Archive for category: Economy

Information and stories about economy.

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Agricultural Solutions to Poverty in Moldova

Poverty in Moldova
Over the past decade, Moldova had remarkable progress in the form of economic growth, the reduction of poverty and greater shared prosperity. However, poverty in Moldova is at one of the highest rates in Europe.

The World Bank reports that Moldova’s economy had rapid growth over the past decade, with an average growth rate of 5% per year. In addition, the poverty rate dropped from 60% to 27% between 2000 and 2004 and reached 11.4% in 2014. While impressive, these data points fail to demonstrate the instability caused by the very factors that spawned this progress.

Economic growth was largely driven by an increase in private consumption. However, this does not necessarily signal that Moldova’s economic situation improved, as this growth is primarily funded by remittances. In 2014 remittances accounted for 26 percent of Moldova’s GDP and were received by more than 25% of households. The decline in employment from 55% in 2000 to 40% in 2014 further demonstrates that while Moldovans may have more money and are actively participating in the economy, the past decade’s growth was not spurred by internal progress.

Any steps taken to create such progress face significant obstacles due to spatial and cross-group inequalities as access to assets, services and economic opportunities varies greatly across the population. The lack of progress toward expanding economic opportunities within Moldova pushed many to leave the country. The lack of employment opportunities was particularly damaging to rural areas, where the slow-growing farming industry remains the primary sector. Limited access to markets and non-farm jobs fostered a system where residents of rural areas are persistently poorer.

Declining fertility and the increasing emigration of the young population left the state with a rapidly aging population and a shrinking workforce. This means that pensions, which were a significant generator of income growth over the past decade, are no longer a viable tool for lifting households from poverty.

Rural areas are home to most of the poorest 40% of Moldova’s population. Residents of these areas have significantly less education and typically have inadequate access to healthcare. Even when health services are physically accessible, many lack insurance and either refuse to pay for care or are driven further into poverty in Moldova by high out-of-pocket costs.

Many believe that the 2014 association agreement with the European Union, which opened up trade opportunities, will stimulate Moldova’s domestic economy in preparation for greater dependency on exports. However, this fails to account for the significance of Moldova’s small scale farming sector which, by design, does not have access to the same opportunities as industrial farms.

Recommendations for leveling these inequalities and avoiding economic stagnation include strengthening the domestic labor market, addressing corruption in the business environment and improving the government’s social assistance scheme. Perhaps most important is the advice of Alex Kremer, World Bank Country Manager for Moldova, who urges that “enhancing the livelihoods of small farmers is paramount” for Moldova to foster internal economic progress.

Given the persistent spatial inequalities in living conditions and the fact that agriculture accounts for such a large portion of employment, it is important to note that the causes of poverty in Moldova remain much the same as they were a decade ago. To eradicate them once and for all, Moldova must invest in its human capital by improving living conditions across the rural-urban divide and foster quality education and healthcare services.

– Alena Zafonte

Photo: Flickr

The High Cost of Living in Denmark

Cost of Living in Denmark
Denmark is known for its high taxation and social spending as a significant portion of its budget, but it may be a lesser-known fact that the cost of living in Denmark is among the highest in the world.

As of 2017, the cost of living in Denmark was ranked sixth in terms of its consumer price index (including rent), which is currently at 65.83. The consumer price index is a calculation of the average prices of rent and consumer goods and services within the country. Though this number is high, it pales in comparison to the two other Nordic nations that are also listed as being in the top ten most expensive countries to live. Namely, Iceland, which was ranked third with a CPI index of 92.79, and Norway, ranked fourth with a CPI index of 76.70.

The reference point of these CPI calculations is the cost of living (including rent) in New York City, meaning that New York City is a baseline equal to 100. That said, this data reflects that the average cost of rent plus the average cost of living in Denmark is 34.17% less than the cost of living and rent in New York City.

The country also has a sales tax rate of 25% and Danish citizens, in almost all cases, pay more for consumer goods and services. For example, the price of a Volkswagen Golf 1.4 TSI hatchback in the U.S. is approximately $20,000. In Denmark, this price is about $45,747.33, and the cost of gas is about or $1.59 per liter, or $6.36 per gallon.

