LITERATURE REVIEW (doc.

Empirical 2)

Farmers cooperatives Union and their empowering role for smallholder farmers

The historical role of farmers cooperatives worldwide has been pivotal in providing market
access, credit, and information to producers/farmers, contributing significant economic returns
for independent farmers (Mamo, 2021). These member-owned businesses aggregate the market
power of individuals who might otherwise achieve little, offering prospects out of poverty and
powerlessness. Serving as economic enterprises and self-help organizations, cooperatives play a
vital role in uplifting the socio-economic conditions of their members and local communities.
They advocate common goals, enhance participation in value chains, and shield producers from
unfair pricing, while also facilitating networking and partnerships with other agencies (Argaw,
2019) .

Generally, Barker (1989), outlines three key factors underlying cooperative theory: bargaining
power, marketing efficiencies, and market investment, all of which foster cooperation.

In Ethiopia, the government has actively promoted agricultural cooperatives to engage

smallholders in the market, with these cooperatives assumed to significantly benefit member
farming communities through value chain development and market linkage (Bernard et al.,
2008). At present, it is widely believed that agricultural cooperatives in the country are
significantly instrumental in ensuring benefits for the rural farming community through effective
value chain development and market linkage. For example, in the SNNPR, the WFP-P4P
program purchases agricultural products from market cooperatives, thereby enhancing members'
bargaining power and ensuring the benefits derived from their produce. This is achieved by
streamlining the lengthy and inefficient chain, the substantial business volume generated by the
program, and stimulating the market by securing domestic purchases of grain, which would have
otherwise been imported as relief or emergency support (Argaw, 2019).

The linking agricultural cooperatives have an optimistic impact on the welfare of smallholder
farmers. Still, the analysis also indicates that agricultural cooperative membership has a mixed
impact on welfare among its members (Ahmed & Mesfin, 2017). The impact of modern
cooperatives has speedily improved and certainly paid to community development, some burden
and trials still remain being fixed in the Socio-economic sceneries and there are gradual benefits
for the members of the cooperatives in the present Ethiopia and the higher communal converts
important that earns policymakers’ care on the development of the cooperatives (Mojo et al.,
2018).

Development of Co-operative in Ethiopia has been strongly disposed that gives the motivation to
change inputs of the agricultural farmers into commercialization of their products. Hence, the
effect of commercialization on farmer welfare is still questionable. Both the institutional
situation and the internal regulations have the struggle to adjusting for changes in the economic
conditions of the farmers and members of the cooperative societies (Tefera et al., 2017).

Empirical (doc. Empirical 2)

Farmers’ cooperative Union in Economic Development

Cooperative Union may influence the economic performance of their members. This has mostly
been discussed for developing countries. A large number of empirical studies in such countries
have been devoted to the impact of farmers’ membership of a cooperative on the farms’
productivity (Candemir et al., 2021)These studies emphasize the positive role of joining a
cooperative on members’ economic sustainability. The impact of cooperative membership may
vary depending on farm size. They also show that large-scale farms gain from being a
cooperative member since they can enjoy scale economies in processing and marketing
activities. This effect is demonstrated by Liu et al. (2019) who find a larger positive impact of
cooperatives on farm income for larger farms. In developed countries, the literature gives
evidence of a wider economic impact of cooperatives: impacts for non-members (yardstick
effects), and a mixed effect on quality since quality requirements are higher worldwide

Performance of farmers’ cooperative union in Ethiopia

Theoretically, farmers cooperatives are said to play an immense role in reducing poverty among
smallholder farmers by correcting market failure. They are established to make smallholder
farmers capable while confronting with the prevailing higher marketing transaction costs, limited
access of finance and input markets, and risk of price fluctuations (Ton et al., 2007). However,
some believe that cooperatives may bring about contradictive outcomes on the welfare of the
farmers for a number of reasons (Ruben & Heras, 2012). Hence, the positive or adverse role of
the cooperatives can only be confirmed using empirical studies. To this end, in Ethiopia, various
empirical works were undertaken to show the practical role of agricultural cooperatives in
different places, which came up with different results.

Kodama (2009) has shown that Farmers cooperatives can have a wider effect to the extent that
their spillover effects provide benefit for non-members as well. He has empirically indicated
that, by increasing competition, the activities of coffee cooperatives in Ethiopia have generally
increased the prices paid to both member and nonmember farmers. Besides, with the existence of
the cooperatives, the export volume of fair-trade coffee has also increased and has helped buffer
fair trade coffee farmers from international price fluctuations.

