Sugarcane Outgrowers in Ethiopia: “Forced” to Remain Poor?

Contract farming is often seen as a panacea for many of the challenges faced by agricultural production in developing countries. Given the large heterogeneity of contract farming arrangements, it is debatable whether all kinds of contract farming arrangements offer benefits to participating smallholders. Nonetheless, many donor agencies, nongovernmental organizations, and governments of developing countries are increasingly pushing for contract farming and outgrower schemes as an instrument to commercialize small-scale farming. Their desire for such arrangements is further reinforced by the recent rush for large-scale agricultural land acquisition in most developing countries, often described as “land grabbing,” because contract farming and outgrower schemes can result in the same advantages as large-scale farming, but avoid its main drawback—namely the displacement of the current land-users. Using data from the oldest and some more recently established sugarcane outgrower schemes in Ethiopia, this paper examines the effects of compulsory participation in sugarcane outgrower production on total household income and asset stocks. Because outgrowers and non-outgrowers may have some differences prior to joining sugarcane outgrower schemes, we use genetic matching and propensity score matching to make the two groups comparable based on their observable characteristics. Our results indicate that compulsory participation in an outgrower scheme significantly reduces the income and asset stocks of outgrowers who contributed irrigated land to the outgrower scheme, while the effect is insignificant for outgrowers who contributed rain-fed land. We provide several explanations and discuss policy implications.