The Health of Farmer-Based Organizations in Ghana:

Organizational Diagnostics and Governance Implications

 

Gian Nicola Francesconi (CIAT) and Fleur Wouterse (IFPRI)

Motivation Agricultural cooperatives are increasingly

recognized as key organizations for the development of agribusiness and smallholder value chain integration in developing countries.

Cooperatives are expected to play a particularly important role in rural Africa where rural institutions and infrastructure remain underdeveloped

Although agricultural cooperatives exist throughout Africa and have received some form of donor and government support, their contribution to the development of agribusiness has remained limited.

Many cooperatives appear to be dormant or unable to mobilize collective action

Motivation Clearly, having in place the organizational

infrastructure does not automatically imply collective action.

There is need to open the cooperative black box and assess the level, extent and intensity of the collective domain.

This study uses new organizational level data for Ghana to better understand what determines cooperative health and how and why it may be compromised.

Theory The cooperative life cycle framework” specifies that the “health” of a cooperative evolves according to a life cycle:

Theory • P1: Economic justification: Farmers need an

economic justification to self-organize and collective action is often considered as an effective means to reduce transaction costs as it enables the exploitation of important economies of scale in accessing markets.

• Design: Cooperatives are typically established on the basis of equity principles, property rights tend to be vaguely defined, allowing for patronage or the support that a member bestows upon another given differential usage of the services provided.

• P2: a period of membership growth and good performance due to the ability to take advantage of economies of scale and scope.

Theory P3: FBOs tend to experience increased

heterogeneity in members’ socio-economic preferences. Although this process contributes to increased risk-sharing, under vaguely defined property rights it can also give rise to the free-rider problem.

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Theory But what constitutes cooperative health? The success of FBOs in developing countries

appears to depend on the co-existence of systems for risk-sharing and efficiency-enhancement.

A key function of cooperatives is to reduce on-farm risk. Farmers seek to mitigate uncertainty at the level of the farm by transferring risk to the organization in such a way as to spread it among the members

In cooperatives, risk-sharing increases with the degree of heterogeneity in members’ risk preferences.

To provide members with market access and reduce transaction costs, cooperatives need to effectuate investments that centralize the flow of in- and outputs (for example warehouses)

Theory

But the existence of assets in organizations where social capital is low can result in agency-cost problems due to elite capture and leading to decreased opportunities for risk sharing.

We thus define cooperative health as the alignment of heterogeneity in risk preferences and the existence of a collective asset.

Setting Agriculture is the dominant sector in Ghana’s

economy. The sector employs about 60 percent of the

economically active population and contributes about two-thirds of foreign exchange earnings.

Staples—roots and tubers—contribute about two-thirds of agricultural GDP. Cocoa, the largest foreign exchange earner in the sector, contributes 12–13 percent.

Ghana's agricultural sector is characterized by smallholdings and traditional farming practices.

Three-fourths of farm holdings are less than three hectares

Production systems and technology are mainly traditional, based on intercropping and use of simple implements and hand tools with little use of modern inputs

Crop production is largely rain fed

Setting Favorable weather conditions and world market

prices for cocoa have contributed to recent rapid growth in agriculture with the bulk of this growth coming from area expansion.

Productivity in the food crops that smallholders dominate has been rather variable and stagnant in many areas.

Access to input and output markets has been identified as a key constraint to smallholder development

Ghana has been trying to transform its agricultural sector and improve the lot of smallholders

Transformative goals for small farmers include increased participation in markets and higher productivity, enabled in part by better access to and use of input and credit markets.

Farmer-Based Organizations in Ghana One strategy to reduce market access constraints

for smallholders has been the promotion of Farmer-Based Organizations (FBOs)

FBOs are organizations owned by the individuals using their services.

FBOs can thus be considered as patron-owned (or user-owned) cooperatives as opposed to investor-owned firms.

In 2010 there were approximately 10,000 grass-root (or primary) FBOs in Ghana involving about 350,000 farm households

One incentive scheme to promote rural development was the agricultural program of the Millennium Development Authority (MiDA).

Data Primary data on 500 FBOs collected in 2010. Randomly selected from a list compiled by the

Ministry of Food and Agriculture (MoFA), which included only organizations at the village level (i.e. no unions, federations or other forms of apex organizations).

