presented by Mr. Tadiwos Zewdie at the In-House Seminar organized by IFPRI-ESAO

1. IFPRI
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
Market Forces and the Boundary of
Agricultural Cooperatives in Ethiopia
Tadiwos Zewdie and Getaw Tadesse
September 19, 2016

2. Outline
Motives
Data and descriptive statistics
Estimation approach
Estimation results
Discussion
Conclusion

3. Motives
 Since 1967 Ethiopia had always been trying to promote
cooperatives with varying emphasizes and objectives.
 Currently, cooperatives are being expanded and promoted to
develop themselves into autonomous, self-help and competent
institutions. E.g GTP II
 However, their performance is not as good as expected (Bernard et
al., 2008; Bernard and Spielman, 2009; Francesconi and Heerink,
2010; Getnet and Tsegaye, 2012)
Possible reasons:
Capacity
Deviance from cooperative principles: participatory, voluntary, etc.
Deviance from market principles: missing market, high transaction
cost, economies of scale, market power etc.

4. Motive … cont’d
 This prompt us to question:
» Do cooperatives set their boundaries (type and number of
activities they are engaged in) based on market principles?
How important are market forces?
» Which market forces are important for coops’ participation in
different markets/services?
 Objective:
» to assess the effect of market indicators - transaction cost,
market power, economies of scale etc. - on the probability of
coops engaging on different commodity and service markets

5. Data and descriptive statistics
 Structured questionnaire
 We identified 25 commodities and services in which cooperatives
can possibly engage in
 These include: output marketing for 9 grains, input marketing for 5
inputs, financial services, rural agricultural services like
transportation, milling, machinery rental etc.
 Multi stage sampling
 171 primary cooperatives selected, from Oromiya and Amhara
 Intensive interview were made with the leaders of the cooperatives

6. Data and descriptive statistics …cont’d
 We assed:
the performance local markets of these commodities/ services
in terms of functionality, transaction cost, distance from
markets, type of roads, riskiness of the market and frequency
of the transaction
the extent of cooperatives participation (boundary) in each of
the commodity /service markets
the capacity of the cooperatives in terms of asset, finance,
capital and human resources
 That means, 171 coops asked for about 25 commodities/services,
which makes the data a sort of panel
 Both descriptive and econometric analysis were employed

7. Table 1. The capacity of sample cooperatives
Mean Median P10 P90
Capital holdings (in 000 ETB)
Total asset value 1486.088 551.983 78.000 2703.91
Working capital 2104.184 919.445 45.000 5770.708
Fixed capital 440.392 130.2 13.098 715.212
Per capita total asset 1.440 0.414 0.119 4.021
Per capita working capital 1.378 0.832 0.079 3.562
Members’ size
Number of members 1467 1094 285 3183
Proportion of female-headed 0.170 0.149 0.065 0.331
Proportion members who own share 0.960 1.000 0.980 1.000
Membership growth rate 0.032 0.008 0.000 0.060
Total employed people 4.4 4 0 9
Manager with at least college diploma 0.0124224 0 0 0
Experience of cooperative manager (years) 2.795031 2 0 6
Members’ participation in general assembly 0.5438596 1 0 1
Age of cooperative 29.68421 36.00 7.00 38

8. Proportion of sample cooperatives engaged in different activities
0.06
0.67
0.13
0.99
0.81
0 .2 .4 .6 .8 1
Proportion of coops providng the services
Financial services
Extension and information
Rental services
Input marketing
Output marketing

9. Table 2: Extent of cooperatives participation in rural markets
Type of market:
(commodity/
Service)
Service provision Beneficiaries Business volume
Number
of
markets
evaluated
Coops
participatio
n (in %)
Number
beneficiarie
s per coop.
per year
Beneficiari
es over
members
Value of
transaction
per coop
Value of
transaction
per
beneficiary
Output markets 2052 22 61.12 4 83178.32 2481.536
Input markets 855 48 550.19 55 10,39371 1610.966
Rental service 1026 2 36.99 2 1082.02 2782.697
Information ser. 513 24 327.04 32 0 0
Financial service 513 2 11.00 1 22700.1 1567.802
Total 4959 20 174.33 16 223058 1685.406
Overall,
• Significant number of coops are idly present without function
• Members are not using their coop, as expected: may be because coops
are unable to creating better bargaining power and market channels.
• Performance (measured in business volume) is not as good as expected

