I recently sat on a panel discussing “Black Economic Development” in Atlanta. It became very clear to me that there was at least two divergent streams of thought and thereby strategies for economic development. One thought was to empower and organize on a grass-roots level and the other was to leave the masses as they were but find business opportunities that would return a quick profit to the investors.

It became increasingly clear during the discussion that the grass-root organizers were not going to convince the “black capitalists” to believe in organizing the masses. It was also quite apparent that the “black capitalists” had not heard of the idea of a ‘cooperative’ corporation. They were quite happy with the limited liability corporation as the model for investment and profit generation. My studies convince me that the cooperative corporation is the vehicle that can educate and organize the masses in terms of economic development, however I see that at certain critical points capital infusion from the capitalists will be needed and should be courted.

The moderator for the panel gave us a scenario of how to develop a substantial plot of land in the middle of a city. The group was in basic agreement as to the preliminary steps to take in studying the feasibility of such a project. When it came down to the financing part, the idea was put forward about setting up a limited liability corporation (LLC) that would find investors to put their money into the project to get it built. Presumably those investors would put their money in and get a return on that money in a pretty short period, say two to five years. Then those investors would move on to another project, taking no interest in the one just financed.

On the other hand the ‘cooperative’ corporation model requires the owners or members of the co-op to participate in the long term management and sustaining of the corporation. These of course would be people who are a part of a community and had a long term stake in that community.

In the scenario presented by the moderator there would be a strip mall with a well established retail outlet as the center piece and the major tenant, for instance a Kroger’s grocery store. If the developers could take this promise from Kroger’s that they would rent space in their shopping center to a bank or other private investors, then it would be more likely to float than the idea of a number of “no-name” vendors promising to rent space. These no-name vendors with extensive marketing, adequate capital and time could become stable tenants in such a complex. However, the “system”, and black people as well, have more faith in these name brands than they do in black people developing and sustaining a business.

Of course in this financial downturn, even a Kroger’s could go under or close a number of branches, leaving you with a “white elephant”, i.e. large vacancy. So instead of taking the “either or” approach, one must look at where your potential capital market is and how to reach them, and where to use them. Now, some background information on the economic demography of the black community and an understanding of what a cooperative corporation is could be useful.

If we are going to develop an economic program for black people, we have to study them and their condition. We are going to need them as investors, producers and customers. They have certain economic realities and social realities that we must consider if we are planning to help them develop.

Black people live in what used to be, until recently, a very rich country. Black folk spend an estimated $700 billion a year on consumer items. They do this making 61 percent or 3/5^th of what white people earn. I do not think that it is a coincidence that black people were considered 3/5^th of a human when the constitution of the US was written, and now are still considered 3/5^th. What is so special about 3/5^th? Maybe if we received 4/5^th we could save some money and become a part of the middle class? Or, maybe if we were paid 2/5^th we would rebel and go for self?

However, according to data from the 1990 Census in terms of wealth, black people own on average 1/4^th of the net worth of white people. We do have a few Blacks, like entertainers and athletes, who make a lot of money which pushes our average wealth up. However, when you compare the median net worth, which means the most likely, Blacks have 1/9^th the net worth of Whites. The majority of that net worth owned by Blacks is in the form of their home.

On the other hand white people own financial assets like stocks and bonds. When you compare financial assets, we find that in 1990 Blacks owned, on average, 1/7^th of the net financial assets of Whites. However, the mostly likely Black that you meet owns 1/74^th the net financial assets as compared to Whites.

Therefore, Blacks are basically wage earners with very few investments. They spend most of what they earn consumer items and have little savings.

The wealth distribution among black people is more unbalanced than with white people. Remember, the “mean” is the average, while the “median” is most likely. The median net worth of black people was $6,127, while the mean was $28,643. If you divide the mean by the median, you get 4.67. When you do the same type of calculations with white people’s net worth you get 2.07. Therefore, in the black community, the distance between the wealthy blacks and the poor is twice as large as it is in the white community.

If we do these same type of comparisons with net financial assets, we find that the distribution of this type of wealth is even more skewed than it was for net worth. Our measure of skewed-ness for Blacks is 76.11 and 7.59 for Whites. This indicates that a whole lot fewer black people have net financial assets than do Whites. And within the black community, the vast majority of blacks have no financial assets while a few at the top have a lot more.