Among other comparisons to the U.S., the average price in Denmark for a pair of Levi 501 jeans is about $130, a basic dinner for two in a local pub or diner is about $64 and a 40” flat screen television costs about $603. Also, the median monthly rent for a furnished 480-square-foot studio apartment in an average neighborhood is about $917, in addition to an average of $190 in utilities per person.

Another unique aspect of the Danish economy is that although the average citizen makes about $43,000 per year, they devote between 35 to 45% of this to their income taxes, depending on whether they are married, have kids and a few other factors. For those making $67,000 or more per year, a total of 52% of their income will go to taxes, and the highest marginal tax rate for the wealthiest is currently 55.8%. However, these tax rates are comparatively lower than in the past. Data shows that in 1997, Danes paid a record high top marginal income tax of 65.9%, and the rate did not fall below 60% until 2009.

Nonetheless, as of August 2016, 60% of Danes said that they would oppose tax cuts, 15% said they were unsure and only 25% favored them. The reason for such a high level of support for high taxation is because most Danes view the taxes as an investment for a better society and an increased quality of life.

Since it is a focus of many Danish policymakers to take into consideration the quality of life and overall happiness for their citizens, they ensure that they have a highly funded welfare system. For this reason, it is not surprising that education is entirely free even at the university level and every Danish student gets $900 monthly from the government. This is not only beneficial for young people, but it also relieves parents from having to worry about how they will finance their children’s education.

Denmark also has one of the most generous parental leave policies worldwide, allowing parents up to a total of 32 weeks of funding from the state to tend to their newborns following birth, as well as free, safe and high-quality health care for all citizens.

The Danish labor market is also positively impacted by the welfare model. By practicing an extremely efficient active labor market policy that, among other things, provides job-searching assistance to the unemployed and makes efforts to keep the unemployed actively engaged in searching for a job. In addition to this, if a Danish citizen loses his job, he can receive unemployment insurance for up to four years.

Perhaps it is a combination of these things that has led Denmark to be ranked the happiest nation in the world for the third year in a row, according to the United Nation’s World Happiness report of 2016. The five countries that were ranked directly below Denmark were Switzerland, Iceland, Norway, Finland and Canada, which is notably significant as all of those countries also impose high taxation and have similar welfare programs in place.

While the cost of living in Denmark is high, and the country is certainly not a flawless, utopian society, it appears to value the well-being of its people over economic growth. Demark can, at a minimum, serve as a role model to the global community when it comes to improving the lives of its citizens.

– Hunter Mcferrin

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Poverty in Oman: Past, Present, and Future

poverty in oman

Oman is a country in the Arabian Peninsula bordering Saudi Arabia, Yemen and the United Arab Emirates, which places it in the southeastern coast of the region. The coastal regions of the country benefit from fertile soil and a beautiful landscape with impressive mountains. Despite the country’s strong agriculture and its oil, it has recently faced an economic downturn following its big investments in social welfare, causing oil prices to drop and the budget to decrease.

Economic Crisis

The aforementioned economic downturn of the country was due to a protest during the Arab Spring in 2011. The citizens demanded more employment opportunities, economic benefits, and a crackdown on the government’s corruption, which is an absolute monarchy led by the Sultan of Oman. While the government did respond to the protest by providing social welfare benefits, the result was an unmanageable budget that contributed to the poverty in Oman. The biggest concern on the economy of Oman is related to the shifting prices of oil, as the country is highly dependent on oil to generate revenue. In fact, oil can account for somewhere between 68% and 85% of the country’s entire revenue generated in a year. This is why Oman suffered a budget deficit of $13.8 billion in the year 2016, the same year global oil prices dropped.

Wages and Migrant Inequity

While the statistics don’t indicate a high rate of the country’s nationals being under the poverty line, poverty in Oman primarily affects migrant workers. Omani nationals benefit from a minimum wage at $592 a month in addition to a $263 allowance. Migrant workers in Oman do not have access to these benefits and are compensated with low wages.

