GLOBAL ECONOMIC CRISIS
It started off as a sub-prime housing mortgage crisis in the United States where the Banks lent mortage loan to the people without assessing their assets value and credibility. The Banks converts those mortgage loans into Bonds & “securities” and attracted Global Investors into a trap for investments which appeared an easy and steady source of income.
Credit rating agencies erred in estimating the risk associated with mortgage - based “securities” and rating them as the safest investment product. Investment in these “toxic-assets” cascaded into a Global Banking Crisis and then later compounded into a full blown Global Economic Crisis.
CAUSE OF ECONOMIC CRISIS
§ Imperfect understanding of the implications of the mortgage based securities by the investors.
§ Failures in Regulation, Supervision, and Monitoring of the Financial Sector by the Regulating Authority (US Federal Reserve). There was a mismatch between Securities offered as Financial Innovation and the ability of the Regulators to properly scrutinize and monitor the associated risks.
§ Excessive leverage on the part of banks and the Financial Institutions. (More Debt than Equity & holding more Non Performing Assets)
§ Excessively loose and open monetary policy (Low Interest Rates on Loan).
§ Lack of transparency on the part of Banks and other Financial Institutions in sharing with the investors the market risks associated with the mortgage based securities.
§ Unsound Risk Management Practices of the Investor Companies.
§ Short term greed of the Corporates.
ECONOMIC CRISIS IN DEVELOPING COUNTRIES
Globalisation helped in forwarding the crisis to the developing countries through multiple transmitting mechanisms:
§ Trade - Volume of Exports of Goods and Services is contracting in open economies.
§ Financial Flow - No Fund lending for new project.
§ Foreign Direct Investment - Sharp fall in Foreign Investment into Emerging Markets (Developing Countries)
§ Remittances - Income transfers from workers employed abroad back to their households have decreased.
§ Less Employment Opportunities Abroad.
IMPACTS OF ECONOMIC CRISIS
§ Hundreds of thousands of businesses have collapsed or are in a state of near collapse.
Lehman Brothers, Bear Stearns, Goldman Sachs, Morgan Stanley, Merrill Lynch, AIG Insurance Company, General Motors etc.
§ The estimated market loss due to this Global Melt Down is USD 50 Trillion.
§ Global Credit Crunch.
§ Rapid increases in Unemployment, Job Losses, Salary Cuts, Poverty and Hunger.
§ Reduced Public Confidence in Financial Institutions.
§ Unprecedented Rise in Essential Commodity Prices.
§ Deceleration of Growth, or Severe Economic Contraction. Reduction in Country GDP.
§ Downslide of Stock Markets across the world.
§ Slowdown in Real Estate.
THIS ITSELF PROVES THAT SURVIVAL IS IN TOGETHERNESS.
COOPERATIVES – AMIDST ECONOMIC CRISIS
Late Mr. Ivano Barberini, President of ICA termed this economic crisis as the moral crisis of capitalism & termed Cooperatives as the antidote to Economic Recession. Even in this age of Global Economic Crisis the Cooperatives stood strong and positioned themselves as a rock of stability. No Cooperatives report to have applied for Government aid so far. Bankruptcies of Cooperatives due to the crisis have not been reported, nor have Employee Layoffs been reported.
Japanese Cooperatives are a classic example; NORINCHUKIN Bank in Japan incurred losses to the tune of US $ 8 Billion. But reposing their faith in the NORINCHUKIN Bank came forward and funded further capital in Bank. This is a unique example of Cooperative functioning where in the members own the responsibility of their decisions.
RABO Bank, originally a Federation of Credit Unions, though has recorded reduced profits is trying to aggressively reposition it in the market by using captive slogans of Cooperative advantages.
Cooperative Enterprises around the world are showing resilience to the crisis. Financial Cooperatives remain financially sound; Consumer Cooperatives are reporting increased turnover; Producer Cooperatives showing increased production and Worker Cooperatives are seeing growth.
The Global Economic Crisis poses an opportunity for Cooperatives to show their presence to the world and prove that they are the best alternative business model.
WHY COOPERATIVES SURVIVED?
Ivano Barberini – Cooperatives are borne out of the need of the members & their members take responsibility of their decisions. Cooperatives are the top survivors of Global Economic Crisis.
Cooperative Principles and Values that we practice, and our ethical practices – like Good Governance, Democracy, Transparency & Accountability saved us from the crisis. They keep the wealth generated by local businesses in the local community with meagre outside exposures. They have depth of Loan given- Loan attached with the holding. More traditional values helped Cooperatives to suffer less.
