Mobilizing Rural Institutions for Sustainable Livelihoods and Equitable Development

A Case Study of Agricultural Marketing

and Smallholder Cooperatives in Ethiopia

By

Tanguy Bernard and David J. Spielman International Food Policy Research Institute

Addis Ababa, Ethiopia

Revised draft for comment April 2008

International Food Policy Research Institute 2033 K St., NW

Washington, D.C. 20006 U.S.A.

P.O. Box 5689 Addis Ababa, Ethiopia

ii

Table of Contents

1. MARKETING AND SMALLHOLDER COOPERATIVES IN ETHIOPIA ...............................................1 1.1. INTRODUCTION............................................................................................................................................1 1.2. RELEVANCE OF THE STUDY .........................................................................................................................1 1.3. RELEVANCE OF THE STUDY TO ETHIOPIA ....................................................................................................2 1.4. DATA AND DATA SOURCES ..........................................................................................................................4

2. COOPERATIVES AND THEIR CONTEXT IN RURAL ETHIOPIA ........................................................6 2.1. COOPERATIVES, MARKETS AND THEIR LOCAL CONTEXT..............................................................................6 2.2. MARKET ACTORS AND MARKETING CHAINS ................................................................................................7

3. MARKETING COOPERATIVES IN ETHIOPIA .......................................................................................10 3.1. COOPERATIVE DESIGN AND FUNCTION ......................................................................................................10 3.2. INCIDENCE, INCLUSION AND PARTICIPATION .............................................................................................16 3.3. REPRESENTATION, RESPONSIVENESS, AND ACCOUNTABILITY ...................................................................24 3.4. ADAPTABILITY AND ADAPTIVE CAPACITY .................................................................................................31

4. PERFORMANCE, OUTCOMES, AND LIVELIHOODS ...........................................................................33 5. CONCLUSIONS AND RECOMMENDATIONS .........................................................................................38 6. REFERENCES.................................................................................................................................................41

The authors thank Zewdu Tadessa, Dejene Tefera, Martha Negash, and Ira Matushke for their contributions to the work undertaken for this study; Nicolas Perrin, Arun Agrawal, Jeeva A.

Perumalpillai-Essex, Achim Fock, Getachew Adem, Ibrahim Mohamed, Girma Tadesse, Haile Gebre, Abera Bekele, and Belew Worku for their guidance and oversight; and Noah Kebede, Damtaw Engida,

Etenesh Yitna, and Kwaw Andam for their technical support. The authors also acknowledge the insights and comments provided by participants at a World Bank-IFPRI workshop on “Rural Institutions and

Sustainable Livelihoods” conducted in Addis Ababa on April 10-11, 2008.

1

1. Marketing and smallholder cooperatives in Ethiopia

1.1. Introduction

This paper provides a diagnostic of how smallholder cooperatives in Ethiopia contribute to the

improvement of rural livelihoods by facilitating commercial linkages between smallholders and markets.

The paper examines the key problems that necessitate the use of cooperatives for marketing purposes; the

institutional context within which cooperatives operate; the key characteristics of cooperatives engaged in

marketing; and their real and potential outcomes. In doing so, this paper also addresses a key issue in the

study of membership-based rural producer organizations (RPOs)—whether such organizations can be

leveraged for pro-poor development by linking farmers to markets.

The study relies on a combination of qualitative and quantitative data from several different sources. The

analyses contained in this study are specifically drawn from three sources described in the overview

accompanying this paper. They are the 2005 Ethiopia Rural Smallholder Survey (ERSS); the 2006

Ethiopian Smallholder Cooperatives Survey (ESCS); and the 2007 Cooperative-level Case Studies

conducted as a part of this study.

1.2. Relevance of the study

The commercialization of surplus output from small-scale, resource-poor farmers is closely linked to

higher productivity, greater specialization, and higher income. These outcomes, in turn, can contribute

significantly to improvements in household food security, poverty reduction and economy-wide growth

(Timmer 1997; Fafchamps 2005). However, in the face of imperfect markets, high transaction costs,

volatile prices and sizable risks, many smallholders are rarely able to exploit the potential gains from

commercialization (de Janvry et al. 1991; Key et al. 2000; Jayne et al. 2006). Mechanisms to cope with

these constraints are needed to increase smallholder participation in markets and to ensure that they

realize the benefits of participation.

One such mechanism is the membership-based rural producer organization (World Bank 2007; Chen et al.

2006). Governments, donors, and rural development practitioners expect that membership-based RPOs

can help smallholders overcome marketing constraints and contribute to improvements in their well-being

and livelihoods (World Bank 2003; Berdegué 2001; Collion and Rondot 1998).

2

The empirical record—drawn from experiences across a variety of developing countries—provides

insight into the external and internal conditions under which these organizations may be more or less

effective at serving their members (e.g. Bernard et al. 2007, 2006; Chirwa et al. 2005; Neven et al. 2005;

Sharma and Gulati 2003; Damiani 2000; Uphoff 1993; Attwood and Baviskar 1987; Tendler 1983). Key

issues include the extent to which RPOs are inclusive of the rural poor, governed and managed

effectively, responsive to internal and external changes and opportunities, and independent from wider

political agendas.

1.3. Relevance of the study to Ethiopia

These issues are particularly relevant in Ethiopia, where smallholder cooperatives are an important

component of the country’s rural development strategy. In Ethiopia, smallholders represent the vast

majority of the agricultural population (63 percent of farmers cultivate less than one hectare, and 87

percent less than two hectares). Yet just 28 percent of agricultural output in the country is

commercialized, suggesting the need for innovative mechanisms to encourage commercial production

among smallholders (Dessalegn et al. 1998).

These issues are central to the Government of Ethiopia (GoE) and its economic growth strategy,

Agriculture Development-led Industrialization (ADLI). Since it was formally set forth in 1995, this

strategy has motivated efforts to accelerate agricultural growth through the commercialization of

smallholder production (FDRE 2005, 2002). It has also contributed to the foundations of the GoE’s

poverty reduction strategy, which includes the Sustainable Development and Poverty Reduction Program

(SDPRP) approved in 2002, the 2004 Food Security Strategy (FSS), and, most recently, the 2006 Plan for

Accelerated and Sustained Development to End Poverty (PASDEP) (FDRE 2002, 2006).

Farmer cooperatives represent one of the GoE’s key mechanisms through which it intends to promote the

modernization and commercialization of smallholder agriculture. Farmer cooperatives also represent a

preferred mechanism through which many donor and non-governmental organization (NGOs) are

organizing their interventions in support of the country’s agricultural development strategy. Thus, since

1994, the GoE has assigned rural marketing cooperatives with significant responsibility for promoting

smallholder commercialization (cf. Proclamations 85/1994, 147/1998, and 402/2004; FDRE 1994, 1998;

Rahmato 2002).

3

To this end, the Federal Cooperative Agency of Ethiopia was created in 2002 to organize and promote

cooperatives at the national level as a means of promoting smallholder commercialization. Its ambitious

five-year development plan (2006–2010) aims to provide cooperative services to 70 percent of the

population through the presence of at least one such organization in each kebele1 by 2010. Under the

GoE’s current strategy, each kebele is expected to have a cooperative in place by 2010, through which 60

percent of the agricultural outputs will be marketed and 90 percent of agricultural inputs supplied. Legal

reforms in 1998 and 2004 were introduced to strengthen membership incentives by improving member

rights associated with ownership, voting, share transfers, and risk management.

This strong government effort to promote cooperatives implies that the decision of where to establish a

cooperative is largely driven by external considerations, and is thus exogenous to members themselves.

This is further supported by cooperative-level data indicating that only 26 percent of these organizations

were initiated by members themselves (Bernard et al. 2007).

This approach has proceeded even in spite of the long and tumultuous history of cooperatives in Ethiopia

that started during the Imperial era prior to 1973 and continued through the military (“Derg”) regime

(1974-1991), at the fall of which they were dismantled. However, the approach may be slow in fulfilling

its objectives. As of 2005-06, cooperative coverage was estimated at less than 35 percent of all kebeles,

with only 17 percent of households living in a given kebele with a cooperative actually participating in the

organization. And while cooperatives are not meant to be selective, participants tend to be better-off in

terms of physical and human capital (Bernard et al. 2007). Meanwhile, only 55 percent of the

cooperatives that claim to be involved in marketing their members’ surplus cereals output had actually

sold any produce in 2005.

Still, there is much anecdotal evidence from across Ethiopia to suggest that cooperatives can play a

constructive role in promoting smallholder commercialization, particularly with respect to high-value

crops such as coffee, or perishable crops such as dairy, fruits, and vegetables (although the challenge of

extending this role to less valuable food-staple crops remains). Cooperatives can also serve as interfaces

between smallholders and other rural actors, e.g., public, private, and civil society organizations engaged

in research, extension, business education, or entrepreneurship training to enhance productivity and value

addition.