Many countries in the Middle East, including Oman, employ female migrants to work in households. They are tasked with taking care of the children, cooking, and doing daily chores. Oman has at least 130,000 of these female migrant workers, and they face poor working conditions. This includes lower wages than initially promised, excessively long working hours and, according to interviews with about 59 of the workers, there are even cases of physical and sexual abuse from employers.

A Plan Forward

The state is at risk of major deficits in its budget in a case where oil prices drop, as was the case in the year 2016. To solve this, the sultan has been seeking alternative ways for generating revenue in order to reduce the risk of another economic downturn. The country has already made progress by making a development plan in 2016 to decrease its oil dependency. The plan seeks to open doors in industrialization and privatization, diversifying its sources of revenue.

According to the CIA, “The key components of the government’s diversification strategy are tourism, shipping and logistics, mining, manufacturing, and aquaculture.” Despite Omani nationals struggling to find employment opportunities due to migrant workers’ lower wages in earlier years, the country has seen an increasing number of citizens entering the job market recently. To highlight some of the progress Oman has made in previous years, its tourism industry has been opening up and contributing to the country’s GDP. 32 new hotels opened in 2018 to add over 3000 rooms to accommodate tourists, which put the country at an expected tourism growth rate of about 13% between 2018 and 2019.

COVID-19 Influence

Reports in recent months have shown a spike in Covid-19 cases among migrant workers in the Arabian Gulf countries, including Oman. Living conditions for these workers tend to be cramped and they lack access to necessary equipment and care for protection against the virus. Back in April, 16 NGOs sent letters to the gulf countries with recommendations to protect migrant workers amidst the pandemic. These recommendations include providing equal testing, medical access and continued wages for workers no longer able to work in these conditions.

While Oman has yet to respond to the letters, there has been a decline in Covid-19 daily cases over the past week. It peaked at an estimated 2164 new cases on July 13th but has been declining. In comparison, on July 15th, there were an estimated 1157 new cases.

Despite facing an economic downturn in 2016, the country has made strategic progress by diversifying its sources of revenue and decreasing its dependency on oil. These changes can greatly alleviate poverty in Oman.

– Fahad Saad
Photo: Flickr

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The Effect of Refugees on the Economy

Refugees on the EconomyThere has been considerable debate regarding the effect of refugees on the economy. Although refugees often do require assistance establishing their lives in new countries, there are countless stories of refugees who have succeeded through determination and innovation.

With a net worth of about $38 billion, Sergey Brin, the Google co-founder, is arguably the greatest refugee success story. Brin’s family fled from Russia to the United States when he was six years old to escape anti-Semitism. Google is now the most popular search engine in the world. In 2015, Google’s search and advertising tools helped generate $165 billion in economic activity; nearly 1.5 million businesses and nonprofits benefit from Google’s ad tools. It is a shining example of the positive effect of refugees on the economy.

Similar to Brin, George Soros endured strong anti-Semitism while growing up in Europe. After the Communist takeover of Hungary, Soros moved to London then eventually to the United States. He is now one of the most successful hedge fund managers, with an estimated net worth of $25 billion. He has leveraged much of that wealth to help refugees and migrants. Last year, he committed to investing $500 million in companies founded by refugees and migrants.

Andrew and Peggy Cherng have likewise channeled some of their success to help the less fortunate. Andrew emigrated from China after the Communist takeover and Peggy is originally from Burma. The couple opened their first restaurant in 1983 and have since grown a fast food empire that generates $2.5 billion in annual sales. In 1999, they established Panda Cares, a charity dedicated to serving disadvantaged children the world over.

Although these individuals may be outliers and more successful than the average refugee, studies indicate that many immigrants share a propensity for entrepreneurship. According to the Kauffman Institute, immigrants are twice as likely to start businesses as native-born Americans. These new businesses can help to provide employment opportunities for both native and foreign-born Americans. Immigrant-owned businesses employ a full ten percent of American workers and generate $775 billion in revenue. With such statistics, there is little question as to whether the effect of refugees on the economy is positive or negative.

