The Hidden Middle: How SMEs Are Driving Value Chain Transformation in SSA

Debate around how to increase production and consumption of nutrient-dense foods like fruits and vegetables and animal products in Africa south of the Sahara has long centered on overcoming constraints such as high cost. According to a new IFPRI working paper, however, this focus may ignore how grassroots efforts, particularly among small and medium-sized enterprises (SMEs) and midstream value chain actors, are in fact driving substantial growth in both supply of and demand for these more nutritious foods. By better understanding this growth in the so-called “hidden middle,” policymakers and development practitioners can cull important policy lessons to speed value chain transformation even further.

The study first provides analysis of fruits and vegetables and animal products across SSA as a whole. It then examines the grassroots “meso booms” in domestic markets for these products in several countries in SSA: fish in Nigeria, dairy in Ethiopia, and vegetables in Tanzania, Zambia, and Ethiopia.

As a whole, SSA is experiencing a contradiction when it comes to the supply and consumption of nutrient-dense foods. While total domestic supply of fruits and vegetables and animal products has increased significantly over the past decade, per capita supply remains significantly below the levels needed for a healthy diet for the majority of studied food products. This adequacy of supply has seen little change since 2010. The cause behind the contradiction? SSA’s rapid growth in healthy food production has not yet managed to keep pace with population growth.

Underlying these broad macro trends, however, the authors identify another trend: “meso booms” consisting of dynamic growth in supply spurred by midstream value chain actors and SMEs without strong government subsidization.

In Nigeria’s fish value chain, domestic production increased four-fold between 2010 and 2020. The authors found that in three of the country’s major aquaculture and capture fishery clusters, increased output seems to have been supported by five factors: good enabling conditions for fish production, good connection via roadways to major cities and wholesale markets, dynamic growth in and transformation in fish value chains, large representation of SMEs in the value chain, and ability to supply domestic urban markets.

The identified value chain transformation has been driven by growth in wholesalers, processors, and transportation in the past decade. As these midstream actors have been able to take advantage of innovations like cold storage technologies and third-party transport logistics, they have helped better connect producers with urban and rural retail and wholesale markets and other collection points.  

Ethiopia’s dairy sector has seen a similar boom in the past decade, coming largely in response to the rapid population growth and rising incomes in the country’s capital of Addis Ababa. SMEs have dominated this expansion in milk farming, with medium farms responsible for the majority of the increased yields. The authors found that these medium farms are more likely to invest in innovations like cross-bred animals, artificial insemination, commercial feed, and extension services – all of which contribute to increased productivity. Ethiopia has also seen growth and transformation in its midstream dairy value chains, with a tripling in the number of milk processing firms in the last decade.

In Tanzania, production of fruits and vegetables has been substantial over the past decade and has managed to keep pace with and outpace population growth for vegetables and fruit, respectively. Domestic consumption has also burgeoned, spurring farmers to enter the value chain at rapid rates in order to meet the increased demand. There has also been significant rise in clusters of fruit and vegetable production, which are linked by lengthening and modernized supply chains to both urban and rural markets. The growth of these supply chains equals growth in midstream value chain actors such as wholesalers and retailers.  

Zambia and Ethiopia have seen similar growth in SMEs entering commercial horticultural value chains over the past decade, as well as similar growth and transformation of midstream value chain actors. The authors found that fruit and vegetable farmers in Zambia have increased their use of irrigation, fertilizers, and improved seed varieties, while Ethiopian farmers have invested in pump irrigation, improved seed varieties and seedlings, fertilizers, and pesticides. These investments support increased production to meet growing demand, particularly from urban areas. Results also showed that many of these SMEs’ entry into the value chains in both countries was funded by non-farm rural employment and remittances from relatives and friends who had migrated, as well as by private input suppliers. Interesting, neither the government nor donors played a major role in the expansion of these lucrative value chains in terms of subsidization or extension services. Government action was key, however, in investing in rural electrification and roads.

The authors conclude with two important policy implications.

1. Policymakers and development practitioners need to acknowledge the grassroots expansion of fruit and vegetable and animal product value chains in order to learn from its success. This “hidden middle”, driven in large part by SMEs, could provide important information for encouraging and enabling similar expansion of healthy food production throughout SSA.
2. Direct government and NGO action may not be necessary for the growth and transformation of lucrative value chains like the ones studied here. None of the production clusters or midstream value chain nodes examined were created or managed by government agencies or NGO programs. However, government investment in infrastructure like roads and electrification is critical in enabling the spontaneous rise of such clusters.