1 In Ethiopia, kebeles or peasant associations (PAs) are the smallest administrative unit below the woreda (district) level. For purposes of comparison, kebeles correspond to a cluster of villages in most other sub-Saharan African countries.

4

1.4. Data and data sources

Data for this study are drawn from three main sources: (a) the 2007 Cooperative-level Case Studies; (b)

the 2006 Ethiopian Smallholder Cooperatives Survey (ESCS); and the 2005 Ethiopia Rural Smallholder

Survey (ERSS). Each source is described in detail in the overview paper accompanying this study.

Note the following. First, while the 2006 ESCS surveyed a total of 207 cooperatives, only 172 were

established with the intention of providing marketing services to their members, while only 140 actually

engaged in marketing services in the prior year. This study draws on this sub-sample of 172 marketing

cooperatives. Second, all of the case study cooperatives covered by the 2007 Cooperative-level Case

Studies are cooperatives with activity portfolios that include, but are not limited to, agricultural

marketing. Table 1 provides a basic description of these cooperatives, including their variation in terms of

agroclimatic zones and socioeconomic characteristics. These case study cooperatives are examined in

more detail throughout the study.

5

Tab

le 1

. Cas

e st

udy

site

cha

ract

eris

tics

A

groc

limat

ic c

hara

cter

istic

s

Eco

nom

ic c

hara

cter

istic

s Fo

cal t

hem

es

Woreda,

reg

ion

- coo

pera

tives

Hig

hlan

d/

low

land

R

elia

ble

moi

stur

e/

Dro

ught

pro

ne

Food

secu

re/

inse

cure

M

arke

t ac

cess

C

rop

prod

uctio

n/

mar

ketin

g

Nat

ural

re

sour

ce

man

agem

ent

Gov

erna

nce/

se

rvic

es

Sheb

edin

o, S

NN

PR

Hig

h R

elia

ble

Secu

re

Med

ium

-- L

eku

Are

a H

oney

Pro

duct

s M

arke

ting

Coo

pera

tive

Yes

Yes

-- T

aram

essa

Mul

tipur

pose

C

oope

rativ

e

Gor

o G

utu,

Oro

mia

H

igh

Dro

ught

In

secu

re

Low

Y

es

Yes

Y

es

-- K

ara

Luku

Mul

tipur

pose

Fa

rmer

s Coo

pera

tive

-- M

edda

Inci

ny Ir

rigat

ion

Use

rs

Coo

pera

tive

Oro

mia

, Dug

da B

ora

H

igh

Rel

iabl

e Se

cure

H

igh

Yes

Y

es

Yes

--

Woy

o Se

riti G

ebre

a M

ultip

urpo

se C

oope

rativ

e

-- T

epo

140

Irrig

atio

n C

oope

rativ

e

Tig

ray,

Ahi

fero

m

Hig

h D

roug

ht

Inse

cure

Lo

w

Yes

Y

es

Yes

--

Tha

heta

y M

egar

e Ts

emri

Mul

tipur

pose

Coo

pera

tive

-- M

aige

betta

Irrig

atio

n U

sers

C

oope

rativ

e

Sour

ce: A

utho

rs; C

SA/E

DR

I/IFP

RI 2

006.

6

2. Cooperatives and their context in rural Ethiopia

2.1. Cooperatives, markets and their local context

In light of the GoE’s strategies for rural development and economic growth, smallholder

commercialization is a topic that has received extensive attention in recent years. And as in many other

sub-Saharan African countries, Ethiopia’s agricultural sector underwent major reforms in the in the early

1990s to encourage smallholder commercialization. Specific reforms included the removal of restrictions

on private trade in grains and other commodities.

But while these reforms increased market integration, market competition, and the entry of private

traders, wider systemic and structural constraints may have limited the impact of reforms. Several studies

on agricultural marketing in Ethiopia describe the challenges facing both smallholders and the wider

economy.

A fundamental problem in Ethiopia is the persistently high transactions costs associated with trading

agricultural commodities (Gabre-Madhin 2001; Dercon 1995; Negassa and Jayne 1997). Poor market

information systems to provide smallholders and traders with price information, when coupled with poor

infrastructure and weak private sector capacity, are a significant impediment to the commercialization of

the country’s largely subsistence-oriented smallholder population (Gabre-Madhin et al. 2003; Alemu et al.

2006a, 2006b). Indeed, these factors are believed to have contributed to Ethiopia’s most recent food crisis

in 2002-03 when, despite good harvest and sizable grain surpluses, grain producer prices dropped 60-80

percent (Gabre-Madhin et al. 2003). A wide range of solutions are needed to improve financial services

for the agricultural sector, modernize storage facilities for grains and other commodities, facilitate

linkages between agricultural production and processing, and improve legal recourse for contract

enforcement. To the credit of both the GoE and stakeholders in the agricultural sector, progress is being

made in many of these areas.

To provide a more detailed understanding of the context within which smallholder commercialization is

progressing, as well as the constraints it faces in Ethiopia, we provide here an overview of the markets for

food staple crops (grains, namely teff, wheat and maize, representing Ethiopia’s main staples) and high

value crops (coffee). These two sets of crops are critically important: 98 percent of grains cultivated in

Ethiopia are produced by smallholders, of which 80 percent are cereals; while coffee, Ethiopia’s largest

export crop, comprises 37 percent of its export earnings (Gabre-Madhin 2001; NBE various years).

7

2.2. Market actors and marketing chains

A closer look at the key actors and their interactions in markets for grain and coffee provide a better idea

of exactly where these constraints exist, and how such constraints might be lifted. The following draws

largely from Gabre-Madhin et al. (2003) and from observations drawn from the data sources used in this

study.

The key interface between farmers and markets occurs primarily at level of the market town—often, the

woreda capital and/or a junction between primary or secondary roads—with marketable surpluses moving

onward through a series of exchanges in regional and terminal markets. Market participants in these

marketing chains include a range of actors including assemblers/collectors, wholesalers, processors,

brokers, cooperatives, government agencies, financial service providers, and industry associations, and

vary between grain markets (Figure 1) and coffee markets (Figure 2). Key participants include the

following.

– Assemblers and collectors. Assemblers are traders or part-time traders in assembly markets who collect surplus output from farmers at the farm-gate, from village markets, or from market towns. Collectors, found commonly in the coffee sector, are locally-licensed traders who, by law, are allowed to buy only sun-dried coffee from individual farmers. They typically transfer their purchases to wholesalers.

– Grain wholesalers. In Ethiopia’s grain markets, wholesalers can be classified into three major

categories, with some overlap: (a) the regional wholesalers who supply grain from the surplus areas or from farmers, assemblers, or other wholesalers and sell their grain to the central markets and sometimes to deficit markets; (b) wholesalers in the deficit market who purchase in bulk from regional wholesalers or from central markets such as Addis Ababa and sell in deficit markets; and (c) government parastatals such as Ethiopian Grain Traders Enterprise (EGTE).

– Coffee wholesalers. In Ethiopia’s coffee markets, Wholesalers are coffee traders whose licenses

entitle them only to buy sun-dried coffee from collectors. Currently suppliers are allowed to buy coffee directly from farmers. The wholesalers have to process their coffee before taking it to the terminal market, where it is auctioned. However, as per the regulation, suppliers are not allowed to involve in export. They have storage facilities and some even have their own hullers.

– Processors. Processors include grain mills, coffee processing companies, or value-adding enterprises

that are owned either by private individuals and the government and who process commodities for onward distribution to intermediary or consumer markets. In market towns, small grain mills also serve as grain wholesaling and retailing outlets, and may provide cleaning and packaging services to customers as well.

– Brokers. Brokers specialize in bringing the buyers and sellers together by facilitating sales between

wholesalers and other wholesalers, processors, or retailers; by disseminating price and other information to market participants; and by influencing grain trade and price formation in the Addis Ababa central market. Brokers can be classified as those with relatively more working capital with

8

which to provide storage services, cover transportation cost on behalf of regional wholesale traders, and engage in wholesaling. The second group of brokers only facilitates the sales of grain brought to the market at some fixed rate for their services.

– Exporters. Exporters are coffee traders who are allowed to buy coffee at the auctions, and to process

and export it. Although getting a license to export coffee from the Federal Ministry of Trade and Industry is relatively easier, the Ethiopian Coffee and Tea Authority also maintains some regulatory control by checking the minimum level of capital, sufficient facilities to operate, etc. before the applicant is given the license. Coffee exporters are not allowed to by coffee from farmers, collectors and suppliers. They are only allowed to buy coffee from the auction markets. Efforts should be made to allow exporters to buy coffee directly from farmers. Coffees that are not sold in the auction or cannot be exported are sold to domestic wholesalers. In 2002, there were over 180 exporters, out of which 72 were active. The export share of the private sector has grown significantly in recent years.

