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Northern Italy and the republican tradition

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The Emilia Romagna region in northern Italy gives an insight into how a republican economy might look in practice. The whole infrastructure is significantly geared towards cooperative production without any sign of lost efficiency. There is plenty the UK should learn.

Kaveh Pourvand
2 August 2013

In a very important sense republican political theory is a historical argument. It contends that freedom has deeper roots than the modern liberal definition, that you are free simply if your choices are not interfered with. Predating Liberalism was an older and more demanding ‘Republican’ conception, that you are free if you are not subject to the arbitrary will of another. A key historical reference for republicans in making this argument is the civic humanist school of thought of late 14th and early 15th century Italy.

The school arose amidst the remarkable plethora of republican city states dotted around northern Italy during the period. These ‘free’ cities were characterised by a degree of political equality, freedom of association and prosperity unprecedented in feudal Europe. As early as the 11th century, cities such as Pisa or Milan were electing leaders - or podestas - by citizens’ councils for fixed terms. Moreover, these councils were often highly inclusive. The town of Modena was said to include fish-mongers on its citizens’ council. They also had a wide variety of civic associations, from communes to guilds to business partnerships, and this associative culture facilitated the creation of sophisticated financial networks, laying the basis for later European capitalism. Civic humanists, such as Leonardo Bruni or Coluccio Salutati, stressed the importance of civic equality to a free society. Crucially, this not only meant that individuals should be judged solely on personal virtues rather than lineage or wealth, but also that every citizen enjoy an equal opportunity to involve themselves in the business of government.

One of these free cities was Bologna, the capital of the Emilia Romagna region in northern Italy. The region has retained these age-old civic traditions up to the present day and they have helped create a cooperative based economy that belies the notion of a trade-off between economic equity and efficiency. It thus represents a fruitful case study for those looking to transform civic republican political principles into concrete forms of political economy. The discussion of the region’s political economy here draws greatly on the excellent summaries provided by American cooperative advocates John Logue and John Restakis.

One of the poorest Italian regions in the 1970s, Emilia Romagna now has one of the highest GDP per capita ratings in Europe. Around 30 – 40% of its GDP is provided by small employee-owned cooperative firms. There is a high concentration of small businesses more generally, with one person in 12 owning a small business or being self-employed. In sum, the region has around 420,000 small firms, making it one of the most entrepreneurial regions in the world. Individuals who are self-employed or have a substantial say in how their workplaces are run are much less susceptible to the arbitrary will of another. They are in this sense more free. Cooperatives are particularly strong in retail, construction, social services, agriculture and especially manufacturing. Half of the region’s manufacturing output is exported. Moreover, the region’s cooperative sector is often geared towards high-value added work, be it the complex restoration of Bologna’s historic buildings by construction cooperatives, or the supply of technologically advanced input parts to the region’s ‘super-car’ manufacturers.

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         Emilia Romagna. Flickr/Lorenzog .Some rights reserved.

Policy supports for a cooperative economy

The key challenge in creating a viable system of economic democracy is scale. Substantive democratic management is feasible at a small scale. However, as firms grow the process of obtaining substantive deliberative input from employee-members starts to become cumbersome and time-consuming. Yet market forces pressurise small firms to aggregate into larger ones as the subsequent economies of scale provide competitive advantages. For example, bigger firms can reduce their costs by buying raw materials and other input goods in bulk.

The Emilia Romagna region has been able to handle this tension in several ways.

Firstly, the region’s cooperative economy has been facilitated by the wider constitutional framework, which gives cooperatives special recognition. Article 45 of the Italian constitution states:

The Republic recognizes the social function of cooperation of a mutualistic nature and without purposes of private speculation. The law promotes and encourages them through the appropriate means and secures, through appropriate controls, their character and purposes.

This constitutional recognition was given a concrete policy grounding in the Basevi Law of 1947, Italy’s basic cooperative law. This legislation gave cooperatives specific privileges and responsibilities in order to encourage their self-capitalisation and long-term viability. The privilege was in the form of a full corporation tax relief on retained earnings. However, if the cooperative was sold, its reserves by law would go to another cooperative or cooperative federation rather than the members, who received returns through dividends or interest payments on their fees.  While there have been some reforms to the basic law since 1947 (for example, making the tax relief proportionate to the percentage of employees who are cooperative members rather than salaried employees) the essence of Basevi remains in place to this day.

