Middlemen in Value Chains: an Enabling or Constraining Institution?

Abstract: All around the world, many smallholders are striving to comply with the increasingly stringent quality requirements. Whether they are successful depends to a large extent on the way production and distribution is coordinated along the value chain. Different institutional arrangements, such as contract farming, vertical integration and producer organizations, have emerged in agrifood chains to successfully address these new challenges. There are, however, still many chains in Sub-Saharan Africa where middlemen play an important role in linking farmers to traders and final market. However, middlemen in developing countries are a much debated institution. We conducted a survey in the fall of 2010 among 345 potato growers in the Rift Valley region of Ethiopia, where potato is the dominant crop and middlemen are highly involved in potato marketing. Using propensity score matching, we analyse the impact of this institution on farmers’ income and the implication for smallholders’ commercialisation in the Ethiopian context, where middlemen dominate trading relations in the potato market. Although the literature emphasises the positive contribution of middlemen, our findings show that farmers who rely on middlemen are economically inefficient from the welfare perspective. The main reason for farmers’ use of middlemen appears to be ethnic ties. We conclude that ethnically-based trading relations may lead to economic inefficiency due to lock-in effects.