Being a factory worker does not make you a capitalist. Having a small business does not make you a capitalist. However, having large amounts of financial assets, does make you a capitalist, because now your money is making money for you and not your labor.

The scattered and unorganized nature of black people in America means that you had better get them disciplined and under control before you try to build for and with them. The old adage of build a better mouse trap and the world will flock to your door will not work with black people. We must organize them into a market before we try to produce for them.

No farmer today will put a seed in the ground until they have a market for that product. We must do the same. A market is not a store, necessarily, but a group of customers that you can depend on.

We can take certain organizing and business tools to put together a plan. We start off with a food buying club, because we know everyone must eat and we do have a few black farmers left. We do not have that many manufacturers and we can not expect to set up such plants until our market is stable and there is money for investment in buildings, equipment, inventory and operating capital.

After the buying club reaches 25 to 50 members, it should incorporate and begin to set up “internal accounts” or transfer patronage refunds into stock in the cooperative corporation. When the membership in a given location reaches a level, say 500 (that can support a store), the internal finances of the co-op can be augmented with additional debt financing in the form of loans, non-voting preferred stock, bonds or other private placement instruments.

Once stores like this are up across the country and we see what the customers are buying on a regular basis, we can set up processing and manufacturing plants to supply those needs. Food, clothing and shelter will probably be the easiest needs to satisfy before we start building cars and televisions. Again the cooperative model can facilitate the development of capital for those ventures and provide a guaranteed market for those products.

The keys for our success are planning, faith, consistency, love for each other, and a determination to make it work regardless… We need to start acting like the Americans in terms of self-confidence and independence, instead of continuing to act like the slaves of Americans. Remember, each of us is going to die anyway, why not try living as a free and productive person, instead of a cowardly slave. Many young black men will tell me that they are not afraid of anything, until I point out to them the “ring in their nose” controlled by their wife or girlfriend(s).

When a cooperative is incorporated under a state’s cooperative statutes, it is called a cooperative corporation. Cooperative corporations are a hybrid form of organization entitled to benefits common to all corporations: limited liability, perpetual existence, and tax-deductible fringe benefits for employees. In addition, cooperative corporations may obtain advantages to cooperatives such as: being able to use the word “cooperative” in their name, being able to issue memberships instead of shares of stock with restrictions on transfer to non-members, obtaining exemptions from or having simpler procedures for registering memberships with the federal Securities and Exchange Commission and state counterpart agencies, payment of patronage refunds based on participation, and receiving possible exemption from stock permit fees required of most for-profit corporations.

Cooperative corporations may also take advantage of Subchapter T of the Internal Revenue Code, which allows cooperatives to avoid the double taxation imposed on corporate profits. Subchapter T is expressly available to worker cooperatives, although it originated as a tax break for agricultural cooperatives. However, it is important to know that the particular state-level incorporation statue is not controlling for federal tax purposes. This means that if the enterprise is incorporated as a business corporation but operates in substance on a cooperative basis, it can still qualify for the tax advantages under Subchapter T.

Although organizing a cooperative corporation appears to be an appropriate form of legal structure for a worker-owned business, prior to the 1980s few were organized this way. Many states made it difficult for co-ops to incorporate as cooperative corporations. Now, each state has its own cooperative laws, and no two states’ laws are alike. Most states have no worker-cooperative statutes, and in others only large agricultural co-ops qualify. Unfortunately, prior to 1982, only a few states had co-op statutes which allowed any type of cooperative to incorporate under the cooperative corporation rules. Beginning in 1982, the legal climate for worker-owned cooperatives began to change. However, it is possible to incorporate in another state such as Delaware or Massachusetts as a “foreign incorporation.”

Acquisition and Growth of Capital for the Cooperative

A big question that arises about a cooperative corporation is, where to get the capital to start it up and how does the cooperative grow? Since the idea of returning all surpluses to the patrons in a consumer co-op and workers in a worker-owned co-op is at the heart of principles of cooperation, how can the co-op compete for capital?

Since a ‘cooperative corporation’ is a corporation, it can engage in debt financing like any other firm. However, the for-profit corporation can issue ownership shares of stocks to outsiders to bring in more capital, whereas in a co-op the ownership capital must be derived from within. In the case of developing a co-op with poor people this could be a problem, but models exist to help solve this major issue.