10. Table 3: The performance of rural markets /services (proportions)
Performance indicators Output
market
Input
market
other agri.
Services
Overall
agri.
service
Number of markets evaluated 2,052 855 2,052 4,959
Missing village markets 0.72 0.76 0.56 0.66
Missing district markets 0.30 0.17 0.18 0.22
Distance from the markets(km) 5.17 5.19 4.62 4.92
Villages with asphalt road 0.17 0.17 0.16 0.17
Villages without road 0.13 0.15 0.16 0.15
Villages without transport 0.97 0.94 --- 0.96
Monopolistic/monopsonic 0.05 0.56 0.55 0.43
Oligopolistic/oligopolistic 0.17 0.28 0.28 0.25
Competitive market 0.55 0.07 0.09 0.20
Proportion of risky markets 0.88 0.34 0.34 0.48
Proportion of frequent
transactions
0.26 0.17 0.47 0.34

11. Estimation approach
 The study of organizational boundary is as old as the seminal
work of Coase in 1963 and further works of Wilimason (1979)
on the boundary of the firm
 According to these works, the boundary of the firm should be
guided by efficiency principle, mainly by transaction costs
 More recent works in organization boundary, however,
suggest other determinants, such as market power
 Though these suggestions are made for business firms, they
can equally be applicable to cooperative organizations, which
aimed at being market-oriented, and competitive
 Thus, we regressed the probability of a cooperative
engagement on in a given market/service as a function of
market forces and capacity of cooperatives

12. List of market forces and their proxy variables

13. Table 4: What derives the boundary of agricultural cooperatives: how
important are market forces, which market forces?
***, ** and * are significant at 1, 5 and 10 percent significant levels, respectively.
Variable
Probit Xtprobit
Coefficient SE Coefficient SE
Nonexistence of village market 0.201** -0.1 0.281*** -0.1
Market distance -0.045*** -0.01 -0.042*** -0.01
Village with Asphalt road -0.184* -0.1 -0.138 -0.1
Lack of transportation service -0.104 -0.24 -0.216 -0.24
Monopolistic/Monopsonistic
Oligopolistic/Oligopsonistic -1.084*** -0.13 -1.261*** -0.13
Competitive market -0.909*** -0.11 -1.363*** -0.15
Risky market 0.296* -0.18 0.203 -0.18
Frequency of transaction -0.131 -0.13 -0.146 -0.13
Member size 0.001*** 0 0.001*** 0
Age of coop 0.003 0 0.003 0
Total capital -0.003 -0.02 0.003 -0.02
Edu. status leader -0.209 -0.48 -0.104 -0.49
Experience of leader -0.022 -0.02 -0.021 -0.02
cash loan support 0.401*** -0.09 0.427*** -0.09
_cons 0.299 -0.31 0.547 -0.38
N 1012 1012

14.  It appears that both transaction cost and market
power explains cooperatives choice of activities
 However, the market power effect is stronger than
transaction cost effect
 As expected external support (cash) strongly
explains cooperatives choice of activities

15. Table 5. Which market forces are important for cooperatives participation in
different markets/services?
Market performance
indicators
Grain markets Input markets Other rural service
Nonexistence of village market -0.513*** 1.358*** 0.625***
Market distance -0.033** -0.048*** -0.017**
Village with Asphalt road -0.494*** 0.090 0.025
Villages with road transport 0.102 -0.321
Competitiveness of the market
Oligopolistic market
Competitive market
-1.002**
-1.235***
-1.407***
-1.269***
-0.691***
-0.593***
Riskiness of the market 0.373* 1.379** 0.001
Frequency of transaction 0.140 -1.365*** 0.772***
Members size 0.001*** 0.000 0.000
Age of coop 0.002 0.017** -0.003
Total capital in ETB 0.001* -0.001 -0.001
Education status of leader 1.005** 0.246 -0.009
Experience of leader 0.037 -0.020 0.001
N 505 507 1187
***, ** and * are significant at 1, 5 and 10 percent significant levels, respectively.

16.  The drivers of cooperatives participation in input
and output markets are different
» While participation in input markets is driven by
market failures, participation in output markets is
driven by market power
» Cooperatives tends to buy crops in markets which
are functional but less competitive
» Is cooperative the best intervention to make markets
competitive?

17. Conclusion
 Despite early establishment of coops across the region and
country, coops couldn’t flourish and benefit members as
expected.
 The majority are simply present without function, except input
(fertilizer) distribution.
 Ethiopian cooperatives’ boundary is influenced by market
power more importantly than transaction costs
 The poor performance of cooperatives in output markets could
be related to the improper choice of markets or commodities
» Participating in markets that function well, will lead to poor performance
» Example : the market for tef is fairly functional and competitive,
cooperatives may not need to engage in this market

18. Thank you!