Six (out of ten) administrative regions, and all three main agro-ecological zones of the country (coastal, rainforest, sahelian).

Semi-structured interviews were conducted with three board members (president, secretary and treasurer) from each sampled organization.

Risky-dictator games were played to assess the heterogeneity in risk-preferences and thus the potential for risk sharing.

Methods Conform our theory, we define two indicators of

cooperative health: 1. the degree of heterogeneity in risk preferences2. the existence of a collective asset

Using cluster analysis we can categorize FBOs on the basis of their health and distinguish four types

N=500 Homogeneous risk preferences

Heterogeneous risk preferences

Total

Collective Asset

15% (type 3a) 11% (type 2) 26%

No collective Asset

39% (type 1) 35% (type 3b) 74%

Total 54% 46% 100%

Findings Most FBOs (39 percent) are of type 1

(homogenous risk preferences and no collective asset) while many others FBOs (35 percent) fall in typology 3b: no collective asset and heterogeneous risk preferences. The rest are either of type 3a (15 percent) or type 2 (11 percent).

Given that typology 2 is supposed to characterize healthy organizations i.e. those that provide their members with both risk-sharing (due to heterogeneous risk preferences) and cost-saving (due to the collective asset) services, we can infer that the health of sampled FBOs is generally poor.

MethodsThe health types are correlated with three performance indicators

1. the participation of an FBO in the MiDA program (external incentives)

2. the growth in membership recorded by an FBO since establishment and

3. the type of problem predominantly faced by an FBO (access-barriers to markets or lack of internal cohesion).

Findings (1) Type 1 FBOs are significantly more likely

to participate in the MiDA program Organizational health lower in those

FBOs that lack an economic justification

No. of observations

: 500

Participation in MiDA

Aggregate participation for other typologies

t-test

Type 1 0.49 (0.50) 0.37 (0.48) 2.06**Type 2 0.05 (0.22) 0.12 (0.32) -1.81*Type 3a 0.09 (0.28) 0.16 (0.36) -1.66*Type 3b 0.37 (0.49) 0.35 (0.48) 0.34

Findings (2) Type 2 FBOs grew significantly faster in

terms of membership compared to other types i.e. healthier FBOs grow faster

No. of observation

s: 500

Membership growth

Aggregate growth for

other typologies

t-test

Type 1 1.14 (2.27) 1.07 (1.96) 0.32Type 2 1.68 (2.38) 1.03 (2.04) 2.15**Type 3a 0.81 (1.69) 1.15 (2.14) -1.26Type 3b 1.00 (1.90) 1.15 (2.18) -0.77

Findings (3) FBOs of type 3a and 3b are,

respectively, significantly less and more likely to be confronted with problems of market-access.

No. of observations:

500

Lack of internal cohesion

Barriers to markets

t-test

Type 1 0.42 (0.50) 0.39 (0.49) 0.57Type 2 0.10 (0.30) 0.11 (0.31) -0.28Type 3a 0.21 (0.41) 0.14 (0.34) 1.68*Type 3b 0.27 (0.45) 0.37 (0.48) -1.65*

Findings The vast majority of the FBOs in our sample

appear to be characterized by sub-optimal health This low health may explain why FBOs are often

unable to provide their member-farmers with services that would enhance their participation in markets.

FBOs have the potential to simultaneously provide risk-sharing and efficiency-enhancing benefits to Ghanaian farmers.

The realization of this potential may however require an important shift in the way FBOs are governed.

Although external incentives can promote the establishment of FBOs, for FBOs to perform an effort is required to prevent misalignment of heterogeneity in members’ risk preferences and the effectuation of collective investments.

Implications for governance We find that when external incentives may have

motivated farmers to self-organise, cooperative health is generally low.

FBOs appear to either maximise risk-sharing between members while failing to mobilize resources for collective investments that should help member-farmers participate in markets or favour efficiency-enhancing investments while failing to foster the necessary risk-sharing mechanisms to maintain internal cohesion.

Only a few “healthy” organisations appear to be able to “walk the line” or align the heterogeneity in members’ risk preferences with the level of collective investments.