– Cooperatives and cooperative unions. Cooperatives for both grain and coffee are involved in a range

of activities including from supplying inputs to collecting, processing and wholesaling surpluses from smallholder production. In the coffee sector, several cooperatives are licensed to export as well. Cooperative unions provide both input supply and marketing services to their member cooperatives, and sometimes to other cooperatives throughout the country.

– Government agencies. A range of government agencies is involved in the production and marketing

of cereals and coffee. Chief among them is the Ministry of Agriculture and Rural Development (MOARD) and the regional ministries of agriculture and rural development. Through woreda-level offices, kebele-level development agents, and (more recently), through cooperatives, MoARD and its regional counterparts provide inputs (seed and fertilizer), extension and advisory services, promotion of and support to cooperatives, and a range of other agricultural production and marketing services. Similarly, the Ethiopian Coffee and Tea Authority and the regional coffee and tea bureaus provide technical services such as extension, training, processing, and marketing to coffee growers and other market actors, while also representing the industry in policymaking and international forums.

– Financial service providers. Regional credit and savings institutions represent the main source of

financing for the purchase of inputs for smallholder production. The Development Bank of Ethiopia (DBE) is the main supplier of both short and long term loans to coffee growers, processors and exporters, and has recently become engaged in providing short-term loans to coffee marketing cooperatives and new investors in the coffee sector.

– The Ethiopian Private Coffee Exporters Association. The coffee exporters association was created to

provide coffee trade information, advocate for improved policy environment and provide technical support to its members (private exporters). It promotes coffee exports, organizes conferences for its members, etc.

For cereals, farm-gate sales to regional traders represent 36 percent of all sales, followed by sales directly

to rural consumers (31 percent) and rural assemblers (12 percent), the latter of which re-sell onward to

regional traders. Even despite grain market reforms over the past decade, processors still do not play a

more significant role at points of exchange beyond the farm-gate (Gabre-Madhin et al. 2003).

9

Figure 1. Grain marketing channels in Ethiopia c. 2002 Source: Gabre-Madhin et al. (2003)

The story is slightly different in the case of coffee marketing, where market reforms over the last 15 years

encouraged the entry of new intermediaries and exporters. Private agents—including traders, collectors,

cooperatives, suppliers, huller operators and exporters—account for 90 percent of coffee delivered to

auction, while private exporters have taken a similar share (95 percent) of coffee exports. Because of the

extensive privatization of coffee processing and marketing in Ethiopia, along with the overlaps in roles

played by the various agents in the marketing chain, the entire process from production to consumption is

viewed to be at least one step shorter than the same process for grains (Gabre-Madhin et al. 2003).

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Figure 2. Coffee marketing channels in Ethiopia c. 2002 Source: Gabre-Madhin et al. (2003)

These two cases illustrate the complexity of marketing chains in Ethiopia and the difficulties facing

smallholders and other marketing chain agents. At each point along the chain, there exist constraints

relating to inequitable bargaining power, information asymmetries relating to both commodity price and

quality, issues of quantities and scale economies, as well as standards and measures. It is for many of

these reasons that cooperatives are expected to play a constructive role in the commercialization and

marketing of smallholder production.

3. Marketing cooperatives in Ethiopia

3.1. Cooperative design and function

More specifically, marketing cooperatives are intended to be the main conduit for both input provision to

smallholders and marketing of their surplus output. Marketing cooperative design in Ethiopia follows a

fairly consistent template, not least because of the common approach taken by federal, regional, and

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woreda authorities in promoting cooperative formation. Thus, most cooperatives are governed by a

management committee consisting of several members who handle most of the day-to-day operational

decisions. Other bodies include membership committees (for the consideration and admittance of new

members), finance committees (for bookkeeping and the distribution of dividends), and other, more ad

hoc committees set up for various purposes. Figures from the 2006 ESCS show that 94 percent of

management committee members are said to have received management training.

Marketing cooperatives also maintain a fairly standard function in terms of their activity portfolios. We

present here figures from the 2005 ESCS that are drawn from a sample of 172 cooperatives that were

specifically identified as being involved in some form of agricultural marketing by both the woreda

cooperative promotion office and the cooperative itself (Table 2). Most marketing cooperatives (84

percent) were engaged in the provision of fertilizer or improved seed to their members, price information

(71 percent) and credit services (54 percent) to their members.

Table 2. Smallholder marketing cooperatives in Ethiopia: Descriptive statistics Variablea

Unit / description Mean

(Std Dev) Cooperative characteristics Average membership size Number of members in 2005 942.23 ( 773.52) Average land holding per member Hectares 1.75 (1.01) Age of cooperative Years 8.18 (4.68) Received external assistance at inception Yes 59.30 (49.27) Received financial assistance at inception

Yes 20.34 (40.37)

Marketing performance Sold members’ surpluses over the past 12 months Percent 58.72 (49.37) Value of surplus output sold last yearb Ethiopian Birr 256,408 (734,526) Value sold last year, per memberb

Ethiopian Birr 1,116 (6,982)

Marketing-related activities

Average number of marketing-related activities No. of activities, including marketing 3.51 Input provision Percent providing this service 83.72 % Credit Percent providing this service 54.06 % Extension Percent providing this service 23.25 % Price information Percent providing this service 70.93 % Processing

Percent providing this service 19.18 %

a Based on a sample of 172 cooperatives surveyed in 2005. b Only for cooperatives reporting that they had sold members’ surplus output. 1Ethiopian Birr (ETB) ≈ 0.114 US

dollars (USD). Source: ESCS (2006)

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However, in spite of the consistent design of cooperatives in Ethiopia, there are significant variations in

terms of the role and functions that marketing cooperatives play.

Consider, for example, the Leku Area Honey Products Marketing Cooperative in Shebedino woreda of

the SNNP regional state. The Leku Cooperative is a honey production and marketing organization located

in Shebedino woreda of the Southern Nations, Nationalities, and Peoples (SNNP) regional state.

The woreda comprises 32 densely-populated kebeles that cover a range of agroecological zones

(highlands, midlands, and lowlands) and with it, a range of stresses (drought, pest infestations, volatile

rainfall patterns, and flooding). Average household size is 7-8 people with average land holdings of 0.25

hectares per household. The woreda’s farming activities rely primarily on rainfed cultivation of coffee,

maize, false banana, and beans. Since the drought in 2001-03, the woreda has seen consistent rainfall that

has improved the area’s food security situation significantly.

The Leku Cooperative was established in 2002 by a small group of beekeepers—in effect, a local

solidarity group—to train its members in modern beekeeping technologies, increase honey production

among its members, and protect them from price volatility in the honey market. Today, the cooperative is

promoting modern beehiving and honey extraction techniques among its 127 members, and is marketing

its high-quality honey in local markets at a significant (133 percent) margin over the farm-gate price. The

cooperative is succeeding in its efforts to improve the quality of production and processing through the

introduction of new technologies such as modern beehives and a honey extractor.

But the cooperative is also struggling on the marketing side: Its sales are limited to the local market only,

and it has thus far missed out on marketing opportunities in the nearby regional capital (Awassa) and

contract opportunities with a private firm (Beza Mar PLC) owing to a lack of technical capacity to seize

these opportunities. The cooperative’s level of human capacity is quite limited, and they are currently in

search of technical training assistance in most areas of engagement, including production, processing and

marketing.

The Leku Cooperative is indicative of many cooperatives in Ethiopia, including both those case study

cooperatives covered by this study and those surveyed by the 2006 ESCS. Despite lofty goals, members’

high expectations, and workable designs, their functional capabilities are fairly limited. Many lack the

managerial and technical capacity needed to play a significant role in the marketing of surplus output for

their members.

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Another useful example is the Woyo Seriti Gebreal Multipurpose Cooperative in Dugda Bora woreda,

Oromia region. The woreda is situated in the lowlands of the Rift Valley characterized by issues of soil

fertility and erosion, limited and variable rainfall, small and scattered landholdings, and endemic diseases

such as malaria. In spite of this, the woreda is also suitable for cultivation of high-value crops such as

onions, chilis, tomatoes and potatoes with the provision of irrigation that draw water from neighboring

Lake Ziway. The area is also suitable for high-value crop cultivation because it is situated within the

Ziway-Meki marketshed, an area of rapid economic growth that lies within close proximity to Addis

Ababa, Adama, Mojo and other commercial centers via two of Ethiopia’s major primary transport arteries

that link the central, south and eastern parts of the country.

While the area offers significant potential for both production and marketing, smallholders in the area

have only begun exploiting these opportunities in the last 5-10 years. And, by their own admission, they

are still learning how to bargain with area traders to obtain profitable or even break-even returns on their

crops.

The Woyo Seriti Gebreal Cooperative was formed in 2000 by a small group of farmers who owned land

adjacent to one another and to Lake Ziway. The purpose of the cooperative is to increase agricultural

yields and output of its members, provide them with market price information, provide access to financial

services, and improve their position with local traders through collective bargaining. From an initial

membership of 25 (22 men and 3 women, all drawn from separate households), the cooperative has

expanded concurrently with the expansion of its pump irrigation scheme to 48 members (42 men and 6

women). Each member cultivates 0.5 hectares within the pump irrigation scheme’s catchment area.

