Identifying and Addressing Institutional Problems Constraining the Financial Performance of Rice Cooperatives in the Philippines

Abstract

Farmer-controlled cooperatives contribute significantly to the growth of the rice sector in the Philippines, the country’s most important agricultural sector. Despite ongoing financial support from various government agencies, many of the country’s rice cooperatives struggle to remain viable. Cooperative failure is often attributed to poor management, inadequate capital, and opportunistic side selling by members. However, a growing body of literature views these problems as symptoms of much more fundamental flaws in the institutional arrangements that characterize traditional cooperatives. Relationships between indicators of financial performance and institutional attributes observed in case studies of four Philippine rice farmer cooperatives were identified using hierarchical cluster analysis. The results of this analysis were interpreted against causal relationships predicted by the New Institutional Economics theory. Financial performance improves when cooperatives require their members to invest in proportion to their patronage, allow members to adjust their shareholding, and periodically redeem members’ shares. Other performance-enhancing institutional arrangements could be adopted if the Philippine Cooperative Code authorized directors to issue class B shares. The findings also highlight operational and governance practices that improve financial performance, which directors can and should apply.