First let us list possible sources of debt financing that is available to the cooperative corporation: 1. The ICA Revolving Loan Fund, 2. The Self-Help Credit Union, 3. The NCB (National Cooperative Bank) Development Corporation. 4. Churchs and Foundations and 5. State Programs.

Sources of private external financing for traditional and cooperative corporations include: 1. Commercial Banks, 2. Insurance Companies, 3. Asset-based Lenders such as Chase Commercial Co., 4. Commercial Mortgages, 5. Leasing and 6. Venture Capitalists.

Public sources of external financing for traditional and cooperative corporations include: 1. Small Business Administration, 2. Economic Development Administration, 3. Department of Housing and Urban Development, 4. Farmers Home Administration and 5. Industrial Revenue Bonds.

There was no lending agency to finance the Basques who founded the first worker-owned factory during the height of the Franco regime. Money came from their own pockets or from friends and relatives. From the start, Mondragon workers used internal accounts to finance their own growth.

At first, Basques reinvested 70 percent of the net income (profits) in the cooperative by crediting each member’s internal account. The remaining 30 percent was divided into two parts with about 10 percent going to provide education aimed at fostering new vocational skills or cooperative abilities within the company or community, and about 20 percent going into the collective retained earnings account for the proverbial rainy day and to finance capital expenditures. Today, those figures have been revised. Usually 50 percent of net income is contributed to the internal accounts, 40 percent to retained earnings, and 10 percent to education.

Over the years the value of a share of stock in a successful business increases, this is called capital gains. As workers retire they want to pocket the accumulated result of their labor. In conventional employee-owned corporations, like the plywood cooperatives in the Northwest, the tendency has been to sell shares to outsiders. Younger, potential worker-owners cannot afford to buy a share (at a price of $50,000 or more) and enter the firm. Gradually, as more and more shares are sold to outsiders, workers are no longer owners controlling corporate affairs.

When a worker-owner retires from or quits one of the Basque cooperatives, the membership certificate or ownership share is automatically forfeited back to the cooperative. The balance in the member’s internal account—the original membership fee plus accumulated earnings and interest—is paid to the former worker-owners over a specified period of time. The internal accounts keep the price of a share at a level which job-seekers or potential members can afford. A person hoping to join the cooperative pays a membership fee to purchase one share, which is a capital contribution equal to the contribution of every other member, thus putting that person “at equal risk” with the fellow workers. This contribution can be paid in installments, or all at once.

The internal account for a new worker-member, which starts with only the value of the one share, grows with the addition of the member’s share of net income each year, plus interest paid for the use of the money. In effect the Basques established a generational revolving loan fund which provides capital for expansion and modernization, and prevents shares from escaping worker control. At the same time, the system allows each worker-owner to receive a share of the profits earned over the years of membership, which can be withdrawn at the time of departure or retirement.

We understand that each individual has a different set of investment capital, profit expectations, risk aversion and time horizons. An economic plan must take all these factors into consideration when developing growth strategies.

Our idea in the Ministry of Agriculture is to develop a chain of cooperatively owned supermarkets in the black community. We intend to build our own brand name and franchise. Of course this sounds like a pipe dream to the “almost wealthy” among our people. However, the “almost wealthy” may be convinced to participate in a short term profit making opportunity that will arise when it is time for a co-op in a given city to build its own store and/or strip mall. But first the co-op will have to depend on the masses or grass root people in their community to go through the stages of food buying club to cooperative corporation to supermarket ownership.

So basically we are talking about first forming a cooperative corporation, establishing a small store or warehouse, then graduating to a large full-service supermarket. At the point where large influxes of capital must be obtained to build the facility, then the group or subset of the group would set up a LLC (limited liability corporation) and seek investors for the short term building of the facility. After the facility is built, the co-op would buy the building from the LLC at a profit to the LLC and its investors. The LLC could then be dissolved or move on to some other short term maximizing scheme.

For more information on the theory and background for the development of a new economic paradigm are outlined in my new book:  "Commonomics: Developing a Post Yakub Economy".

To learn more about food co-ops go to “Setting up food co-ops”.