– Rebecca Yu

Photo: Flickr

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The True Costs of Fast Fashion

Fast Fashion
The fashion industry used to be “four seasons in a year; now it may be up to 11, 15 or more.” This phenomenon is resulting in “fast fashion.” Currently valued at $1.2 trillion, with more than $250 billion spent in the U.S. alone, the fashion industry has exploded as increased wages have increased demand. With this overload in consumption, there is inevitably much waste which damages the environment and exploits poor workers.

According to the Environmental Protection Agency, 15.1 million tons of textile were created in 2013. More than three out of every four garments has been incinerated or put in landfills. Traditionally, the U.S. has tried to reduce waste by selling used clothing to countries such as Pakistan, India, and Russia. With the strong dollar and increasing availability of cheap clothing from Asia, however, demand for secondhand clothing has decreased. As a result,  large amounts of waste needed to be taken care of.

The fast fashion industry also imposes an immense burden on the environment. The industry produces “10 [percent] of global carbon emissions and remains the second largest industrial polluter, second only to oil.” Producers consume nearly 70 million barrels of oil a year in just the production of polyester fiber and dump 1.7 million tons of dyeing chemicals into the environment. The industry also goes through an estimated 1.5 to 2.4 trillion gallons of fresh water a year, polluting much of it and damaging both human health and the environment.

While recent progress has created worker empowerment, the use of cheap labor in the fashion industry has been marred by tragedy. In 2013, a garment factory in Dhaka, Bangladesh collapsed, killing more than 1,100 people. Like other countries experiencing immense poverty, Bangladesh would “see its economy collapse” without the textiles industry. Brands such as Gap, Adidas and H&M have also been criticized for using child labor, paying wages of 50 cents per hour and demanding 10-hour shifts. With other options only as good as intensive agricultural work, many uneducated women find these abusive jobs as their best options. Workers also have had very little leverage in negotiating their working terms and so have less job security.

As all these issues continue to be exposed, however, progress will continue to be made. Since the factory collapse, registered trade unions in Bangladesh have increased from three to 120 and wages nearly doubled. As consumers have grown warier, smaller brands have emerged to promote the “slow fashion movement,” where people shop for quality over quantity and buy products made of sustainable materials. Larger brands have also sought change. H&M and Patagonia launched trade-back programs where customers can send in unwanted clothing that will be recycled and sold again. Nike has also worked to eliminate child labor and improve working conditions.

Although it is always great to see businesses take the initiative in improving the fast fashion industry, the ultimate dictator of change is the customer. Customers are the deciding factor in what companies produce. If the purchasing culture changes to one where customers primarily value how companies have treated its workers and the environment, then the necessary change will follow.

– Henry Gao

Photo: Flickr

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The Missing Middle of Economies in Development

Missing Middle of Economies
Cited in the 2015 award-winning documentary “Poverty, Inc.,” the “missing middle of economies” refers to the theory that a gap of “small and medium enterprises” in developing nations prevents economic prosperity.

The Harvard Kennedy School’s Center for International Development is studying this issue to develop solutions that could lead these countries out of foreign aid dependency and into an environment that encourages local entrepreneurship and development.

World Bank Group databases suggest that small and medium enterprises (SMEs) “are responsible for 50 percent of GDP and over 60 percent of employment” in higher-income nations. Rates are “less than half of that” in developing, low-income countries, a fact that indicates major hurdles to economic autonomy and prosperity.

While small and large businesses may profit in low-income countries, the missing middle of economies produces roadblocks to development that keep countries dependent on foreign aid.

In a 2006 study published in Elsevier’s Journal of Financial Economics, researchers highlighted the challenges local entrepreneurs face with “entry costs” or “entry regulation.” They concluded that “entry regulations hamper entry,” an effect that is heightened in developing countries.

Harvard Kennedy School’s Asim Kwaja is a professor of public policy and principle investor in the Entrepreneurial Finance Lab Research Initiative, a pilot program designed to open entrepreneurial opportunities in developing African markets. Kwaja mentioned a “frustration” he has experienced throughout his career.

“There is a perceived massive cost, a political cost,” Kwaja said, for developing nations’ governments to set policy for local entrepreneurship. Tax codes and permit requirements, among other regulations, ultimately stymie development.