The cooperative’s success is attributable to a number of factors, including the extensive material, financial

and organizational support it receives from different sources (Figure 3). The Oromia Development

Association (ODA), a local NGO working in close collaboration with the regional government, provided

the cooperative with a loan of 110,000 Birr which was used to purchase the pump and irrigation

equipment. The Meki Batu Cooperative Union provided the cooperative with a working capital loan of

200,000 to cover inputs (pump motor maintenance, fuel, seed, fertilizer, pesticides and equipment) for

high-value crop cultivation. The cooperative promotion desk at the woreda office of the Bureau of

Agriculture and Rural Development for Oromia region provides oversight of the cooperative’s

governance system, and was instrumental in securing the cooperative’s legal status in 2003.

14

ACDI/VOCA, an international NGO has provided training in cooperative management with sessions on

bookkeeping, recordkeeping, administration and leadership.

For the most part, the support provided by these organizations to the Woyo Seriti Gebreal Cooperative is

given in a coordinated and concerted manner. Figure 3 below illustrates the Woyo Seriti Gebreal

Cooperative in terms of access to agricultural inputs and marketing of agricultural surplus. As shown in

this figure, ACDI/VOCA’s activities are undertaken in partnership with the woreda office of the BoARD,

while the Meki Batu Cooperative Union maintains close linkages with both of these organizations in areas

such as training and capacity strengthening. This particular case is indicative of how the design and

functions of cooperatives contribute to their success given the right combination of production inputs,

market accessibility, and concerted effort by government agencies, non-governmental organizations, and

rural producer organizations.

15

Provision/financing of inputs

Provision of marketable outputs

Management and leadership training

Supervision and auditing

Coordination and cooperation

Legend

Figure 3a. Woyo Seriti Gebreal Cooperative: Material, financial, and organizational inputs

Figure 3. Woyo Seriti Gebreal Cooperative: Input provision and output marketing networks

Note: Arrowheads denote direction of materials or services provided (e.g., from node “a” to node “b”). BoARD denotes Bureau of Agriculture and Rural Development; ACDI/VOCA is an international NGO.

Figure 3b. Woyo Seriti Gebreal Cooperative: Surplus agricultural output marketing

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3.2. Incidence, inclusion and participation

We examine here issues relating to the incidence of cooperatives in Ethiopia and, more specifically, the

extent to which they are inclusive, i.e., allowing for the participation of all individuals or households that

are meant to be covered.

Of the 205 cooperatives surveyed under the 2006 ESCS, 172 (84 percent) declared that they were

engaged in marketing their members’ production. Using data on these cooperatives, Bernard et al. (2007)

found that the overall incidence of cooperatives among Ethiopian smallholders remains limited at present:

Only 9 percent of all smallholders were members of such organizations in 2005. This low incidence may

result from both limited cooperative coverage and limited participation incentives. Indeed, only 40

percent of households have access to a cooperative in their kebele, while only 17 percent of the

households that do live in a kebele where a cooperative exists are, in fact, members.

Surveys of non-members suggests a variety of possible reasons for not joining, ranging from a perception

that the cooperative will not be beneficial, to concerns about the trustworthiness of cooperative

management, to rejection of membership bids (Table 3). These figures suggest the need for closer

examination of households’ reluctance or inability to participate in a cooperative in Ethiopia.

History and legacy. First, households may be reluctant to join because of the cooperative movement’s

checkered past in Ethiopia. Under the previous regime, cooperatives were used to extend strong

government control to the local level and promote socialist ideology through compulsory participation.

Field observations suggest that present-day cooperatives must go through a slow process of trust recovery

to overcome persisting suspicion and wariness on the part of their potential members.

Such was the case with the Taramessa Multipurpose Cooperative in Shebedino woreda of the SNNP

regional state. The cooperative was first established in 1974-75 under the Derg regime not only to boost

coffee production, but also to manage the economic activities of its farmer-members. At that time,

farmers were obliged to supply and sell all their main outputs (coffee and maize) to the cooperative for a

price set by the state. In return, they received access to shops for basic consumer items and grain mills,

both owned by the (state) cooperatives and distributed to each kebele.

Following the fall of the Derg in 1991, the cooperative collapsed and its property was stolen, damaged or

left idle. The cooperative was brought back to life in 1995 with a loan of 700,000 Birr from the Ethiopian

Coffee and Tea Authority for the purchase of machinery and the construction of a new office. The

17

cooperative now boasts over 2,000 members and, in spite of price volatility in international coffee

markets and some internal governance issues (discussed later), is performing satisfactorily, according to

members interviewed for this study.

Table 3. Reasons for not being a member of a cooperative (percent) Response ESCS cooperatives

(in percent, n=270) Case study cooperatives

(in percent, n=53)

Doesn’t think the organization could benefit him/her 39 9Was not accepted as a member in the organization 14 9Prefers to wait until he/she sees that the organization is benefiting other members

13 4

Scared that once money is invested in the organization, it will be difficult to get it back

11 0

Does not trust this organization’s management 9 2Does not trust organizations in general 4 0Is not aware that the organization exists 0 23Does not have land (e.g., in the cooperative’s area of operation) -- 28Does not have money to meet membership requirements -- 13Other

9 11

Source: ESCS (2006); 2007 Cooperative-level Case Studies. Note: May not total to 100 percent due to rounding.

Conception and formation. Second, some households may not join cooperatives simply as a result of the

way in which a specific cooperative was conceived and formed. While woreda-level cooperative

promotion offices play a central role in establishing and designing cooperatives, some cooperatives form

along more organic lines, for example, as local solidarity groups among peers, as a group neighbors

defined by some geographic limitation, or as the result of some implicit membership criteria. Table 3

gives a statistical representation of the magnitude of the phenomenon.

Again, the Leku Honey Marketing Cooperative provides an illustration of this phenomenon. Membership

in the Leku cooperative is technically open to all and draws from across several kebeles and ethnic groups

in the woreda. The only membership criteria is the purchase of a share in the cooperative and payment of

membership fees that total 30 Ethiopian Birr (US$3.35)—an amount that is not particularly onerous for

most households in the woreda. Yet membership remains limited: Only about a third of all households

18

involved in beekeeping in the woreda are actually members of the cooperative. This is mainly due to two

factors: First, that few beekeepers in the woreda are actually aware of the cooperatives existence; and

second, that the cooperative leadership places high value on prior knowledge of, and a one-to-one

relationship with, prospective members. In effect, the cooperative operates as a local solidarity group

among peers rather than a major marketing channel for the area.

The Woyo Seriti Gebreal Multipurpose Cooperative in Dugda Bora woreda of Oromia region offers

another illustration of these criteria. The cooperative’s initial membership was limited to just 50

households that held land within the pump irrigation system catchment area. Since diversifying into

activities such as input supply and seed multiplication, membership has been expanded, and has

maintained a strong track record in delivering services to its initial members (those who are part of the

pump irrigation scheme), new members (those who use its collective marketing and input supply

services), and non-members (those who make use of the cooperative’s collective marketing and input

supply services).

Economic incentives. Third is another class of explanation based on the analysis of a household’s

economic incentives to participate in a cooperative. Consider, for instance, a commercialization

cooperative where each individual’s gain from participation is a function of both the gains in prices he/she

may obtain from participating in the organization, and the quantity of output he/she would like to market.

The price difference is in large part driven by the level of product aggregation in the cooperative. Indeed,

it is likely that the per unit transaction costs decrease with the total amount commercialized. This is also

true at the individual level, where it is often observed that larger farmers face lower per unit of output

transaction costs than smaller ones. The gains in transaction costs provided by the cooperative are

therefore typically larger for the smallest farmers than for the larger ones. The total gains however will

depend on the overall quantity that is being commercialized: for a given per unit gain, those with a lower

marketable surplus will now gain less than those with larger surplus. From these simple mechanisms, one

can clearly see an inverted U-shape relationship between the “size” of the farmer, and his/her potential

gains from the cooperative on a commercialization perspective.2 Considering a fixed cost of participation

into the organization, one may therefore observe somewhat of a “middle-class” effect of cooperative

participant, similar to what Weinberger and Jutting (2001) observed in Chad.3

2 Note that commercialization can here refer to both access to inputs and marketing of output. 3 Of course, few, if any, cooperative participants could be classified as “middle class” in terms of the broader distribution of income in Ethiopia. Rather, most participants would likely be classified as “poor” or “extremely poor,” and would likely fall within Ethiopia’s lowest income deciles.

19

We use the results form Bernard et al. (2007) to illustrate this middle class-effect hypothesis. In Table 4,

we report their results on the determinants of household participation in cooperatives, using the

commercialization survey data described above. Education and landholding4 seem to be the dominant

variables explaining household participation. Thus, the probability that a household participates in a

cooperative is increased by 10 percent if the household head is literate. The probability of participation

also increases by 5 percent for each additional hectare of land. Note, however, that the marginal effect of

landholding decreases with the amount of land. Eventually, very large farm households (holding more

than 14 hectares) are less likely to participate, supporting the idea of the middle class effect discussed

above.

