Institutional Challenges in the Development of the World's First Worker-Owned Free Trade Zone

By Susman, Paul; Schneider, Geoffrey | Journal of Economic Issues, June 2008 | Go to article overview
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Institutional Challenges in the Development of the World's First Worker-Owned Free Trade Zone

Susman, Paul, Schneider, Geoffrey, Journal of Economic Issues

The world's first worker-owned free trade zone, run by a small cooperative in Nicaragua created by a group of poor women, reveals a grass roots effort to appropriate advantages for themselves from within a neoliberal export-production strategy, one not known for empowering small producers. While a sustainable development strategy would rely on local production with integrated horizontal and vertical linkages, neoliberal policies are biased against small local producers. Here we examine the Women's Sewing Cooperative--COMAMNUVI (1)--which took years of sweat-equity, the assistance of a U.S.-based Non-Governmental Organization (NGO), and persistence to navigate a host of domestic and international institutional barriers to achieve modest export success. Although in Nicaragua, as well as worldwide, government rhetoric tends to support cooperatives as part of an anti-poverty commitment, the reality of institutional arrangements often disadvantages cooperatives and small enterprises while favoring multinational corporations (MNCs).

COMAMNUVI's successes and challenges can be understood through the lens of the theory of grounded comparative institutional advantage. (2) This theory provides a useful framework for examining the institutional matrix advantaging and disadvantaging specific types of economic activity in particular places. Below, the example of COMAMNUVI exposes some of the major institutions at play in the world of "free trade zones" affecting locally-based export activity.

Domestic Institutions

The theory of grounded comparative institutional advantage focuses on identifying the institutions that facilitate or inhibit particular types of production operations in a specific geographical location (Schneider 2007; Schneider and Susman 2008). Institutional arrangements favor some interests over others, for example, larger rather than smaller actors. This is the case in Nicaragua where the bias is evident in national rules governing free trade zone participation.

Nicaragua's policy of promoting free trade zone production excludes cooperatives by law. Pursuing a neoliberal agenda of trying to attract foreign capital and promote export production, Nicaragua provides tax exemptions and other incentives to firms managing the zones and establishing factories within them. (3) In 2007, free trade zones in Nicaragua employed about 75,000 workers in 85 foreign owned factories or "maquilas" (NSCAG 2007). These large operations are positioned to benefit from free trade zone status, while smaller cooperative enterprises, even when their principle production is export oriented, are usually unable to participate. (4) This is because the Nicaraguan Industrial Free Zones for Export Law (Decree No. 46-91) of 1991, limits participation in free trade zones to "a company organized as a mercantile partnership or corporation," (5) neither category fitting cooperatives.

While private enterprises allowed to operate in free trade zones are driven by profits, the law governing cooperatives explicitly identifies different goals targeting social-economic development. (6) In support of those goals, the government may provide some initial capitalization and protections not afforded other forms of enterprise, offering a small institutional advantage over other very small enterprises. Thus, the government reserves the name "cooperative" for enterprises serving a goal of social integration rather than just profit. (7)

Because as a cooperative they are excluded from free trade zone benefits, COMAMNUVI pursued a strategy of creating a wholly owned limited liability corporation, the Zona Franca Masili, operating under the commercial name of "Fair Trade Zone," a deliberate play on the implications of the name (Renk 2005, 50). Members of the cooperative have equal shares in the ownership of the "Fair Trade Zone." Effectively, its internal operations continue as a cooperative while its external relations (importing inputs and exporting commodities) operate as a private enterprise free trade zone.

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