In fact, in a given place, different types of cooperatives can have different levels of performance
due to different reasons. Ruben & Heras (2012)have compared the activities of coffee
cooperatives in Sidama zone based on their level of social capital and governance structure.
Their findings indicate that the cooperatives of Kege and Magerra present significantly lower
levels of social capital shared by their members compared to the better performing cooperative
societies of Waycho, Shoye and Goyda. This is because the former is situated close to the main
road and near to the Woreda township whereas the latter are located at the considerable
geographic distance. Having better social capital means better access to markets and information,
and proximity to road reduces the external transaction costs.

With regard to the differences in governance structure, they have shown that in Kege and
Magerra cooperatives, the participation in assembly meetings and the coffee deliveries by
members are indeed significantly lower. Consequently, cooperative profits and traded volumes
are highly dependent on members’ commitment for devoting time and resources to coffee
production and delivering coffee to the cooperative society. Moreover, Kege and Magerra
cooperatives present a very low and distant feelings of ownership regarding their organization,
whereas in the other three cooperatives members instead share strong feelings of opposition
against the committee that are reflected in active participation in the assemblies and stronger
involvement in cooperative affairs. This is further reinforced by the fact that Waycho, Shoye and
Goyda cooperatives are eligible for bank loans and can thus provide early payments for coffee
deliveries (Ruben & Heras, 2012).

So far, we have presented more about the performance of the cooperatives in terms of their own
efficiency or strength. However, it is also crucial to see the impact of these organizations on the
farmers’ livelihood. As far as our knowledge, in Ethiopia, it is only Abate et al. (2014) who have
undertaken a study related to this specific aspect (impact assessment). Abate et al. (2014) , in
their investigation of the impact of agricultural cooperatives on small holders’ technical
efficiency in Ethiopia, have shown that agricultural cooperatives are effective in providing
support services that significantly contribute to members’ technical efficiency.

However, this result does not necessarily imply that cooperatives improve profitability of
member farmers since their study focuses on efficiency of the use of inputs, which does not
consider the feature of pricing of final outputs in particular and the interplay of the market in
general. In other words, there may be a situation where farmers are technically efficient but they
face unfair price for their final output due to market failure. In consideration of this gap, this
inquiry will give much focus towards the impact of the cooperatives on profitability of farmers,
giving due attention to the interplay of the market. In addition, in this study, an attempt will be
made to identify the major marketing challenges facing the market oriented agricultural
cooperatives in general and the farmers in particular.

Challenges face farmers’ cooperative Union in Ethiopia

Farmers cooperatives in Ethiopia have encountered various challenges, including financial

limitations, transportation issues, lack of skilled labor, and delays in the provision of essential
supplies like fertilizer and improved seeds (Wayessa et al., 2021). Presently, the Ethiopian
government is actively promoting and backing the formation of cooperatives across various
sectors of the country's economy. Consequently, the cooperative movements are expanding,
diversifying, and rapidly growing. However, like to other developing nations, Ethiopia's
cooperative sector also challenged with organizational and structural, resource, political and
legal, as well as monitoring and evaluation difficulties.

Organizational and Structural challenges

Numerous cooperatives in Ethiopia operate within the agricultural sector and possess few
resources. Regrettably, the government lacks sufficient staff and resources to carry out initiatives
aimed at raising awareness(Negarit Gazta , 1998). Cooperative organizational hierarchy
comprises three levels the General Assembly, management committee, and employees, each with
distinct duties and responsibilities outlined in the cooperatives' by-laws. The management
committee, appointed by the general assembly, oversees operational policies and supervises
cooperative business performance.

Resources and Capacity Challenges

Most cooperatives often encounter financial challenges when endeavoring to broaden their
business operations and recruit professionals, aiming to enhance their effectiveness (Wayessa et
al., 2021). Sufficient capital stands as a fundamental requirement for robust cooperative business
operations. Ownership perspective distinguishes between two types of capital: equity and debt.
Members furnish equity capital as owners of the business, denoted as net worth in the balance
sheet. This equity represents the owners' stake in the business, obtained when total liabilities are
deducted from total assets. In an ideal scenario, cooperative members should supply capital to
finance its activities. Given that the cooperative's purpose is to provide benefits to its members,
each member ought to contribute capital in direct correlation to their utilization of the
cooperative's services.

Lack of Sense of ownership:

In contrast to other types of businesses, cooperatives are governed, operated, and possessed by
their users. In order to address prevalent issues, members must initially promote a sense of
ownership and develop economic stake in their organizations. When a member possesses a
strong sense of ownership, they actively engage in the cooperative's business activities through
efficient management, participation in meetings, and related activities(Debeb & Haile, 2016).

Lack of Commitment of Members in their Cooperatives

In order for any business to prosper, the primary catalyst is the unwavering dedication of its
members to loyally serve their business. similar to other business establishments, the success of
farmers cooperatives hinges on the allegiance of their members to their organizations. However,
when examining the history of the cooperative movement in Ethiopia, a significant shadow is
cast, particularly during the military regime, with respect to loyalty. During that era, many
members were compelled to join cooperatives without their own volition, enforced by the
government. Consequently, numerous members did not reap the benefits of their
cooperatives(Debeb & Haile, 2016). This tainted history has led current members to harbor
suspicions that the assets of their cooperatives have been misused by a select few.