Table 4. Determinants of household participation in cooperatives

Marginal Effect At Mean Of Independent Variable (Std Error)

Dependent Variable: Household Participates In At Least One Cooperative

Mean (Std Dev)

(1) (2) (3)

Household Size 5.13 0.015 0.014 0.019 (2.25) (0.003)*** (0.003)*** (0.004)***

Age Of The Household Head 44.4 0.002 0.002 0.001 (44.36) (0.000)*** (0.000)*** (0.000)**

Hh Head Is A Woman 0/1 -0.064 -0.063 -0.045 (0.021)*** (0.021)*** (0.021)**

Hh Head Is Literate 0/1 0.095 0.094 0.101 (0.021)*** (0.021)*** (0.021)***

Landholding (Ha) 1.35 0.043 0.056 0.051 (1.25) (0.006)*** (0.010)*** (0.001)***

(Landholding (Ha))2 -0.002 -0.001 (0.001)* (0.000)*

Ethnicity Dummies Yes Regional Fixed Effects Yes Number Of Observations 2,224 2,224 2,193 *** Significant at the 1 percent level, ** Significant at the 5 percent level. * Significant at the 10 percent level. Reported are marginal effects at the mean of the independent variable after Logit estimations. Standard errors in parenthesis. Source: ERSS (2005)

4 Land in Ethiopia is the property of the state and cannot be owned by individual farmers. Nevertheless, land is allocated to households for an undetermined period. Although land cannot be sold, it can be rented out and eventually passed on to heirs. The variable we use here as landholding is the amount of land allocated by the state to the household. It is considered as exogenous and does not capture land rented-in or rented-out by the farmer. For a detailed description of the Ethiopian land tenure system, see Gebreselassie (2006).

20

Scale economies vs. coordination costs. A fourth class of explanation for low participation emanates from

the cooperatives’ perspective. The overall low participation observed in Ethiopia may be driven by

cooperatives’ reluctance to include all potential members. Indeed, inclusive membership implies two

potentially opposing effects: Economies of scale in the collective marketing of surpluses or procurement

of inputs, and the offsetting increases in coordination costs that result from larger numbers of members.

This latter effect may be particularly important if increased membership goes along with increased

heterogeneity and divergent interests among members with respect to the cooperative’s operations.

An interesting angle on this issue is reflected in the experiences of the Maigebetta Irrigation Cooperative

in Ahiferom woreda, Tigray region. Like much of the Tigray region, Ahiferom woreda is a highland

region characterized by steep hillsides and valleys, short and variable rains, poor market and transport

infrastructure, and high population densities. Major crops cultivated in the woreda include teff, millet,

sorghum, barely, wheat, and beans, all of which are adapted to the woreda’s difficult agroecological

characteristics but of limited market value.

The Maigebetta Cooperative was established in 2002 with support from the cooperative promotion desk

of the woreda office of the Bureau of Agriculture and Rural Development for Tigray region. The effort to

establish the cooperative revolved around a pump irrigation scheme and smallholders residing in its

catchment area. The cooperative was supported by start-up capital of 109,457 Birr in cash, of which

30,000 Birr was provided by the woreda administration, 64,507 Birr from the woreda safety net

programs, and 14,950 Birr from the region’s cooperative promotion bureau. It also received a generator

from FARM Africa, an international NGO, to run a 46 hp water pump for its irrigation scheme. The

irrigation catchment area covers 20 hectares and provides sufficient water for the cultivation of chilis,

onions, and tomatoes, all of which are cash crops in local markets.

The cooperative is comprised of 25 members (23 men and 2 women), all of whom joined at inception.

The experiences gained from their initial forays into vegetable production have allowed them to move in

to year-round production, alongside new activities such as beekeeping and livestock fattening.

However, the cooperative is still contending with the near absence of linkages to support its operations

and expansion. First, the cooperative has difficulties in finding technicians (and spare parts) to keep the

pump and generator running. Second, it has experienced problems in finding transporters and market

21

traders for their surplus output are equally hard to come by. Geography explains part of this: Maigebetta

is 40 km from the nearest market town via a tertiary road.

The Maigebetta Cooperative is also noteworthy for its relatively unique agricultural marketing strategy

that somewhat illustrates the tradeoff between scale economies in the collective marketing of surpluses,

and the offsetting increases in coordination costs that result from large numbers of members. When

members first started producing vegetables, they realized that their surplus output consisted of just a few

semi-perishable crops (e.g., chilis, onions or tomatoes) that were ready for market all at the same time.

This tended to put them at a disadvantage when bargaining with traders, or tended to glut the thin local

markets. To address this situation, the cooperative now requires members to vary their production, e.g., if

several members cultivate tomatoes, others should cultivate onions, while others should cultivate chilis.

Instead of aggregating production to increase their bargaining power and reduce per unit transactions

costs, the cooperative has chosen the opposite strategy which, in the context of local markets, may be the

most rational and strategic option.

In Table 5, we report cooperative-level indicators of inclusiveness. We find that although the majority of

cooperatives declare that their membership is open to all individuals, all of them condition membership

on the fulfillment of particular criteria. For instance, 87 percent of the organizations only accept members

living within the same kebele, a criteria that may be interpreted as a means to reduce monitoring costs

among members. Surprisingly, asset ownership is not often cited as a primary criterion, possibly due to

the fact that these cooperatives are all mainly linked to agriculture and that most households control at

least a portion of land such that an asset criterion would not be binding in most cases. More constraining

however may be the request that all members buy a share of the cooperative, which costs an average of 45

birr (US$ 5.00) but can reach up to 1000 birr (US$ 111.00). Overall, although very few cooperatives had

officially refused membership to interested individuals, household-level data indicate that nearly 50

percent of non-members living in kebeles with such organization did not join because they could not

fulfill membership criteria that were, in most cases, of a financial nature.

22

Table 5. Cooperative membership Indicator Unit Mean

(Std Dev)

Can anybody join the cooperative? Percent responding yes 73.26 Are there any criteria to join the cooperative? Percent responding yes 100.00

Buys cooperative share and pays annual fee Percent responding yes 56.97 Living in the same PA Percent responding yes 87.20 Minimum / maximum age requirement Percent responding yes 65.69 Ownership of specific asset Percent responding yes 7.55

Price of cooperative share Ethiopian Birr 45.24 (96.39) Price of annual fee Ethiopian Birr 5.56 (9.62) Has anybody ever been refused from the cooperative? Percent responding yes 8.77 Did not join because did not fulfill criteria or was not accepted* Percent responding yes 50.5 Number of members in the cooperative Number 942.23 (773.52) Share of women in the cooperative Percent 16.72 (18.39) Coefficient of variation of members’ landholding

0.394 (0.283)

Source: ESCS (2006) except those indicators marked * denoting ERSS (2005).

To further describe inclusiveness, we report in Table 6 correlates between the cooperatives’ membership

rules and their membership structure. Column (1) shows a positive relationship between the kebele and

age criteria and the total number of members in the organization (expressed in log values); However, an

opposite effect is found with the financial criteria. In column (2) we replace the financial criteria by the

actual price of the cooperative share. Results are clearly robust, indicating that a 1 birr (US$ 0.11)

increase in the price of the cooperative share is typically associated with 0.4 percent decrease in the size

of the organization. Columns (3) and (4) report similar estimates, this time using the landholding

heterogeneity—measured as the coefficient of variation (CV) of members’ landholdings—as the

dependent variable. Although we do find a clear negative effect of membership criteria on the level of

heterogeneity, the actual price of the cooperative does do appear to be statistically significant.

23

Table 6. Membership criteria and actual membership

Dependent variable Total membership (log) heterogeneity (CV landholding)

(1) (2) (3) (4) PA criteria 0.477 0.287 0.018 0.027 (0.256)* (0.242) (0.066) (0.071) Age criteria 0.336 0.379 -0.043 -0.002 (0.200)* (0.175)** (0.052) (0.051) Asset criteria -0.305 -0.422 -0.032 -0.016 (0.345) (0.317) (0.089) (0.093) Financial criteria -0.482 -0.095 (0.176)*** (0.045)** Share price -0.004 0.0002 (0.001)*** (0.0002) Constant 6.040 6.136 0.462 0.364 (0.314)*** (0.263)*** (0.081)*** (0.077)*** Number of observations 171 165 171 169

*** significant at the 1 percent level, ** 5 percent level, and * 10 percent level. Least square coefficients reported with standard errors in parenthesis. Source: ESCS (2006)

In summary, the limited incidence of, and participation in, marketing cooperatives in Ethiopia can be

explained in part by a households’ choice not to join the organization, in part by the nature of the

cooperative’s inception and formation, and in part by a cooperative’s reluctance to open its membership

widely. In all cases, the mechanisms identified suggest that the poorest households may not participate in

such organizations, either because of the low returns they would derive from it, or because of the high

financial contribution required by the organization. Indeed, wealth self-assessments by cooperative

members and non-members support these finding (Table 7).