The Entrepreneurial Finance Lab Research Initiative investors have tested their model in seven countries, trying its ability “to stimulate entrepreneurship, access to finance and economic growth across the developing world.” Kwaja looks to change the “little perception of any returns” by encouraging policy reforms to stimulate the growth of SMEs.

On top of regulatory obstacles, local entrepreneurs face competition from low-cost (or no-cost) foreign aid suppliers like NGOs and non-profits.

Michael Matheson Miller, director-producer of “Poverty, Inc.,” holds graduate degrees in international development, philosophy and international business. He is a fellow at the Action Institute, a non-profit organization that aims to promote “a free and virtuous society.”

“Poor people are not poor primary because they lack stuff,” Miller said in a radio interview in May 2016. He asserted that the world’s poor lack the political liberties and economic opportunities they need to prosper.

“Poverty, Inc.” highlights the way unpredictable influxes of foreign aid mire economic opportunism. While most charitable giving is motivated by altruistic intentions, Miller stated that non-profits, NGOs and even foreign governments treat the poor as “objects” rather than “subjects and the protagonists of their own story of development.”

The missing middle of economies engenders a need for more strategic coordination to help developing countries gain a chance at economic prosperity.

– Tim Devine

Photo: Flickr

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Quality of Internet Use is Influenced by Economic Status

Internet Use
Long considered the means by which the democratization of information would be achieved, the internet is increasingly becoming a platform where wealth disparities are made evident. According to a report released in July 2016 by the Organization for Economic Co-operation and Development (OECD), the quality of internet use among students seems to be influenced by socioeconomic status.

The OECD report, which studied teenage students’ time spent online, highlighted the so-called “digital divide” that exists between their respective, qualitative internet use. In addition to this, the report found that despite having equal access, which theoretically should imply equal opportunity and success, poor students were less likely to know about or take advantage of the myriad benefits internet access affords.

Interestingly, in 21 out of the 42 countries from which data was collected, poor students actually spent more time online than wealthier students. Wealthy students, according to the study, spend their time online reading the news and learning. “But disadvantaged students may not be aware of how technology can offer opportunities to learn about the world, practice new skills or develop [professional plans or internet-based communication opportunities],” according to the OECD report.

The report noted that internet use among rich and poor students is strongly correlated with more general academic performance measures. It appears that the problem of ignorance about internet benefits both perpetuates and is perpetuated by lack of education.

A separate, unrelated study by the London School of Economics, published in February 2016, showed that people of the “higher social status” (wealthier and more educated people) benefited from their time spent online. “To some extent, the findings suggest that access to and use of the internet might exacerbate existing inequalities offline,” the study’s author remarked.

The OECD report noted that work aimed at ending these disparities is underway but that far more needs to be accomplished in order to make a difference.

One related effort attempting to tackle the issue of internet access is the Digital Global Access Policy (GAP) Act, which is currently making its way through Congress. This legislation is designed to bring internet access to the 60 percent of the world that is currently offline.

Though not directly related to efforts to leveling the playing field among people who are already online, the Digital GAP Act should have indirect but related benefits, as its passing will mean wider dissemination of internet education.

– James Collins

Photo: Flickr

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Palm Tree Oil Plantations in Gabon Create Rural Jobs

Palm Tree Oil Plantation
With notoriety for being one of six leading oil producing countries in Africa, Gabon embarked on a new project — developing palm tree oil plantations aimed at reducing the poverty gap and encouraging sustainable development.

Since 2013, Gabon has been facing a decline in its oil reserves. The government committed up to one million hectares of sustainable land to appeal to investors in agricultural development and spawn economic diversification.

Collaboration With Olam Palm Gabon

Olam Palm Gabon, Singapore’s Olam International Ltd and Gabonese government-owned company made an agreement with the government of the Republic of Gabon to utilize 50,000 hectares of land for palm plantation.

The development of palm tree oil plantations will enable the country to diversify its dependency on oil and instead invest in a more lucrative and long-term venture. Palm oil trees can produce fruit for more than 30 years with a plant yield far more advantageous than any major oilseed crop.

