The Least Flawed

Ambrose Evans-Pritchard writes:

The Mondragon Corporacion is the world’s biggest co-op with 85,000 'worker-owners’, though the Basque group is better known for products such as Orbea bikes that won gold at the Beijing Olympics and sell for up to £11,000, or Fagur fridges, Brandt ovens, Eroski shops, or the coming electric City Car. Anglo-Saxon elites might find its pay scale unsettling. Top brass in Mondragon’s mountain lair may not earn more than six times the lowliest cleaner. "In reality it is just three times after tax, but we don’t need much money to live here," said an ascetic Josu Ugarte Arregui, the global director. The differential in big Western companies can be 400 times, and is getting worse. The top pay of FTSE 100 bosses has jumped from 124 times the minimum wage to 202 times over the last decade, according to the Hutton Review of Fair Pay.

Mr Ugarte struggled to explain how the group keeps talent. High flyers seem to stay for reasons of tribal loyalty or the ideals of Catholic social doctrine. To be a Mondragon manager is to accept the vows of priesthood, and indeed the movement was founded by a parish priest, Jose Maria Arizmendiarreta. His mission was to lift youths in the hilly Alto Deba region out of poverty after the Civil War, when Basques were on the losing side and a particular target of General Franco’s wrath. Nearby Guernica – flattened in 1937 by the Condor Legion, and seared in our collective mind by Picasso – holds the ancient oak tree and symbol of the Basque nation.

The solidarity ethos has its allure given mounting research by the IMF and other bodies that the extreme gap between rich and poor was a key cause of the global asset bubble and financial crisis, as well as being highly corrosive for democracies. The GINI index of income inequality has reached levels not seen since the 1920s across the West. Mondragon weathered the 2009 slump in machine tools, car components, and its other cyclical niches by putting 20pc of full staff leave for a year at 80pc pay, with names chosen by lottery. Some of its 256 co-ops froze pay, others took a 10pc cut.

The membership rule is that all new workers must put up €13,400 in share capital, which they can borrow from the group’s Caja Laboral, one of the few Spanish savings banks in robust health. Profits are largely reinvested or sunk into research centres, though a chunk is spent on social projects. Worker dividends are paid into retirement accounts. The whole system is run by an elected Congress, known as "the supreme expression of sovereignty". Such an egalitarian venture creates all kinds of problems. "We can’t offshore, so we have to keep climbing the technology ladder and improve core engineering here," said Mr Ugarte.

The group is stepping up investment in thermal insulation, and water purification, and grinding machines for the aerospace industry. Its machine tool arm Danobat has bought Newall in Peterborough. If a co-op keeps losing money, it is given three years to come up a credible plan, but ultimately workers have to be retrained and found other work. Paid-up 'Co-operativitistas' cannot easily be fired. The wider headcount fell by 7,000 during the crisis, but they were outsiders in building. So far none of Mondragon’s plants in China, India, Latin America or the rest of Europe have opted for co-op status. "We encourage them to be owners of their future, but they are afraid of the obligations that go with it," said Mr Ugarte.

Mondragon pays global staff the market wage, which creates an odd disparity with the Spanish mother company. Mr Ugarte said the net effect of overseas expansion has boosted jobs at home, still 84pc of the total. America’s United Steelworkers has sought help from Mondragon in creating its co-ops, hoping to emancipate itself from a Wall Street that "hollows out companies by draining their cash and shuttering plants". Yet it is unclear whether the model can easily be exported.

Mondragon’s strength comes from the powerful clan ethos of the Basques, the oldest nation in Europe with a tightknit global diaspora (Nevada, Idaho, Argentina, Brazil) and a unique pre-historical language. Linguists doubt claims that Basque is linked to old Etruscan or Berber dialects. Recent studies of DNA suggest that the Basque have a very close genetic profile to the Irish and Welsh, who also pre-dated the Celtic agrarian settlements of the 6th Century BC.

There is a dark side to Mondragon. The town is a cauldron of ETA terrorist sympathies. A socialist politician was gunned down in broad daylight two years ago, and the mayor has still declined to condemn the act. The Corporacion adamantly denies any links to ETA, insisting that it is "radically opposed to intolerance and any type of violence". There is now hope of a lasting peace settlement in any case. "The Myth of Mondragon", based on fieldwork by anthropologist Sharryn Kasmir, argues that political tourists from all over the world have been willing to overlook the subtle forms of peer pressure and worker stress in the valley.

Yet the movement is still flourishing half a century after critics said it would never survive. It generates 3pc of Spain's industrial output of the Basque region and generates annual sales of €24bn. Almost 60pc of its heavy production is exported. As chairman Jose Maria Aldecoa puts it, with a Churchillian twist: "the co-operative model is absolutely flawed, but it has shown itself the least flawed in a crisis of values and models".