24

Table 7. How wealthy do you consider yourself compared to other farmers in your community?

ESCS cooperatives*** Case study cooperatives

Wealth self-assessment category Percent of

members (n=270) Percent of non-

member (n=270) Percent of members

(n=68)

Percent of non-members

(n=53) Very rich 0.37 0.00 0.00 0.00 Rich 5.56 3.33 11.76 0.00 Comfortable 39.26 28.15 61.76 47.17 Can manage 28.52 22.22 5.88 11.32 Never have quite enough 8.52 12.22 4.41 11.32 Poor 17.04 34.07 16.18 28.30 Very poor 0.74 0.00 0.00 1.89 *** denotes a significant difference in the distribution of wealth self-assessments between members and non-members at the 1 percent level, used to test cooperatives surveyed by the 2006 ESCS only. Source: ESCS (2006); 2007 Cooperative-level Case Studies.

3.3. Representation, responsiveness, and accountability

We examine here topics relating to three areas of cooperative governance and management. First is the

issue of representation, or the extent to which those who are supposed to be covered by the cooperative

are involved in its decision-making processes. Second is the issue of responsiveness, or the extent to

which the cooperative’s decision-makers adequately address the demands of their members. Third is the

issue of accountability, or the extent to which cooperatives’ decision-makers are answerable to higher-

level authorities, their members, both or neither. These issues require further discussion of such topics as

cooperative leadership, decision-making procedures, and conflict resolution mechanisms.

Representation and responsiveness. As noted earlier, most cooperatives in Ethiopia follow a fairly

standard governance and management design. The role of the management committee and its supporting

subcommittees is structured in a way to provide sufficient representation from the membership, although

strong leadership no doubt plays a role in many cooperatives as well.

Regardless of a given cooperative’s design and structure, a fundamental question is whether its members

are actually aware of the organization’s purpose, activities, and rules. An analysis of data from the 2006

ESCS and field observations accompanying this study suggest that, by and large, cooperative members

well-informed about their cooperative. However, their awareness with more detailed aspects of

governance and management—particularly a cooperative’s rules, regulations or bylaws—is significantly

lower than their awareness of the more general purpose and activities of the cooperative (Table 8).

25

Table 8. Cooperative members’ knowledge about their own cooperative Question: In your organization, are you aware of… Percent

responding (n=68)

Percent responding

“yes”

…the purpose of the organization? 99 95.52 …the activities of the organization? 97 93.94 …the rules, regulations, and/or bylaws of the organization? 97 53.03 …how decisions are made in the organization? 97 71.21 …how leaders are selected in the organization? 97 90.91 …how conflicts are resolved?

96 83.08

Do you feel that your cooperative is governed democratically?*

100 97.41

Source: 2007 Cooperative-level Case Studies, except * denoting ESCS (2006) (n=270)

A further issue is whether members actually participate in the governance and management activities of

their cooperative. Observations from the 2007 Cooperative-level Case Studies suggest that, in general,

most members participate in meetings on at least a monthly basis (Figure 4), although half identify

themselves as either not active or sometimes active in the cooperative (Figure 5).

26

Figure 4. How many meetings of the organization have you attended over the past one year? Source: 2007 Cooperative-level Case Studies (n=68)

0 5 10 15 20 25 30 35 40

0

1-10

11-20

21-30

>25M

eetin

gs a

ttend

ed

Percent

Figure 5. How active have you been in your cooperative over the past one year? Source: 2007 Cooperative-level Case Studies (n=58)

0 5 10 15 20 25 30

Not active

Sometimes active

Usually active

Highly active

Leve

l of a

ctiv

ity

Percent

27

Data from the 2006 ESCS provide some insight into how decisions are actually taken within marketing

cooperatives in Ethiopia. Overall, general assembly members tend to allocate technical decisions to the

cooperative leadership in the majority of the cases, while they tend to allocate general decisions to the

cooperative leadership in roughly half of the cases (Figure 6).

Figure 6. Distribution of cooperatives according to percentage of decisions taken by the general assembly

Source: ESCS (2006)

0

10

20

30

40

50

60

70

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

All decisions General decisions only Technical decisions only

In summary, while evidence suggests that cooperative members are generally informed about the basic

structures and functions of their cooperatives, there is some variation in (a) the degree to which they are

aware of how decisions are made and (b) the degree to which they participate in different types of

decision-making functions within the cooperative.

Accountability. To better understand the issue of accountability, consider the Taramessa Multipurpose

Cooperative in Shebedino woreda of the SNNP regional state mentioned earlier. This cooperative is

considered to be one of several model coffee producers’ organizations in the Sidama Zone of SNNP,

home to Ethiopia’s reknowned high-quality export coffee. The cooperative comprises more than 2,000

members, is fully integrated into the coffee marketing chain, and receives support from the woreda office

28

of the regional Bureau of Agriculture and Rural Development, the Sidama Coffee Producers’ Cooperative

Union, several commercial interests that finance coffee production, and ACDI/VOCA for management

and leadership training (Figure 7).

Provision/financing of inputs

Provision of marketable outputs

Management and leadership training

Supervision and auditing

Coordination and cooperation

Legend

Figure 7. Taramessa Multipurpose Cooperative: Coffee production and marketing networks

Note: Arrowheads denote direction of materials or services provides (e.g., from node “a” to node “b”). BoARD denotes Bureau of Agriculture and Rural Development Source: 2007 Cooperative-level Case Studies

29

Internally, there has been much concern among the Taramessa Cooperative’s membership over the

accountability of its leadership. Members recognize that leadership is also a means of gaining personal

benefit—employment for relatives, access to the cooperatives resources, and social recognition and

stature. Thus, the local office of the Bureau of Agriculture and Rural Development has intervened on

several occasions to audit the cooperative and, where necessary, change the leadership. However, there is

little capacity among the members to directly hold their leadership accountable by investigating suspected

wrongdoing, enforcing rules and regulations, or even discussing these issues in open forums. These

problems have been compounded by occasional shocks such as the fall in international coffee prices

during the early 1990s, and a fraudulent check worth ETB 117,000 (approximately US$ 13,340) received

by the cooperative in exchange for its coffee—a transaction that nearly rendered the cooperative

insolvent.

Yet in spite of these problems, the cooperative has been performing over the last several years and,

importantly, has demonstrated its capacity to bounce back from various shocks. And in spite of the

governance issues, the cooperative has been able to expand its scope of activities in response to members’

interests and market signals over the past two to three years. Still, the Taramessa Cooperative illustrates

how even among the larger cooperatives engaged in lucrative markets for high-value crops, governance

and management issues can still be a persistent threat to their success.

Responses from members polled in the 2007 Cooperative-level Case Studies tend to support the findings

from this example. Between 40 and 50 percent of these cooperative members did not agree with

affirmative statements about transparent decision making, effective activity monitoring, or effective

conflict resolution (Figure 8a-c). Interestingly, a much larger proportion of members (82 percent) agreed

that their organization was nonetheless working for the economic benefit of its members.

30

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31

In summary, there is some evidence suggesting that cooperative have limited capacity to ensure

accountability, i.e., to ensure that no one person can use the cooperative to obtain power or resources over

another person. This is true even despite the fact that management committee members are thought to be

properly trained to carry out their leadership roles in an accountable manner. In general, field

observations suggest that cooperatives’ decision-makers are responsible and answerable to woreda-level

cooperative promotion offices far more than their own members.

3.4. Adaptability and adaptive capacity

We briefly address here the issue of adaptability, or the extent to which cooperatives are able to address

threats or opportunities in the external environment to the benefit of their members.

As suggested by several examples cited from the 2007 Cooperative-level case studies, many of the

successful marketing cooperatives in Ethiopia (e.g., the Woyo Seriti Gebreal, Leku and Taramessa

Cooperatives) have demonstrated their ability to leverage resources and expertise from other agricultural

sector actors to exploit new market opportunities. This includes local and international NGOs, private

companies involved in production and marketing, and cooperative unions that form umbrellas over these

cooperatives. However, in many of the cases cited here, it is often these other actors that motivate, design

and support the cooperative. A more grassroots but possibly less common means of promoting

cooperatives would require that smallholders (or activists within a smallholder community) organize

themselves and convey their interests and needs to these other actors. It may be that these two avenues of

cooperative formation result in qualitatively different outcomes in terms of governance, performance, and

impact on livelihoods. However, the data collected and analyzed for this study do not offer any immediate

conclusions on this.

