MIDI does not imply any sort of actual quality. It doesn't even imply instruments. MIDI is a way for enabled instruments and computers to communicate, and sequence tracks together. It stands for "Musical Instrument Digital Interface", and its nothing more than that, an interface. So yes, Mario may have used MIDI instruments, and a MIDI interface on a computer to make it's soundtrack. What the quality is dependent on is the samples used by the MIDI program Nintendo uses. Use cruddy samples and you have cruddy music. Use nice samples and you have nice music.
MIDI is really great for video games, because you can build algorithms to change one MIDI file in real time. So, like in Wind Waker for instance, when you're sailing it plays a song in a major key, however it starts to storm, and the song switches to the relative minor. The composer only had to track the song once, and then can set up a program that allows the MIDI file to switch keys on the fly. Or you could build it up to include new tracks depending on certain situations, like "moblin appears, add track 3", or remove tracks "enter cave, remove track 1". Better yet, you can even tell it to switch what sample bank its using on the fly. So you build one track, but because of the flexibility of MIDI sequencing it can apply to as many situations as you need it to.
So here's the example. Link is out in the field, so the game starts playing the overworld music. It starts raining, so the game is able to switch that same track it has loaded already to the relative minor. A moblin runs up, on this same track the composer added a horn track, that would add some intensity to the same overworld track. It stops raining while you fight the moblin so the game switches the same track back to the initial major key. You kill the moblin and the horns drop out, and it turns to night, where the game adds and subtracts a few instruments as per the composer's arrangement. So lets say its drops a "cello" track, adds some flutes, and switches the bass drum part to be played on a bassoon.
This whole time the game only had one track loaded, but made minor changes to that one track, depending on the situation. As opposed to a straight orchestrated track, which can only sound one way forever.
I HOPE they use midi!
tl;dr MIDI is an interface, not an instrument set
read this at your leisure to understand better