Almost completely ignored by the international development community in recent years are local financial systems and institutions that have been successful in promoting sustainable and equitable local economic development. This chapter presents four cases from Europe and Asia to illustrate this.

Northern Italy

After 1945, northern Italy’s famous credit cooperatives (Banche di Credito Cooperativo, BCCs), operating alongside the larger cooperative banks (Banche Popolari, BPs), supported a wave of small enterprises that arose out of the region’s largely destroyed but once very significant military-industrial complex. Over subsequent years, enormous effort also went into diversifying the local economy into new markets, technologies and global value chains. Attention was paid towards redirecting local MSMEs to operate in line with the newly elected communist and socialist regional governments’ ambitions to reform capitalism. At a practical level this involved supporting only enterprises that were able to succeed on the basis of well-paid, unionized and secure employment relations, thus moving beyond the pre-war forms of exploitation that contributed to the rise of Fascism.

The most far-reaching contribution made by northern Italy’s BCCs and BPs, however, was the comprehensive support provided to a variety of non- financial cooperative enterprises. Always a region with a strong cooperative spirit dating back to the mid-1800s, in the post-war period this sector massively expanded and diversified into new areas of technology-driven economic activity and many worker cooperatives became leaders in their field. Particularly important were the linkages created between different types of cooperatives, such as rural-based agricultural cooperatives selling to retail cooperatives in urban areas. Marketing cooperatives also linked private micro- and small enterprises to generate economies of scale. The eventual result was the creation of the world’s leading regional cluster of cooperatives.⁸ Pointedly, they were on the whole more efficient than their investor-driven counterparts, which clearly contributed to the high levels of productivity and growth registered by the northern regional economies.⁹

While the wider investor-driven enterprise sector in Italy endured a difficult time during the 1980s and 1990s, northern Italy’s cooperative sector was, in stark contrast, able to flourish as never before.¹⁰ Although the BPs struggled to compete against the more aggressive Italian and foreign private banks and were eventually restructured almost to the point of losing their co- operative identity, the smaller and more localized BCCs proved more resilient. One important reason for this was that in 1993 the BCCs were mandated by a new banking law to join one of 15 local federations operating under a national federation (Federcasse). This arrangement allowed for each BCC to reap an important share of the collective economies of scale that

arose from the central provision of a whole range of core services and functions. Being small was not such a disadvantage to the average BCC, but being isolated was. It has also greatly helped the BCC sector that, in return for tax breaks, Italian law mandates that 70 per cent of annual net profit in a BCC must be allocated to its legal reserve, which usefully builds the capital base of the institution. Even though mergers and some closures reduced the actual number of BCCs after the 1980s, the sector managed to increase its market share. By law, a BCC’s assets cannot be appropriated by members seeking to privately profit, so in the event of a liquidation, any remaining assets must be passed to a cooperative support fund (Fondo Sviluppo Spa). This important ‘asset lock’ constraint safeguards against speculation and take-over by an outside investor.

Nonetheless, the financial cooperative sector has had to hold fast to its initial ambitions and hopes. Fearing a collective ethos that downplays the role of the individual entrepreneur, Italy’s succession of right-wing governments and their big business allies have tried to tear down supportive legislation and regulations for the cooperative sector, particularly from 2001 onwards. Most recently, the financial cooperatives have had to make some painful adjustments in order to survive in the aftermath of the global financial crisis of 2008. Many other forms of cooperatives in the northern regions were forced to downsize after demand from Italian and European consumers fell precipitately. Nevertheless, northern Italy’s cooperative sector has managed to maintain and extend its unique regional/local economic model based on the pursuit of higher average living standards, economic democracy and a high level of social justice.¹¹

The Basque region of northern Spain

Spain also provides a number of important examples where cooperative- based local financial systems have produced sustainable local economic development. By far the most important example is that of the famous Mondragón Cooperative Complex (MCC) located in the Basque region of northern Spain. MCC’s origin lies in a small cooperatively managed technical training school established by Don José María Arizmendiarrieta,

a local parish priest. This was followed in 1956 by the opening of the first worker cooperative in Mondragón making stoves for the Spanish market. Raising the initial financial resources to launch this first cooperative was not easy, however, and it became clear that a bank owned by and serving the community was needed.