Inaccessibility to credit and slow response to the credit request:

Adequate capital is one of the fundamental requisites for the sound business operation of
cooperatives business. From the stand point of ownership, there are two kinds of capital: equity
and debt capital. Equity capital is provided by the members’ owners of the business. In the
balance sheet it is referred to as the net worth. It is the equity that the owners have in the
business the Birr left when the total liabilities are subtracted from the total assets. Ideally the
members of cooperatives should provide the capital to finances its operations. Since the
cooperatives exist to deliver benefits to its members, each member should contribute to capital in
direct proportion to usage of services the cooperative provides(Debeb & Haile, 2016).

Political and Legal challenges

The concept of the people to accept cooperatives as an economic alternative was affected due to
the political interference in the affairs of cooperatives and delay in settlement of disputes. The
cooperative proclamation gives clear direction and guidelines to run a cooperative as an
autonomous association. But it is not reached to the people fully yet.

Monitoring and Evaluation challenges

In Ethiopia with predominantly peasant, underdeveloped infrastructure, very limited government

capacity, cooperative could have a very valuable option to resort. However, Abate et al.,
(2014)revealed that Ethiopia experience with valuable rural organization such as agricultural
cooperatives has become a missed opportunity. Most studies in Ethiopia have shown that
cooperatives were a threat, source of insecurity and burden. This was witnessed by the response
of most cooperative members following the announcement of the mixed economy and the
ultimate overthrow of the Derg regime. In connection to this, Abate et al., (2014) revealed that
when the military regime came to an end, several thousands of rural and urban based
cooperatives of various types with multi-million memberships were established across the
country. Not surprisingly, such societies were short lived since they were established in
contravention of the universally accepted values and principles of cooperatives. Also, Abate &
Debeb (2019) pointed out that only a few weeks after the Ethiopian government announced the
mixed economic policy, a greater majority of cooperatives were dissolved by their own
members. just after the 1974 revolution, the military regime enacted proclamation No. 71/1975
to prove the nationalization of rural lands. The rural land reform policy in line with the socialist
line of development triggered the establishment of cooperatives

In the study of cooperative movement in Ethiopia at early days, (Mohammed, 2015) emphasized
that the state was committed to expand collective agriculture. This commitment manifested by
the material and technical investment accompanied by educational programs designed to raise
the social and political consciousness of the peasants. State investment in agriculture designed to
modernize the methods of agricultural production is likely to attract those peasants who are
questioning about the success of collective production.

Legesse (2021) studied the performances of farmers cooperatives and members decision to use
as marketing agents. On his findings he discovered that farmers’ usage of the cooperative as a
marketing agent for farm produces increase if the cooperatives provide them with different
additional services such as dividend payment and supplying of inputs (fertilizer, chemicals, feed
and seed).

Economic Challenges

Despite their above-mentioned economic advantages, cooperatives have long been criticized in
the economic literature. They have particularly been criticized in terms of their poor economic
performance (Hirsch et al., 2020). This is linked to the fact that agricultural cooperatives have
limited powers to restrict the quantity supplied by farmers. In the case of imperfect competition,
the cooperative tends to oversupply since individual farmers do not bear the full marginal profit
loss when they increase their production level (instead, they share it at the cooperative level). A
crucial weakness is that overproduction may arise when the cooperative is a price maker in the
final market. Open membership in agricultural cooperatives is thus viewed as a deficiency,
which reduces the competitive power of cooperatives because of the adverse selection problem.
More precisely, the output-pooling mechanism in cooperatives may increase the number of low-
quality producers who benefit from average quality level (Saitone & Sexton, 2009). However,
this negative effect of open memberships is mitigated by the competitive yardstick effect.

Mérel et al. (2015)investigate the trade-off between these two effects. They compare situations
of open membership and closed membership in a differentiated product setup. They show that in
the open membership case, the farmers benefit from the risk-reducing advantage of the
cooperative and from higher product prices. Finally, the horizon problem in cooperatives implies
that they may suffer from underinvestment issues related to intergenerational conflicts
(Giannakas et al., 2016). In the case of an investment that becomes profitable in the long run,
older farmers tend to disagree with younger members about the implementation of such
investment, because the former are close to exiting farming activities, meaning that they would
not benefit from the realized investment. Therefore, in the context of innovative investment, the
horizon problem may limit the cooperative’s performance. This problem is directly linked to
non-transferability issues in the cooperatives, in the sense that the members of cooperatives
cannot easily liquidate their previous investment if they withdraw from the cooperative