attention to local issues and concerns, while the jointly-owned federated body provides services required by all or many of the co-ops, thus attaining economies of scale. The use of a federated structure should be considered for the provision of municipal government services.
Credit Unions and Other Financial and Insurance Services
The financial and insurance industries are consolidating, with the line between financial and insurance companies and services becoming increasingly blurred. This consolidation is being driven by the economies of scale present in the production of financial and insurance services &endash; although the upfront development cost of a service package is large, the cost of providing it to an additional customer is low. Service provision itself is being split into those activities that can be provided electronically with little human interaction (e.g., chequing) and those that require substantial human interaction (e.g., insurance sales and financial planning).
Credit unions &endash; along with co-operative trust and insurance companies &endash; need to respond to these changes or face a major member and customer loss. One aspect of this response is for credit unions to continue their co-operation at both the provincial and federal level. New co-operative organizations &endash; such as a co-operative bank &endash; need to be explored to allow credit unions to survive and prosper in the next century. The experience of co-operative banks elsewhere in the world &endash; e.g., Rabo Bank&endash; has been good and options such as these need to be examined in Canada.
The continued strength of credit unions is critical for public policy reasons as well. The increasing concentration of the financial and insurance industries is raising concerns about excessively high levels of concentration. High concentration levels are particularly worrisome in areas where the demand for financial and insurance services is low, such as parts of Saskatchewan. Credit unions thus have an important role to play in ensuring competition, service, and the retention of benefits in the community. This role is very similar to the one for which they were first established.
Credit unions also have an important role in supporting economic and co-operative development at the local level. Economic and co-operative development at the local level is required to respond to the problems and opportunities facing co-op members and their communities. Credit unions need to work with individuals and groups to develop business opportunities that create jobs, diversify the economy, capture more of the economic value for the local area and its residents, and provide needed services (e.g., housing, utilities). This development will not only provide direct benefits to the credit unions, but it will strengthen the local community which further benefits credit unions and their members.
To play this development support role, credit unions must ensure they retain their local control, since local control means credit unions will be better able to respond to the specific problems and opportunities facing communities. At the same time, local credit unions must develop structures so they are able to deliver financial packages (e.g., large pools of capital, insurance, planning) as attractive as those of the major financial institutions. The best way to achieve this goal is to co-operate with other co-operative financial organizations across Canada by pooling capital and jointly funding the development of financial packages.
A good example of the role played by co-operative financial organizations is found in Minnesota in the role played by the St. Paul Bank for Co-operatives and the North Country Cooperative Development Fund. The St. Paul Bank has played an important role in the development of NGCs. The Bank's development support has three elements: (1) the provision of education and information about development and organizational options; (2) the provision of assistance to develop and review business plans and to connect developing co-ops with other business service providers; and (3) the provision of loans to both the co-op and the members. Since this third support element is only provided when the St. Paul Bank feels a viable business opportunity has been fully developed, the first two support elements are really the most important in terms of developing new co-ops.
The North Country Cooperative Development Fund focuses on providing development support to very small co-ops, such as working with food co-ops in a small town to expand their business line. North Country provides the same three elements of development support as does the St. Paul Bank. If the level of support required is too large for North Country &endash; either in terms of expertise or capital &endash; it will work with a small co-op to make an approach to the St. Paul Bank.
Retail Co-ops
Like credit unions, retail co-ops also have an important role in supporting economic and co-operative development at the local level. This development will not only provide direct benefits to the retail co-op, but it will strengthen the local community which further benefits the retail co-op and its members.
Retail co-ops &endash; like their counterparts in agriculture and the financial sector &endash; are also facing structural changes in their industry. These structural changes are linked to those occurring in agriculture, although they are not as far along. The experience in Europe, and particularly the UK, provides a picture of the types of issues retail co-ops will be facing in the future.
One issue is the concentrated nature of the retail food industry in the UK. Two retail chains, Tesco and Sainsbury, dominate the industry to such an extent that questions are being raised about the competitiveness of this sector. The second issue revolves around concerns by UK consumers about food health and safety. These concerns have resulted in the retail chains developing extensive linkages backward in the food chain. These linkages are used by the retail chains to trace food products through each stage of the production process. Tracing is important because it enables the retail chains to provide better assurances to their customers about the health and safety of the food being purchased.
Tracing is also having an impact on the structure of the food system. To be able to sell to the major retail chains, for instance, farmers must be able to meet stringent quality control standards. As well, farmers are often locked into selling their output to a particular processor because of the retailers' need to monitor product quality and safety. As was outlined in the section on agriculture, the result is much less emphasis on traditional markets and a much greater reliance on contractual relationships.
Although food health and safety is not yet a major consumer concern in Canada, the expectation is that it will become so in the future. One way for retail co-ops in Canada to respond to this concern is to develop linkages with farmers through farmer-owned processing co-operatives. The development of these linkages will allow the retail co-ops to monitor food safety. As well, developing these linkages allows farmer members of retail co-ops to become both a supplier and a user of food products. Emphasizing this dual role will be important in assuring urban consumers that the food they are purchasing is healthy and safe. Developing these linkages will also provide farmers with the assurance that they will receive the benefits associated with providing safe and healthy foods.
Rural Employment
Rural employment opportunities are critical to the future of both the agricultural and non-agricultural communities in rural Saskatchewan. Employment opportunities in rural Saskatchewan attract people to rural areas; they also sustain the agricultural sector &endash; more than half of farm income is from off-farm sources.