The result in 1959 was the establishment of the Caja Laboral Popular (CLP, Working People’s Bank), a secondary cooperative bank established by four of the town’s cooperatives. The CLP grew very rapidly. One reason was that savings were quickly generated among the hard-working and thrifty local population, not least because they knew that this would help start up new worker cooperatives in their community marked by unemployment and poverty. In the early 1980s the CLP also began to mobilize savings from across Spain.

Crucially, the CLP established an ‘entrepreneurial division’ – a team of specialists able to assess, establish and fund cooperative ventures. New cooperative projects presented to the CLP were carefully evaluated not only on the basis of their individual economic merits and growth potential, their ‘strategic fit’ as subcontractors within the growing Mondragón cooperative group, but also on their adherence to its core principles of extending industrial democracy, fostering cooperation and providing mutual support. Such careful management and investment of member savings by the CLP ensured that in the first 30 years of operation only a handful of new cooperative projects failed. The CLP also played a crucial local development role by funding the most promising ideas and innovations that emerged from the MCC’s own raft of internationally renowned research and development centres.

In the 1990s a restructuring process forced upon the CLP by the Spanish government saw the repositioning of the bank as semi-independent from the operations of the MCC. The CLP was able to successfully generate savings from across Spain, while its lending activities were extended to establishing other types of businesses. Nonetheless, the CLP’s priority remained to provide all necessary financial, technical and advisory services to existing cooperatives within the MCC. It also established a separate financial vehicle – MCC Investments – that provides low-cost funds to medium to larger cooperatives across Spain.

The cooperative bank’s structure has changed over the years, and the 2008 global financial crisis combined with Spain’s dramatic recession affected the MCC’s operations considerably,¹² but the CLP continued to play a major role in ensuring the sustainable development of the Basque region. Indeed, it contributed to turning what was once the poorest region in Spain into its richest, with the average living standards and quality of life among the highest in Europe.¹³ More specifically, despite huge pressures from conven- tional capitalist enterprises deriving a competitive advantage from using exploitative working practices, the CLP (now known as Laboral Kutxa) has not wilted in its ambitions. It has built the MCC up into a major employer (roughly 75,000 worker-members) while maintaining as much as possible the group’s overall focus on extending democracy into the workplace and promoting its wider economic and social justice goals.

Finally, an important aspect of the MCC experience that cannot go unremarked is its transferability. In spite of many critics arguing that the model is interesting but geographically and culturally specific, several other regions in Spain have prospered using the same cooperative parameters and after building their own version of the CLP. By far the most successful is Cajamar, located in Almeria Province in southern Spain. Now the largest cooperative bank in the country, Cajamar was the driving force behind a local economic development success story: the ‘Almeria Model’. Its success derives from Cajamar’s general support for cooperative enterprises, and for clusters of agro-industrial SMEs assembled in cooperatives in particular. Moreover, as Cajamar’s resources and capacity grew with time, it was able to increasingly provide impetus for social innovation, technology acquisition and transfer, and other forms of progressive social and economic development of benefit to the local community. Cajamar’s role has been described as that of ‘a cooperative bank, (which) in concert with the cooperative movement, was able to construct an economically stable community through sustainable innovation’.¹⁴

China

It is under-appreciated that the origin of China’s spectacular rise to economic power beginning in the 1980s came not from foreign direct investment, as many claim, but from urban and rural credit cooperatives (UCCs and RCCs) set up to finance accelerated local economic development.¹⁵ UCCs and RCCs were multi-stakeholders financial institutions that were community- owned but largely directed by local governments with an important element of member input. Local government involvement in the UCCs and RCCs, as well as oversight by the Agricultural Bank of China (ABC), gave local people the confidence necessary to deposit their savings in them. While up to 30 per cent of deposits mobilized by the RCCs were transferred to ABC, the remainder was invested regionally to create new jobs and promote economic development. It helped that local government incorporated UCCs’ and RCCs’ operations into local development plans. This meant that they could receive additional funding and other forms of financial and technical support from local governments in order to build enterprises aligned with sustainable development goals. Member involvement also meant that ongoing problems and opportunities at the local level could be passed on to local government officials and acted upon. By far the most decisive factor behind the success of the UCCs and RCCs as a local economic development instrument, however, had to do with the type of enterprises they supported. These were local government-owned and industry-based Township and Village Enterprises (TVEs). Generously equipped with the latest foreign production technologies, with easy access to the port of Hong Kong, the TVEs proliferated rapidly from the early 1980s onwards. By the mid-1990s there were nearly 7.6 million industrial TVEs operating across China.¹⁶ Large numbers of high-skill industrial jobs were quickly created, with employment in TVEs peaking in 1996 at around 135 million.¹⁷ In addition, local government ownership of TVEs allowed for a significant proportion of their profits to be recycled back into further development of the local economy, through establishing incubator units, business parks, training and vocational education schemes, special development funds, and so on. Social facilities were also supported, particularly in the education, sport and cultural fields.