Sustained Economic Livelihood

Gabon has a population of 1.9 million, the highest urbanization quota in Africa with more than four in five Gabonese citizens residing in the metropolitan area. With an additional unemployment rate of 20%, partnership with Olam to build plantations will generate a revenue of $400 million and up to 5,000 new jobs.

Planting began in 2011; currently, 31,000 hectares exist. Upon complete production, the plantation is expected to yield 24 metric tons of fruit bunches per hectare and 5.2 metric tons of oil per hectare. The total estimated investment in phase one development of plantations, palm oil mills and related assets was $500 million.

Six thousand five hundred and two hectares have been sold and leased for $130 million. This proves Gabon’s ability to support innovative financial structures designed for the growth of the palm oil sector.

Job and Investment Opportunities

Experts believe that investment in the palm tree oil plantations in Gabon and the rest of Africa is thriving and will create local jobs and guarantee the stability of the local economy. Ali Bongo Ondimba, the head of State, commissioned on Sept. 16 the new production site of sustainable palm oil of Olam, in Kango, in the Estuaire province. Eight hundred jobs have been created in this location, with an inevitable 120 contracts planned. Social contracts signed by Olam ensure small farmers are key sellers in the project with a mutual benefit of electricity, road repair and water supplies.

Falling oil prices in Gabon have had the most severe effect on the country’s poor. The project also entails support of local community farming around Kango with the construction of 400 accommodations and social infrastructures.

“In Sub-Saharan Africa, many countries rely on extractive industries for revenues, but extractive industries don’t create a lot of jobs, and so countries are beginning to invest more in agriculture as a means of job creation,” said Gagan Gupta, chief executive at Olam Gabon Enterprise. “To succeed, however, agriculture projects must take into account, and invest in, local communities.”

Given the attention Gabon has received for their actions, it is hopeful that such efforts will continue to yield fruitful results encompassing economic growth.

– Shanique Wright

Photo: Flickr

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Inequality and Poverty in Namibia: A Gaping Wealth Gap

Poverty in Namibia

Namibia is a country in southwestern Africa, bordered by the Atlantic Ocean to the west. It is home to diverse wildlife species. Namibia is one of just nine countries in Africa categorized by the World Bank as “upper middle income.” Poverty in Namibia, however, is still prevalent and the country is rife with extreme wealth imbalances.

The Namibian Economy

The Namibian economy boasts relatively high growth, with an average growth rate of 4.3% between 2010 and 2015. The economy is heavily based on the country’s mining industry, which accounts for 50% of foreign exchange earnings. Despite its high income, Namibia has a poverty rate of 17.2%, an unemployment rate of nearly 20% and an HIV prevalence rate of 11% percent.

Poverty in Namibia is acute in the northern regions of Kavango, Oshikoto, Zambezi, Kunene and Ohangwena, where upwards of one-third of the population lives in poverty. Furthermore, the country’s status as upper middle income makes its most vulnerable population ineligible for aid from the United Nations Development Programme (UNDP) and other development groups.

Economic Disparity in Namibia

The apparent imbalance between Namibia’s high income and simultaneous extreme prevalence of poverty can be traced to enduring income inequalities. Namibia has the second most unequal wealth distribution globally, with a Gini coefficient of 0.63, after South Africa, making it one of the most unequal countries. High inequality persists despite several government initiatives, reflecting the nation’s history when the apartheid system created significant economic and social disparities between the white minority and the Black majority.

In Namibia, the most disadvantaged 20% of the population receives approximately 3% of the total expenditure, while the richest 20% receives more than 70%. Gender inequality is also a significant issue in Namibia. As of 2023, women make up only 55.8% of the labor force, while men make up 63.7%. This gender gap in labor force participation is lower than in other upper-middle-income nations.

Efforts

Even though poverty in Namibia has declined significantly in recent years, the United Nations (U.N.) and other advocacy groups have pressured the Namibian government to do more to tackle the large wealth gap. In response, the Namibian government has implemented several initiatives to narrow the wide gap between the most vulnerable and wealthy populations.