By restricting the ability of cooperative members to ‘cash in’ during good times, the Basevi  law serves to institutionalise a sense of intergenerational mutuality within cooperatives, which are seen to exist for the benefit of both future and present members. As one cooperative member says to John Logue: ‘We receive wealth from past generations, and we create it for future generations of members’. This legal restriction in turn serves to counteract the market pressure for smaller firms to aggregate into bigger ones. This is why the cooperative sector in Emilia Romagna has not gone the same way of British building societies. The 1986 Building Society Act permitted societies to demutualise and turn into limited companies if more than 75% of members voted for it. Members would exchange their mutual rights for shares which they could then freely sell on the market. By 2008 all the demutualised firms had either collapsed or been absorbed into the big four banks.

Secondly, firms in Emilia Romagna cooperate as well as compete in a reciprocal system that the economist Stefano Zamagni has termed a ‘civil economy’. Typically, several small firms will compete for a lucrative foreign contract. However, the winning firm will ensure that they outsource some of the work to other losing firms. In return, they expect outsourced work when they lose a contract. The practice of reciprocal outsourcing not only provides economic stability to individual firms but collectively allows them to service lucrative large scale contracts while maintaining their small scale. 

Thirdly, the Italian system grants regional government a substantial amount of autonomy. This has allowed local governments in Emilia Romagna to create an effective ‘industrial district’ which supports cooperatives and small firms. As the late Paul Hirst explained, industrial districts are collaborative bodies involving governmental authorities and firms within a particular area. They provide cooperatives and small firms with the common skills and facilities that usually only large organisations have access to. Examples of such services include skills training for staff, access to low cost capital, research and development expenditure and marketing services. There is a critical role for government in providing and financing these services but it has to be done at the local level in order to tailor the industrial policy to the particular needs of the locality. In Emilia Romagna, the regional development agency ERVET (Ente Regionale per la Valorizzazione Economica del Territorio) provides small firms and cooperatives with a range of such common services. This assistance is a key reason why the region’s small firms and cooperatives stay competitive.

Is the model exportable? 

One cannot simply take the Emilia Romagna blueprint and import it wholesale into the UK. However, there are certainly steps a British republican government could take to encourage a more cooperative economy in the UK. I propose three initial steps.

First, it should adopt the Italian practice of providing cooperatives with tax relief on retained earnings while also legislating for an ‘asset lock’ – the restriction that reserves can only go to other cooperatives in the event of the cooperative being sold. UK legislation already requires such an asset lock of Community Interest Companies but no such requirement exists for cooperatives. This should change. Moreover, UK cooperatives are currently recognised by UK law as Industrial and Provident Societies which are liable to pay UK corporation tax on their profits. A full tax relief on retained earnings should be introduced which, as in Italy, is proportionate to the percentage of staff who are actually members of the cooperative rather than salaried employees. These changes would help instil in the UK the principle of intergenerational mutuality that has so helped the Italian cooperative sector.

Second, it should genuinely devolve powers down to local regions, so they have the capability to create the requisite ‘industrial districts’ that cooperatives firms need to flourish. Localisation is required because each industrial district has its own unique economic properties and will require its own tailored policies. Inevitably these policies require public funds so there also needs to be some genuine fiscal devolution to accompany this.  The institutional structure for such devolution is already in place in the form of Local Enterprise Partnerships, created by the Coalition government in 2011. These bodies are collaborative partnerships between businesses and local government, which are charged with encouraging economic growth and job creation in their local areas. These are voluntary bodies – regions have to apply for recognition. As of September 2012 there were 39 LEPs in operation. The next steps are to ensure the creation of more LEPs, enough to cover the whole country, provide them with decent finance, and also expand the stakeholder representatives to include unions and community groups as well as business and local government.  A very complementary policy would be a system of regional banks, perhaps modelled on the successful German Sparkassen system, as adopted by Labour.

Third, it should encourage a cooperative economy by measures which directly widen the distribution of wealth. The right typically wish to encourage entrepreneurship by cutting income tax rates but this usually benefits the already wealthy and exacerbates inequality. A better way of encouraging small business and cooperative entrepreneurship would be to endow individuals with substantive assets. One possibility, for example, is to reintroduce and strengthen the Child Trust Fund so that all individuals have a substantial capital endowment when they turn 18. This would, of course, necessitate a political battle for higher taxation. Aiming for a land value tax may be the best way to win it.

I offer these three steps as point marks for a wider discussion of what a republican political economy might look like.

This piece is part of the Democratic Wealth series, hosted by OurKingdom in partnership with Politics in Spires.

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