Similarly, and as suggested by several of these same case study cooperatives, many successful marketing

cooperatives in Ethiopia have demonstrated their ability to respond to new market opportunities. For

example, the Kara Luku Multipurpose Farmers Cooperative in Goro Gutu woreda, Oromia region shifted

from chaat to haricot bean production and marketing organization, even despite the reknowned and

lucrative potential of chaat, because chaat market conditions were simply not in their favor. Their distance

from a main road, the high taxes imposed on their commodity, and the relatively better organizational

skills of chaat traders meant that chaat marketing margins were either too low or too variable to make the

crop a sustainable livelihood option. The entry of two international NGOs—Catholic Relief Services

32

(CRS), which provided training on cooperative management, and the Comitato Internationale per lo

Sviluppo dei Popoli (CISP), which provided a loan for the production and marketing of haricot beans—

allowed the Kara Luku Cooperative to diversify into new income-generating activities. Their ability to

adapt to new market opportunities and new actors in those markets allowed them to continue their

collective efforts and contribute to the improvement of livelihoods for their members.

A more topical issue relating to adaptability is the extent to which marketing cooperatives are able to

leverage similar resources and expertise to manage or mitigate the risks associated with increased risks

associated with climate change. At the level of the smallholder, climate change essentially means that

livelihoods based on crop production and marketing will be exposed to greater environmental risks.

Typical effects of climate change will be an increase frequency of extreme events, ranging from droughts

to floods, which either reduce yields and output, or make yields and output more variable.

At the level of agricultural markets, the occurrence of such events is likely to affect the market prices of

agricultural products. Because such events are likely to affect large geographical areas at once, mutual

insurance mechanisms sometimes offered by cooperatives—for example, where members contribute to

mitigating a negative income shocks experienced by a fellow member—will probably be of limited use in

the face of locally covariate risks.

Institutions such as cooperatives may nevertheless help mitigate the effects of these events through

several mechanisms. Increased access to adequate inputs (seeds, fertilizers and pesticides) may lower the

responsiveness of yields to environmental factors. Similarly, access to irrigation sometimes promoted by

these organizations may lower one’s exposure to such risks. From a market perspective, a cooperative

with enough capital liquidities will be able to store and exploit spatial and temporal arbitrage

opportunities to reduce the effect of environmentally driven price variability. Finally, cooperatives may

offer their members with opportunities for income diversification into non-farm activities, thereby

lowering the exposure of their income to agriculture related risks.

The 2007 Cooperative-level Case Studies attempted to obtain data on the capacity of cooperatives and

cooperative members to manage environmental shocks. Cooperative leaders and members were asked to

recall their experiences with events over the last 20 years such as floods, droughts, insect infestation, and

other climate-related events, as well as agricultural price collapses; and to discuss the extent to which the

cooperative played a role in coping or managing the impact of such events. Responses suggested that

cooperatives are neither designed nor placed strategically enough to play such a role, while other GoE

33

programs such as the Productive Safety Net Program are. Indeed, the GoE has accumulated extensive

experience in recent history addressing negative shocks in the agricultural sector and responses suggest

that cooperative members are often aware of these programs.

4. Performance, outcomes, and livelihoods This section examines the cooperative performance and the livelihood outcomes of cooperatives in

Ethiopia. While it is difficult to provide representative or conclusive analysis of the relationships between

cooperative membership and household welfare, this section examines the pathways through which such

outcomes might occur, and the extent to which cooperative members are either cognizant of such benefits

and pathways. To the extent possible, we frame this part of the study in terms of cooperative members’

own perspectives based on data collected from various sources.

We first examine the extent to which cooperative members are satisfied with the performance of their

cooperatives. Of the 270 cooperative members surveyed by the 2006 ESCS, 89.63 percent responded that

they were satisfied with the services provided to them by their cooperative; a slightly lower percentage

(71.21) offered a similar response in the 2007 Cooperative-level Case Studies. Thus, there seems to be a

basic level of satisfaction with marketing cooperative services, although this does not necessarily reflect

on which type of service the members are satisfied with, e.g., collective marketing, input supply, credit

provision, or other such services.

A more subjective set of questions asked in the 2007 Cooperative-level Case Studies suggests that

cooperative members recognize that the benefits of cooperatives accrue more to individual members than

to the wider community (Figure 9).

34

0 10 20 30 40 50 60 70

strongly disagree

disagree

agree

strongly agree

Resp

onse

Percent

The organization helps to improve the community as a whole

The organization is working for the benefit of its members

Figure 9. Cooperative members’ opinions on the benefits of their cooperative Source: 2007 Cooperative-level Case Studies (n=66)

Indeed, there is some evidence to also suggest that many smallholders have a weak assessment of

cooperatives’ ability to provide marketing services. An analysis of data from the 2006 ESCS shows that

42 percent of non-members with access to a cooperative in their kebele indicate that they do not

participate because they believe that the organization is not effective. Among cooperative members, on

the other hand, although 82 percent of them are satisfied with their participation in the organization, they

are not necessarily relating their satisfaction to the marketing services offered by the cooperative. Indeed,

only 40 percent of members indicate that the main benefits they gain from cooperatives are linked to the

commercialization of their output.

In addition, 60 percent of members do not feel obligated to sell their product through the cooperative,

among which 71 percent have sold none of their past season production to the cooperatives and only 14

percent have sold all of it, according to data from the 2005 ERSS. A possible conclusion is that the

marketing functions of the cooperatives are not the primary attraction for the members.

This contrasts with the findings of Bernard et al. (2007), who show that when they do provide marketing

services, cooperatives perform relatively well, obtaining prices for their members’ produce which are on

average 7 percent higher than what they would have obtained by themselves. However, according to the

2006 ESCS data, only 59 percent of the cooperatives which claim to be engaged in marketing members’

35

products had actually performed such activities over the year 2005. At the same time, most of them

claimed to be engaged in other types of activities, ranging from input provision (84 percent), credit (54

percent), agricultural extension (23 percent), price information (71 percent), processing of agricultural

products (19 percent), consumption services (62 percent), literacy trainings (12 percent), HIV/AIDS

prevention (23 percent), and provision of public infrastructures (15 percent).

Although it is clear that some of these services may be complementary to the commercialization activities

of cooperatives, others appear quite remote from it. Such is the case for social services such as

consumption, literacy trainings, HIV/AIDS prevention or public infrastructure. Overall, 74 percent of the

marketing cooperatives provide—or intend to provide—at least one such social service. Interestingly, the

average membership size in these organizations is nearly twice as large as in the more specialized

organizations. The average per-member landholding is, however, 25 percent larger in the more

specialized ones.

Consider the case of Thahetay Megare Tsemri Multipurpose Cooperative in Ahiferom woreda of the

Tigray regional state. The cooperative has diversified from a traditional role in supplying fertilizer and

seed to members for the production of teff and millet to a range of activities including collective

procurement and sale of household consumption goods, surplus output marketing, honey marketing, and a

water pump rental service. Of particular interest is that the cooperative has, with assistance from the local

office of the Bureau of Agriculture and Rural Development (BoARD), made an arrangement to sell its

well-known premium variety of honey to Dema PLC, a private honey processing and marketing interest.

And in spite of its success, the governance and management of the cooperatives remains organized along

lines similar to many cooperatives in the country: Decision-making and accountability systems are closely

tied to the BoARD rather than the membership, while day-to-day issues tend to be addressed through

informal interactions among the leaders, management committee and members. Note that voting is

conducted on a one-share-one-vote basis, where 40 of the 805 coop members hold 2 shares each while the

rest hold 1 each. There is no indication, however, that the larger shareholders gain any advantage over

others or hold any special position in the cooperative—although votes are cast on a one-vote-one-share

basis, there are rarely opportunities to vote e.g., for new leaders, since the leaders remain unchanged.

Rather, their advantage is only in receiving larger distribution of dividends in accordance with their

shareholding.

36

This illustration suggests that inclusive membership, democratic governance and cooperative performance

are not always clearly linked. Thus, we attempt here to relate various measures of inclusiveness with the

marketing performance of cooperatives using data from the ECS. Indeed, as inclusive as they may be,

Ethiopian cooperatives may have limited impact on poorer households unless they perform well. Less

than 60 percent of the cooperatives had sold—or helped sell—any of their members’ output in 2005,

despite having declared that marketing was their main purpose. We relate this apparent low performance

to cooperatives’ characteristics in Table 9 below.

Specifically, we investigate here the relationship between membership, governance and performance. The

reported results do not account for likely endogeneity biases and should therefore be interpreted only as

correlations. Nevertheless, they are useful in pinpointing eventual tradeoffs relevant for future, and more

robust, analysis. We use as a dependent variable an indication of performance—whether the organization

had sold any of its members’ output in 2005 and relate it to the cooperative’s characteristic through a

series of Logit estimations. Column (1) presents the basic marketing cooperative model, whereby

marketing is a function of the total product aggregation in the organization, proxied here by the log of the

total landholding of cooperative members. As expected, the obtained coefficient is largely positive and

statistically significant. Moreover, the parameter estimates of the log of total membership are negative in

the estimation, consistent with the idea that, for a given level of product aggregation, a larger organization

essentially means larger coordination costs which may impair the organization’s performance. Age of the

cooperative and an indicator of local market access are also introduced as controls, although they yield no

clear effect in the estimation.

