How can intermediaries improve consumer welfare in developing countries?
Editor’s note: This episode of VoxDevTalks is also available on Spotify, Apple Podcasts, and YouTube.
In this episode of VoxDevTalks, Tim Phillips speaks with Meredith Startz about the complex role of intermediaries—wholesalers, traders, and importers—in moving goods from producers to consumers, especially in low and middle-income countries. Drawing on her research in Nigeria and Uganda, Startz challenges the common policy view that cutting out the ‘middleman’ automatically improves consumer welfare.
Intermediaries as an economic force, not just middlemen
Startz explains that in countries like Nigeria, the wholesale and retail trading sector is not only visible in daily life but is the second largest contributor to GDP after agriculture, accounting for a quarter of total employment. Far from being a marginal part of the economy, these traders are a structural feature of commerce.
She defines the sector as involving “the resale of goods without transformation”, meaning sellers are moving goods they did not manufacture. While economic models often use distance as a proxy for trade costs, Startz emphasises that the reality is more complex: goods pass through multiple hands, each step adding cost and potentially altering access and variety for consumers.
“Goods don’t actually always go from point A to point B directly… If things are taking circuitous routes on their way to consumers and being bought and resold multiple times along the way… costs and potentially markups are being added at each step on that route.”
Why economists have overlooked intermediaries
Historically, economic research has paid less attention to traders than to producers. Startz attributes this to a “subtle, ethical, or even aesthetic feeling about the virtue of making things relative to selling and reselling things”, and a widespread belief that intermediation is “necessarily second order”.
She pushes back, arguing that understanding commerce is essential for both short-term welfare and long-run growth:
“Having smoothly functioning markets that carry price signals… effectively from producers to consumers actually drives the allocation of resources to the right places in the long run.”
Field research in Nigeria: Mapping the chain
In Lagos, Nigeria’s commercial capital, Startz and her team interviewed traders about their upstream and downstream transactions. They discovered that most traders—who are themselves intermediaries—buy from other intermediaries and sell mainly to other traders.
For example, a Lagos trader importing laptops might buy from a wholesaler in Dubai rather than directly from a Chinese manufacturer, then resell mostly to traders elsewhere in Nigeria. Even this limited snapshot involves at least three intermediaries before the good reaches the final buyer.
When asked why they do not buy direct, traders cited the prohibitive fixed costs that cannot be spread over small purchase volumes—including visas, travel, container shipping, and port clearance.
Digital tools, platforms, and the limits of disintermediation
Business-to-business platforms like Alibaba market themselves as disintermediating solutions, but their impact in sub-Saharan Africa has been limited. Startz observes that traders are adopting digital tools, but mainly to support traditional practices—using WhatsApp groups, Facebook, and messaging apps to coordinate with suppliers and customers—rather than replacing intermediated supply chains.
She cautions that removing steps does not guarantee lower consumer prices:
“You can actually end up with higher prices at the end of the chain, even though you have fewer people adding the markup… definitely depends on the context and the reason that the chain gets shorter.”
Moreover, longer chains can sometimes improve welfare by providing better access and variety, even if prices rise.
Lessons from Uganda: Agricultural markets and the Kudu platform
Startz’s research on Uganda focuses on maize markets and a digital platform called Kudu, designed to match buyers and sellers. Although the platform was designed for smallholder farmers, in practice it was nearly exclusively used by the largest farmers, with most activity driven by traders.
The platform reduced the search costs of finding trading partners, but other fixed costs, such as transport, remained significant. As in Nigeria, scale economies meant intermediaries still played a central role.
Unexpectedly, Kudu did improve outcomes for farmers, though indirectly. Price gaps between surplus and deficit regions narrowed, boosting farm-gate prices in surplus areas.
“Those price changes do pass through to farmers, so they're not actually just being captured in trader profits. So, if you're a farmer in a place where prices went up, you earn more from selling your crops locally, even though you were not using the platform and changing where you traded.”
Rethinking policy goals on intermediation
Startz urges policymakers to focus on outcomes, not ideology:
“We need to understand more about why we see intermediaries… and what value are those intermediaries providing… That may or may not reduce the amount of intermediation, but it will at least help them do their jobs in cheaper and better ways, like Kudu did, and hopefully in the long run, that makes everyone better off.”
She warns against the “knee-jerk tendency” to assume less intermediation is always better, advocating for nuanced analysis that considers costs, trust, and market structure.
For researchers interested in this space, Startz’s advice is simple: “The first thing we need is more data” on the wholesale and retail sector, its diversity, and its role across different contexts. Only then can interventions be designed that truly enhance welfare without unintended consequences.