One of these initiatives is the Black Economic Empowerment (BEE) program. This policy aims to encourage the participation of the Black population in the economy, which could ultimately transform Namibia’s economy while narrowing the wealth distribution. Additionally, the New Equitable Economic Empowerment Framework (NEEEF), which the Namibian government implemented in 2018, encourages businesses to transfer ownership and skills to historically disadvantaged Namibians.

Final Remark

While these efforts are steps in the right direction, addressing Namibia’s significant wealth gap and inequality remains an ongoing challenge requiring sustained commitment and innovative solutions.

– John English

Photo: Flickr
Updated: June 01, 2024

Mondragon Cooperatives: Improving Spain’s Economic Struggle

Mondragon Cooperatives: An Alternative to Spain's Economic Struggle
Cooperatives are being used as an alternative to the usual corporate hierarchical business model. These are businesses created by people uniting voluntarily in a democratic manner, aiming to improve their economic and social needs.

Economists recognize the crucial role they play in improving Spain’s economic struggle. The largest worker cooperative in the world, Mondragon Corporation based in the Basque region of Spain, best exemplifies this claim. Once known as one of the poorest regions in Spain, the Basque region is now the richest, prospering due to a strong sense of self-determination, grassroots participation and non-governmental intervention.

In the 1940s, the young priest Don Jose Maria Arizmendiarrieta made it a goal to reduce the poverty rate at the time. The repressive policies of Franco’s regime were leading to economic restraints causing more Spaniards to emigrate from the country. Arizmendiarrieta wanted to counteract this by creating humanistic cooperative businesses that looked out for workers’ needs. Arizmendiarrieta and others created a technical school. He then established a cooperative bank, the Caja Laboral, leading to the first industrial cooperative in 1956.

Today, Mondragon is one of the most successful Spanish firms with global sales of $15 billion, employing close to 75,000 individuals in a total of 260 cooperatives. The people of Basque no longer experience the poverty they once did, “In Mondragon, I saw no poverty, I saw no signs of extreme wealth, I saw people looking out for each other,” said Sociology Professor Barbara J. Peters. “It is a caring form of capitalism.”

The Mondragon cooperatives are based on 10 principles: democratic organization, open admission, subordinate and instrumental nature of capital, value and importance of labor, participation in management decisions, fair payment, social transformation, cooperation, education and the university.

Workers in Mondragon have full control over their firm. Once a year members of each cooperative meet in a general assembly and elect who they want in charge; this board of directors is chosen to lead the cooperative in making important decisions and deciding the company’s strategy.

Moreover, the cooperatives are not accountable to shareholder’s needs; outsiders cannot buy any control, which allows management to invest solely on their cooperative with the long-term interest of the community in mind. Instead, the workers of Mondragon receive a share of the annual profits or losses based on a formula that tries to reflect the relative productive contribution of each worker.

Using this formula, most of the profits are reinvested, in turn creating new cooperatives and jobs as well as spurring the long-continued growth of Mondragon. Funds are also put aside for social welfare, providing care for retirement, widowhood and disability. Additionally, top CEOs at Mondragon are not earning exceptionally more than starting employees, somewhere between three to nine times more, which is significantly lower than most corporations.

Due to Mondragon’s investment methods, they barely felt the loss of the 2008 recession, which deepened Spain’s economic struggle. Not a single employee was fired, remaining steady at around 84,000 worldwide, one-sixth of them Spaniards. Instead of firing workers, their employees’ average salaries dropped by around 5%, and those who were left without work found jobs at another co-op; all the co-ops back each other up, making sure they prioritize their profits, investing in the co-ops which are economically declining.

Since 1990, Mondragon has expanded its businesses to international markets. Today, they have 125 different businesses in different countries; however, these businesses are not all cooperatives. In 2006, Mondragon began working with Mexico, Brazil and Poland to educate trade unions on how to properly run a co-op.

The 2008 economic recession set the project back. Nevertheless, in 2009 Mondragon partnered with the United Steel Workers (USW) to lay the groundwork for the formation of Mondragon Union Cooperatives in the U.S.

– Marcelo Guadiana

Photo: Flickr