Cooperative model is a better model of business. It is
§ Not linked to Stock Markets.
§ Relies on Member funds for its operation.
§ Controlled by Local people for Local people
§ Know individual need & repayment capacity hence loans are not unfettered.
§ Hardly any exposure on mortgage-securities.
§ Not motivated by profiting and capitalistic gains.
Cooperatives work within a long-term time frame. They do benefit from long-term perspective in their investment strategies. They are modest and realistic in planning the Growth of the Business with manageable control on costs and aspirations giving them a greater power of flexibility. Cooperatives are organizations with human face and soul. They are in position to retain their workforce and continue to provide services to members at reasonable cost & affordable prices.
COOPERATIVE SECTOR IN INDIA
Indian cooperative sector has once again proved that the efficiency of cooperatives can successfully counter the recessionary trends of the economy thereby ensuring consistent livelihood to the farmer producer and offering value for money products to its consumers.
Cooperative sector in India which is largest in the world is associated with over 0.6 million cooperative societies with 250 million members. They have been playing distinct and significant role in the socio-economic development of our country. There is almost no sector left untouched by the cooperative movement and everywhere they are successful.
Cooperatives have covered 100% of villages and 67% of rural households. They have been operating in various areas of the economy such as credit, production, processing, marketing, input distribution, housing, dairying and textiles. The cooperative credit system has the largest network in the world and cooperatives have advanced more credit in the Indian agriculture sector than commercial banks. They are providing 43% of total rural credit. Over 40% of the total fertiliser distribution in the country is handled by the cooperatives and over 30% of total fertiliser production is also contributed by cooperatives and out of this 25% is contributed by IFFCO alone. Dairy cooperatives operating under the leadership of the national dairy development board has now become the largest producer of milk in the world. In the production of sugar the cooperative share of the market is over 58% and in the marketing and distribution of cotton they have share of around 60%.Cooperatives process, market & distribute 50% of edible oils. Cooperative sector in India generated around 1.20 million direct employment and self employment for 15.50 million people.
IFFCO, one of the premier cooperative society of India engaged in production & marketing of fertilisers has achieved the highest ever sales turnover of Rs. 32, 933 Crore (USD 7160 Million) as compared to Rs.12, 163 Crore (USD 2650 million) in the previous year.
During the current year, IFFCO produced the highest ever 7.2 Million Mt of fertilisers and marketed 11.3 Million Mt of fertiliser becoming the largest marketer of fertiliser in the world. Every fourth bag of Urea and every third bag of NPK sold in India is of IFFCO.
Gujarat Cooperative Milk Marketing Federation Limited (AMUL), the largest Dairy Cooperative of the country has also posted turnover of Rs. 6700 Crores (USD 1490 Million) during the current year.
EXPECTED ROLE OF COOPERATIVES
§ Cooperatives should refocus on their business and increase their capital base to cope with any such crisis in the future. They should continue their trade with increased efficiency with more focus on the risk averse poor people.
§ “Distrust is the biggest challenge for Economic Recovery”. Now the people are disenchanted with “CORPORATES”. Cooperatives can help in the restoration of people confidence.
§ Cooperatives can help in creating more employment opportunities (both locally & globally) and other income support measures.
§ Cooperatives should broadbase their income portfolios by integrating value additive features in the operations and services offered to its members and customers.
§ Continue investing & patronizing local economy and strengthen global connectivity with intra trade network of Coops.
§ Members to patronize Cooperatives & Coops to serve members better than before and create an umbrella model from Local to Global.
§ Expand business and diversify itself into related sectors.
§ Make member business more productive.
§ Cooperation among cooperatives through technical assistance, product development and fair trade.
Cooperatives should ensure that:
§ Any future financial rescue packages for crisis recovery implemented at global or national levels should also take cooperative network into accord and be unbiased against cooperatives relative to the corporate sector.§ Future regulations or legislation that resulted from this crisis should favour, not hamper, cooperatives for building a safer & stable financial system.
§ Should be visible and showcase their achievements aggressively.
§ Should demand a rightful place in economic system, as they deserve.
“BAD COMPANIES ARE DESTROYED BY CRISIS. GOOD COMPANIES SURVIVE THEM. GREAT COMPANIES ARE IMPROVED BY THEM.” - Andy Grove (Former CEO of Intel Corporation)
“COOPRATIVES ARE GREAT ORGANIZATIONS AND THEY HAVE BETTER CHANCES OF SURVIVAL AND THUS HAVE THE POTENTIAL TO HELP THE WORLD TO COME OUT OF THIS ECONOMIC CRISIS.” - Ivano Barberini.
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