Institutional challenges in the development of the world's first worker-owned free trade zone.

Author:Susman, Paul

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.

Creating the free trade zone was not simple. If it were not for the logistical and financial assistance provided by an NGO operating nearby, the Center for Development in Central America (CDCA), it is unlikely that it could have been accomplished. CDCA was instrumental in assisting the women in organizing to construct their factory, extending credit for construction and equipment purchases, and helping them form their cooperative, officially recognized in 2001. CDCA also established contacts with organizations and companies mostly in the United States that were seeking fair trade products. Oriented to the welfare of its members, cooperatives seek to minimize exploitation. Hence, the base wage at COMAMNUVI is over 40% greater than for workers in the maquilas (Mena 2006). (8) Working nonmembers must commit to a year's trial period and a membership buy-in of either $350 or 640 hours of "sweat equity" (based on the unpaid labor of the original members). In 2005, 53 had steady employment. In May 2007, a slight drop in orders reduced employment to 46 (Davila 2007).

CDCA worked with COMAMNUVI to achieve free trade zone status, which was finally gained in October 2004. They were permitted to begin operations as a free trade zone in July 2005 (Renk 2005). Among the financial obstacles was a $300 fee to the Nicaraguan National Free Trade Commission (CNZF) to cover paperwork fees for examining required three year investment and production plans, an environmental impact study, contracts and letters of intent from clients, among other documents. (9) The CNZF also requires a payment of "$10,000 as a guarantee against any future fines," an extraordinarily expensive payment for a small cooperative barely able to meet its payroll obligations (Renk 2005, 51).

Additionally, to operate as a free trade zone, the premises had to meet regulatory standards for number of bathrooms, septic system, a break room, and the entire complex had to be enclosed...

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