Acknowledgements

Economies of Scale Versus Participation: a Co-operative Dilemma?

Jones, D.C.; Kalmi, P.

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ones.

in sum, the clearest evidence of economies of scale within financial co-operatives is related to the US 

experience, whereas the evidence from elsewhere is more ambiguous. This may be related to the above-

mentioned benefits of integration. Collaboration among co-operative banks and the existence of second 

tier organizations may help local banks to maintain small scale and remain efficient. The collaboration 

among financial co-operatives is the least extensive in the U.S., which may expect why the clearest results 

on economies of scale are obtained from that market.

15

in addition, it is clear that many co-op mergers take place under conditions that differ from those 

characterizing investor-owned firms. Often the main circumstance is that of duress; a merger is undertaken 

for reasons of solidarity, to save a co-op in economic distress from going under. For example this was the 

case with many italian PCs in construction mainly during the 1990s (Jones, 2007). in this case presumably 

there is a symbiosis between scale economies and democracy.

5. Case Study Evidence on Democratic Challenges and Responses within Co-ops

in this section we discuss institutional evidence on the ability of co-ops to respond to democratic 

challenges. We provide examples of institutional adaptiveness or lack thereof concerning themes that were 

identified in previous sections, especially part three. To provide a manageable account we focus on two 

contemporary cases, the Mondragon co-operatives and co-operative banks in Finland. We select these 

cases because we know them well and, in the last thirty years or so, both groups typically have experienced 

strong growth. As such they are good “test cases” to investigate the challenges posed by the need for scale 

economies and possible trade-offs with democracy.

Case 1: Mondragon

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: 

The Mondragon group is one of the best-known examples of “real -world” PCs. Founded in 1956 with 

some 25 workers in the Basque country of Spain, Mondragon was originally a group of mainly industrial 

cooperatives. Subsequently the group has grown to include firms in other areas, notably retail and finance 

and, by 2008, the Mondragon group comprised about 250 cooperatives, subsidiaries and affiliated organi-

zations, including 73 manufacturing plants overseas, altogether employing almost 100,000. Membership 

has always been closely linked with employee ownership and, in the early decades, essentially only and all 

workers were members. Membership provides a guarantee of employment, relocation or 80% of salary 

during times of slack demand as well as the right to participate in the firm’s General Assembly, vote for and 

15  

it is also not clear whether the previous studies on economies of scale have adequately controlled for the fact that smaller 

institutions may be less risky, and in particular they are less likely to impose systemic risk. Klinedinst (2012) provides evidence 

that before and during the crisis smaller financial institutions and credit unions had higher net worth than large banks, and were 

also much less likely to be compensate their executives excessively. However, we are not aware on any evidence whether large 

credit unions have been riskier than smaller ones, or whether they have been more likely to have faced difficulties during the 

crisis. in the U.S., the main casualties of the crisis have been some large corporate credit unions (i.e. second-tier organizations; 

see Hoel, 2011). However, the failure of corporate credit unions does not indicate whether there is a relationship between size 

and risk in primary-level credit unions. 

16  

This sections draws on Arando et al. (2011a) to which the reader is referred for an extended account of the current Mondragon 

set-up.

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serve on electoral bodies, and receive a share of profits. Other distinguishing features at Mondragon inclu-

de provision for profit pooling and a rich set of institutions to support primary firms. However, in recent 

years a large fraction of the workforce was often non-members. The bulk of these non-member employees 

work in conventionally-owned subsidiaries and joint ventures that the co-ops have established outside the 

Basque Country,  particularly in the Eroski retail chains in Spain (approximately 30,000 non-member 

workers), and in overseas manufacturing plants (approximately 12,000 non-member workers). Still, several 

thousand others are “temporary workers” inside the co-operatives themselves. These three situations invol-

ving non-member workers have all been controversial in the Mondragon group for many years and have led 

to numerous major debates that, in turn, has produced changes in policy and practice. 

The main driver of the Eroski distribution chain’s use of non-member employees was a growth strategy 

initiated in 1989 characterized by massive and rapid expansion outside its traditional base in the Basque 

Country in response to competitive pressures, especially from large French chains. The majority of this 

growth has involved the start-up and acquisition of non-cooperative supermarkets and other stores as 

subsidiaries of the Eroski cooperative. Eroski’s expansion strategy was successful in business terms, but the 

balance between cooperative and non-cooperative employment gradually became very lopsided. To address 

the issue, in the late 1990’s Eroski established a voluntary, partial employee-ownership structure (called 

GESPA) that eventually involved about 5,000 employees in several of its Spanish subsidiaries.

17

 it was very 

popular among employee participants. Eroski concluded that it was not only capable of doing business 

successfully around the country, but that it was also capable of using cooperative principles and related 

organizational/ownership structures in many different places and under different circumstances. As the 

Eroski Group continued to grow apace through the 1990’s and 2000’s, GESPA, as it was initially structured 

and implemented, could not keep up with the speed of expansion. Hence, an increasing percentage of the 

Eroski work force came to consist of non-member workers in conventionally-owned subsidiaries. By 2008, 

only about 9,000 (18%) of Eroski’s roughly 50,000 workers were co-op members and another 5,000 or 

so (10%) participated as partial employee-owners in GESPA (Altuna-Gabilondo, 2008). As a result, and 

based on the accumulated success of the GESPA process, in 2011 Eroski began to implement a multi-year 

initiative to “cooperativize” its operations.

 

When this initiative is completed (by about 2014-16), the great 

majority of Eroski workers who, today, are non-member employees working in conventional subsidiaries 

or partial worker-owners in GESPA, will become worker-members of cooperative firms. Thus, in a short 

period, this transformation will lift the ratio of members-to-total-work-force up to about 70%-75% in the 

Mondragon group as a whole. 

A second pressing issue concerns  the use of temporary, non-member workers, mainly inside industrial 

co-operatives given the seasonal and/or cyclical nature of production (and hence demand for labor), and 

the prohibitive cost of providing all workers with membership. Precise longitudinal data are hard to come 

by, but employment has been gradually shifting in favor of non-member workers for at least two decades. 

Thus, by 1990, the fraction of the work force that comprised non-members in the average co-op at Mon-

dragon was already 10% (Moye, 1993). By 2007, only 29.5% of the Mondragon group’s total work force 

was a member of their co-op (Altuna, 2008). in other words, some 50 years after the founding of the first 

Mondragon co-op, a substantial majority of Mondragon workers were non-member employees.

18

  During 

17  

See Arando et al (2011 b) for an extended discussion of Gespa as well as findings form a study  of the comparative performance 

of Gespa, co-operatives and conventional ownership.

18  

As such they have standard employment contracts with the coops and do not have the rights and responsibilities associated with 

membership --no voting rights with respect to choosing members of elected bodies, no employment guarantee and no obligation 

to be an employee-owner. On the other hand, non-member workers do receive an annual profit share, at a minimum 25% of 

the share a worker-member at the same pay grade would receive.

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