While the TVEs undoubtedly provided the foundation for China’s economic miracle, the wind turned when the global neoliberal project spread to China in the early 1990s. With capitalism triumphant in the aftermath of the collapse of Eastern Europe’s centrally planned economies, many Chinese policy-makers at the national and local levels began to rethink some aspects of their developmental model and bought into the central neoliberal narrative that local growth would be accelerated if all manner of institutions were privatized and put into the hands of profit-oriented business people. Local governments were encouraged to begin to follow the ‘Wenzhou model’, an overtly neoliberal, and ultimately unsuccessful, local market-driven economic development model pioneered in that city.¹⁸

Inevitably, the UCCs and RCCs also came to be seen as ‘out-of-date’ and ‘too interventionist’. Some were also criticized for having run up serious debts. The RCCs and UCCs were therefore put on a path towards privatization. Most UCCs and RCCs were converted into fully private City Commercial Banks and Rural Commercial Banks, respectively. In the process, their original local development goals were stripped away, their successor institutions pursuing financial self-sustainability above all. As a result, the new banks stepped away from supporting TVEs, and began to support a new generation of privately owned SMEs. While the local neoliberal financial model soon disappointed, especially in terms of the growing inequality it generated,¹⁹ it nevertheless played its intended part in creating a new capitalist elite in China that supports and legitimizes the Communist Party in governing the country.

Notwithstanding their eventual demise, thanks to their decisive support for the TVE movement in the 1980s and early 1990s, the UCCs and RCCs played a critical role in kick-starting China’s staggeringly successful ‘bottom-up’ episode of economic development and structural transformation. Large numbers of high-skill industrial jobs were created, entirely new export markets were established, and the average citizen also greatly benefited from the reinvestment of the wealth generated by TVEs back into local public projects and social services.

Vietnam

Vietnam reformed in the mid-1980s. Serendipitously, the country rejected microcredit, instead choosing to follow China’s local financial model. As a result, Vietnam established a comprehensive set of financial institutions under national and local government and community-cooperative owner- ship and/or control.

One of the most important of several financial institutions operating successfully at the local level is the People’s Credit Funds (PCFs). The PCFs are commune-based financial cooperatives that were established from 1993 onwards to replace hundreds of credit cooperatives that failed in the 1980s due to weak regulations and a lack of supervision, which led to extensive fraud.²⁰ The inspiration for the PCF model comes from the Caisse populaire system pioneered and successfully used for many years in the province of Quebec in Canada. Established by the State Bank of Vietnam, the country’s central bank, the PCFs now operate under their own cooperative institution, the Cooperative Bank of Vietnam (Coop Bank) established in 2013. By 2017 a total of 1,186 PCFs were in operation involving two million members and eight million households across 56 of the 63 cities and provinces in Vietnam, with most located in rural areas.

The PCFs have played an important role in developing the rural agricultural base in Vietnam. More recently, they have helped support a rural indus- trialization and SME development trajectory almost as impressive as in China. Often wrongly described as ‘microcredit institutions’, PCFs rather emphasize support for small enterprises and, in particular, semi- commercial family farms using land leased from the state. They tend to avoid supporting the typical subsistence activities and consumption loans targeted by mainstream profit-seeking microcredit institutions operating in the Global South.²¹ Another decisive factor here, as in China, was local governments’ efforts to provide quality collective services in parallel to the operations of the PCFs, such as irrigation and agricultural extension services that enabled small farms to ‘scale-up’ into much more productive semi-commercial family farming units linked to membership of their own agricultural cooperative.

Overall, the PCFs represent a successful cooperative financial institution model that has managed to achieve sustainable and equitable development goals. Despite ongoing lobbying from the international development com- munity for Vietnam to adopt more neoliberal local financial institutions, such as commercial microcredit,²² the PCF sector has continued to flourish in recent years.