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To what extent can co‐operatives strengthen rural development in sub‐Saharan Africa? This paper explores the development of agricultural co‐operatives in Ethiopia, particularly the changes in economic functions. Co‐operative development in Ethiopia has been strongly influenced by various political regimes. Based on expert interviews and a literature review, we explore the factors that influence a shift in economic functions from provision of inputs to commercialization of farm products. Our review shows that the impact of commercialization on farmer welfare is still inconclusive. Both the institutional environment and the internal governance structure have a hard time adjusting to changing economic conditions. © 2016 The Authors Journal of International Development Published by John Wiley & Sons Ltd.