In Column (2) we introduce an indicator of membership heterogeneity along with the other variables. The

previous results still hold, although the point estimates are somewhat smaller in magnitude. Surprisingly,

more heterogeneity seems to be linked to better performance, which goes against the idea of greater

heterogeneity leading to more coordination costs. One way to interpret this sign is that greater

heterogeneity may mean the cooperative being driven by a few much larger farmers who have an

incentive to ensure the organization’s success, as suggested by anecdotal evidence from our case studies.

All these results hold constant in Column (3) where we use the binary indicator defined above to control

for high versus low levels of participation, the effect of which cannot be distinguished from zero.

Finally, in column (4), we interact the level of participation with the variable for membership structure.

The level of participation remains insignificant, as does its interaction with the log of the total

membership. By contrast, we find a strong and negative effect of the interaction between the level of

37

heterogeneity and the level of participation. This effect is greater in magnitude than the coefficient

obtained on the level of heterogeneity alone. These results therefore indicate that heterogeneity may favor

performance on the condition that the organization is host to low participation.

Overall, these results clearly show some tradeoff between the extent to which a cooperative can open its

membership and hence allow more heterogeneity, give voice to its members through participatory

decision-making, and maintain a minimum performance level in its economic activities.

Table 9. Membership, governance and performance, correlations

Dependent variable: Coop has sold members’ output in 2005 (0/1)

(1) (2) (3) (4) Total landholding in the cooperative (log) 0.142 0.096 0.094 0.093 (0.042)*** (0.045)** (0.044)** (0.047)** Total membership (log) -0.131 -0.085 -0.082 -0.085 (0.050)*** (0.052)* (0.050)^ (0.053)^ Heterogeneity (CV landholding) 0.235 0.238 0.480 (0.115)** (0.112)** (0.179)*** High participation 0.069 0.056 (0.060) (0.282) High participation * Total membership 0.027 (0.3045) High participation * Heterogeneity -0.555 (0.218)** Age 0.003 0.002 0.001 0.002 (0.007) (0.007) (0.007) (0.006) Market access is high 0.020 0.027 0.051 0.049 (0.061) (0.058) (0.060) (0.059) number of observations 162 162 162 162 Pseudo R2 7.67 10.52 11.34 15.40 % correct predictions (probability threshold at 0.5) 80.86 81.48 83.95 83.95

*** significant at the 1 percent level, ** 5 percent level, and * 10 percent level. Reported are marginal effects at the mean of the independent variable after Logit estimations. Standard errors in parenthesis. Source: ESCS (2006)

38

5. Conclusions and Recommendations This study provides a diagnostic of how smallholder cooperatives contribute to the improvement of rural

livelihoods in Ethiopia by linking farmers to markets. The study examines the history of cooperatives in

Ethiopia along with the social context and market environment in which they currently operate. The study

further examines key elements of their design and function—characteristics such as inclusion,

participation, representation, responsiveness, accountability, and adaptability—as well as variations in

design and function. Ultimately, the analytical insights from this study (and summarized below) are

intended to inform policymakers on options available to further strengthen smallholder cooperatives as a

part of Ethiopia’s wider strategy for agricultural development, economic growth, and poverty reduction.

It should be noted that this study is an analysis of a national cooperative promotion effort that is presently

at an interim phase of development. It should also be noted that this study attempts to provide analysis at

both the national and local levels using several different data sources designed for varying (and

sometimes divergent) objectives. Thus, the insights offered below should be viewed as tentative

conclusions and recommendations that, at most, are meant to allow for reflection and exploration of

innovative policy options and solutions.

The cooperative as a development partner. The evidence presented above illustrates how cooperatives

function within the wider landscape of organizations and institutions dedicated to improving the

economic and social welfare of smallholders and contributing more widely to agricultural development,

economic growth, and poverty reduction in Ethiopia. Cooperatives play an important role as interfaces

between farmers and the various woreda-level offices and services of the regional Bureaus of Agriculture

and Rural Development, local and international non-governmental organization, cooperative unions,

private agricultural and agroprocessing concerns, and private traders and brokers. They function as vital

conduits not only for marketable surpluses of agricultural commodities, but also for agricultural inputs,

credit technologies, organizational innovations, institutional innovations, and capacity strengthening. In

the absence of other grassroots organizations—or in the absence of willingness and ability to collaborate

with other organizations for whatever reasons—cooperatives are a useful means of meeting the GoE’s

goal of increasing smallholder production and commercialization. Thus, the evidence presented here

suggests that the cooperative is a relevant partner to the wider development community—both state and

non-state actors—in Ethiopia.

39

Recommendation. Policy initiatives at the federal, regional and woreda levels should continue to

encourage public officials—woreda administrators, BoARD officers, BoARD specialists, kebele

development agents and others—to take advantage of this rich institutional landscape to leverage

resources and expertise in support of cooperatives and the smallholders they represent.

The limits of inclusiveness. The evidence presented here also suggests that it is unlikely that

cooperatives will grow to be as inclusive as current GoE targets expect. Inclusiveness in cooperatives is

limited by several different factors including the history and legacy of cooperatives in previous regimes;

the current processes of cooperative conception and formation; the absence of sufficient economic

incentives and the “middle-class effect”; and the tradeoff between scale economies and coordination costs

in a cooperative. These factors may limit the GoE’s strategy to 2010 that envisions establish a

cooperative in each kebele, cooperative services to 70 percent of the population, marketing through

cooperatives of 60 percent of the country’s agricultural surplus, and provision of 90 percent of

agricultural inputs supplied.

At the same time, the evidence shown here that in spite of limited inclusiveness, some cooperatives are

still able to generate benefits for individuals and households that are not formally members in a marketing

cooperative. The spillover effect occur in a number of instances, for example, where the cooperative

supplies inputs (seed and fertilizer) to both members and non-members, or where non-members are able

to access services through a family member who is also a cooperative member. They are an unintended

consequence of cooperative design and implementation, and may contribute to improving rural

livelihoods in Ethiopia.

Recommendation. Policy initiatives should do more to (a) acknowledge, identify and leverage alternative

mechanisms that respond specifically to the needs of individuals, households and groups that are excluded

from cooperatives, and (b) recognize that the existence of spillover benefits from cooperatives means that

extensive membership in a given community may not be a necessary condition for improving livelihoods.

This first recommendation makes a strong case for continued investment in targeted interventions such as

the Productive Safety Net Program (PSNP), which could be developed further to recognize their

complementarities with cooperatives in Ethiopia. The second recommendation makes a case for

sustaining the commitment to establishment of cooperatives based on a non-compulsory membership as

set forth in revisions to the laws and regulations governing cooperatives in Ethiopia today.

40

The tradeoff between marketing and non-marketing activities. The evidence presented here suggests

a tradeoff between marketing-related activities undertaken by a cooperative and other non-production or

non-marketing activities. Cooperatives may be taking on responsibilities and activities beyond the scope

of either their mandate or capacity, potentially reducing their effectiveness is commercializing

smallholders’ surplus output. This, in turn, may negatively affect the livelihood outcomes expected from

marketing cooperatives in Ethiopia.

Recommendation. Careful consideration should be given to exactly what is expected from cooperatives,

and what their capacity is to manage a diversified activity portfolio. Too many activities that are too

heterogeneous in character could reduce a cooperative’s marketing performance and, in the long run, its

viability as an organization.

The governance challenge. Finally, the evidence presented here suggests that cooperative governance

and management systems and capacities are still under development. While many cooperative members

express some degree of satisfaction with the services provided by their cooperative, issues such as

participation, responsiveness, accountability and adaptability are often raised by members. Given the

checkered history of Ethiopia’s cooperatives and the large-scale initiative currently being pursued to

again promote cooperatives, it is likely that these governance and management issues will remain a

concern.

Recommendation. Efforts to replicate these successes would require greater investment in strengthening

the capacity of cooperatives to govern and manage themselves independently from the BoARD or other

external actors. Paradoxically, this will require new and innovation investments in developing the skills

and knowledge of BoARD officers, BoARD specialists, and development agents to convey governance

and management expertise to cooperative leaders and members. This includes investment and

improvement in the curriculum and teaching practices in Agricultural Technical, Vocational Educational

Training (ATVET) colleges, particularly with respect to topics such social mobilization, cooperative

management, cooperative accounting and bookkeeping and community conflict resolution.

In summary, this study recognizes the potential contribution of smallholder cooperatives to increasing

agricultural production and marketable surpluses in rural Ethiopia and, in the long run, contributing to

Ethiopia’s wider objectives of agricultural development, economic growth, and poverty reduction. A

range of additional and innovative policies and investments are needed to ensure that this contribution

ultimately play a part in meeting these goals.

41

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