One approach to the problem of job creation is the formation of worker co-ops in rural areas. Co-op formation in this area must be directed at the specific problems faced by people in rural areas and must take into account the skills held by these people. For instance, what further activities can be undertaken in the area of short-line equipment manufacturing? What other agricultural or resource extraction services &endash; e.g., custom chemical and fertilizer application, provision of GIS or precision farming services, tree planting &endash; can be provided by worker co-ops? The answers to these questions cannot be determined without substantial knowledge and input from people in rural areas. Thus, one of the roles of the development agents would be to determine the skills and opportunities that would result in successful worker co-ops; very little development is expected to occur without this facilitation.
Health and Education
A large number of issues surround both health and education. Only a small number of these issues will be examined here.
One of the questions raised in the areas of both health and education concerns greater involvement by the users of these services in the services that are being provided. At the same time, there is a need to obtain economies of scale in service provision. As outlined above, one method of dealing with both concerns is through the establishment of a federated structure. Not only does this structure allow both local control and economies of scale, the structure creates a ready-made network that can be used to share ideas and solve problems.
Saskatchewan has some experience with co-operative ownership in health provision through the community clinics. Although the clinics have been successful, this model has not been further developed or used as the foundation for reform of the health system. Much more attention needs to be given to this option.
Little experience with co-operative ownership of formal education is available in Saskatchewan, although the results and efforts of the independent schooling groups indicates collective action in the provision of education is possible. Co-operatives have been successful in day cares and pre-schools.
Although health and education share many of the same problems, they differ in one potentially important way. While the production of health care by health professionals must occur in the same geographical location and at the same time as the health care is actually used, such is not the case in education. The rise of electronic communication has made it much easier for the production and use of education to be separated, both temporally and geographically. What are the ramifications if education is not produced in the rural areas of Saskatchewan or even in Saskatchewan at all? Assuming it is important that the education services required in various parts of the province be produced in these locations, some form of collective action by local residents may be necessary to allow this outcome to occur.
Aboriginal and Metis Communities
One of the most important issues facing the aboriginal and Metis communities in Saskatchewan is self-government. Since self-government is fundamentally an example of collective action, the development in these communities of the human capital, organizational capital and social capital necessary for collective action is both relevant and critical. The development of this capital will require extensive efforts by development agents. The co-operative model must be actively considered as one model for collective action.
The co-operative model can also be used outside self-government. For instance, considerable economic opportunities exist in the area of aboriginal and Metis culture. The use of co-operative structures to create and capture value in activities such as these needs to be examined.
The following books and articles provide the source for many of the ideas and concepts outlined in the paper.
Ayer. H. 1997. "Grass Roots Collective Action: Agricultural Opportunities." Journal of Agricultural and Resource Economics 22(1): 1-11.
Boehlje, M. 1996. "Industrialization of Agriculture: What are the implications?" Choices Fourth Quarter: 30-33.
Cook, M. 1994. The Role of Management Behavior in Agricultural Cooperatives. Journal of Agricultural Cooperation 9: 42-58.
Cook, M. 1995. The Future of U.S. Agricultural Cooperatives : A Neo-Institutional Approach. American Journal of Agricultural Economics 77(5):1153-1159
Co-operative Directorate. 1997. Support for the Development of New Co-operatives: Discussion Paper. Saskatchewan Economic and Co-operative Development, July.
Drabenstott, M. 1994. "Industrialization: Steady Current or Tidal Wave?" Choices Fourth Quarter: 4-8.
Flora, C.B. and J.L. Flora. 1993. "Entrepreneurial Social Infrastructure: A Necessary Ingredient." ANNALS of the American Academy of Political Science and Sociology September: 48-58.
Fulton, M.E. 1997. "The Economics of Intellectual Property Rights: Discussion." Invited paper presented at the joint American Association of Agricultural Economics/ Canadian Agricultural Economics and Farm Management Society Annual Meeting, Toronto, ON, July 27-30.
Furtan, W.H. and K. Baylis. 1997. The Potential for Farmers to Raise Their Income Through Collective Action and Investments. Department of Agricultural Economics, University of Saskatchewan, August.
Harris, A., M. Fulton, B. Stefanson, and D. Lysyshyn. 1997. Working Together: The Role of External Agents in the Development of Agriculture-Based Industries. Report to the Agricultural Development Fund. Centre for the Study of Co-operatives and Department of Agricultural Economics, University of Saskatchewan, August.
Hughes, D. 1997. "Developments in the European food industry supply chain." Agri Chain Competence Newsletter 13(June): 14-16.
Joskow, P.L. 1997. "Restructuring, Competition, and Regulatory Reform in the U.S. Electricity Sector." Journal of Economic Perspectives 11(3): 119-138.
Romer, P.M. 1990. "Endogenous Technological Change." Journal of Political Economy 98(5, Part 2): 71-102.
Fulton, M.E., and R. Gray. 1997. "Railways, Competition and the Hold-Up Problem" Presented at the conference "The Economics of World Wheat Markets: Implications for North America" sponsored by the Trade Research Centre at Montana State University, June 29-June 1, Bozeman MN.
Vercammen, J. 1997. "Optimal Road Taxes for Grain Producers When Procurement is Imperfectly Competitive." Paper presented at the joint American Association of Agricultural Economics/ Canadian Agricultural Economics and Farm Management Society Annual Meeting, Toronto, ON, July 27-30.