ABSTRACT
Cooperative sugar factories in Maharashtra are economically successful, though rife with factional politics. Since they are not heavily subsidized, what makes them efficient? Political competition among the elected leaders of neighboring factories drives them to compete economically. This in turn drives the factories to expand, innovate, and diversify production.
These co-ops compete in several ways: they compete for cane supplies from farmers; they compete in terms of technical efficiency; and they compete in offering higher cane prices to the farmers (many of whom are also shareholders). Cooperative leaders increase their chances of staying in power when their factories operate efficiently and can thus offer higher cane prices, since members dissatisfied with cane prices will vote for other leaders or sell cane to other factories. Intense competition for political power and economic efficiency thus drives factory leaders to risk-taking innovations, such as branching out into other products: alcohol, paper, and industrial chemicals, for example.
In northern India, on the other hand, state officials manage “cooperative” sugar factories, which are protected against competition. Shareholders cannot vote out poor managers, since the latter are bureaucrats, not elected leaders. Thus economic efficiency is not linked to political competition, and the performance of these co-ops is poor.
