N A T U R A L R E S O U R C E S I N

N A T U R A L R E S O U R C E S I N S T I T U T E
NRI Report No: 2753
Rural Non-Farm Economy
The rural non-farm economy,
livelihoods and their diversification:
Issues and options
by
Junior R. Davis
July 2003
The views expressed in this document are solely those of the authors
and not necessarily those of DFID or the World Bank.
World Bank
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The Rural Non-Farm Economy, livelihoods and
their diversification: Issues and options
REPORT I
by
Junior R. Davis (NRI)
2
Contents
1 INTRODUCTION............................................................................................................ 7
2 WHAT IS THE RURAL NON-FARM ECONOMY? .................................................. 7
2.1 COMPOSITION OF THE RNFE....................................................................................... 8
2.2 WHAT MOTIVATES DIVERSIFICATION INTO THE RNFE? .............................................. 9
3 WHAT DETERMINES ACCESS TO NON-FARM RURAL EMPLOYMENT AND
INCOME? ............................................................................................................................... 11
3.1 DETERMINANTS OF ACCESS TO RNFE AT THE HOUSEHOLD LEVEL ............................ 11
3.1.1 Education.............................................................................................................. 11
3.1.2 Social capital.......................................................................................................... 11
3.1.3 Ethnicity and caste ................................................................................................ 12
3.1.4 Gender dynamics................................................................................................... 13
3.1.5 Credit .................................................................................................................... 13
3.1.6 Physical infrastructure, and information ................................................................ 14
3.2 WIDER FACTORS DETERMINING RNF EMPLOYMENT OPPORTUNITIES ........................ 14
3.2.1 Agricultural development ...................................................................................... 14
3.2.2 Natural resource endowments............................................................................... 15
3.2.3 Economic infrastructure........................................................................................ 15
3.2.4 Levels of public service.......................................................................................... 15
3.2.5 Rural town development ....................................................................................... 15
3.2.6 Business environment............................................................................................ 16
4 ARE THERE RNFE DISTINCTIONS BETWEEN DEVELOPING AND
TRANSITION ECONOMIES?............................................................................................. 16
5 WHAT DO WE KNOW ABOUT POLICIES AND INTERVENTIONS FOR RNFE
GROWTH?............................................................................................................................. 18
5.1 SOME INITIAL QUESTIONS .......................................................................................... 18
5.2 THE DEMAND SIDE..................................................................................................... 18
5.3 SUPPLY SIDE: INFRASTRUCTURE, FINANCE, INFORMATION ........................................ 20
5.4 SUPPLY SIDE: INSTITUTIONS, TRANSACTIONS AND GOVERNANCE .............................. 20
5.5 INTEGRATING SUPPLY AND DEMAND: VALUE CHAINS................................................ 22
5.6 DEVELOPING RURAL PRODUCER ORGANISATIONS ..................................................... 24
5.7 LINKING TO PRSPS AND NATIONAL POLICY-MAKING................................................ 24
5.8 SUMMARY................................................................................................................. 25
6 WHAT COULD DONORS DO TO PROMOTE RNFE GROWTH? ...................... 26
6.1 WHAT DO WE THINK WORKS?.................................................................................... 26
6.2 WHAT CAN DONORS CONTRIBUTE?............................................................................ 27
6.3 WHAT GENERIC STRATEGIES COULD BE USED? .......................................................... 27
6.4 HOW TO INTERVENE IN RESOURCE-POOR, LOW-POTENTIAL AREAS? .......................... 28
6.5 HOW TO DEVELOP PRIVATE SERVICE ACTIVITIES? ..................................................... 29
6.6 WHAT ROLE FOR WAGE EMPLOYMENT PROMOTION? ................................................. 29
6.7 HOW TO ENSURE SUSTAINABILITY? ........................................................................... 30
6.8 HOW DO WE PRIORITISE POLICIES & INTERVENTIONS? .............................................. 30
7 REFERENCES ............................................................................................................... 34
8 APPENDIX 1: A GUIDE TO THE CASES REVIEWED ......................................... 37
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Acronyms and abbreviations
CEEC Central and Eastern European Countries
CIS Commonwealth of Independent States
DFID Department for International Development, UK
EU European Union
FAO UN Food and Agriculture Organisation
GDP Gross Domestic Product
GTZ Deutsche Gesellschaft für Technische Zusammenarbeit GmbH (German Society
for Technical Cooperation)
HH Household
HHH Head of Household
IFAD International Fund for Agricultural Development
IGA Income generating activity
IHS Integrated Household Survey
IUDD Infrastructure and Urban Development Department of DFID
LAC Latin American Countries (South and Central America)
LDC Less Developed Countries
LED Local Economic Development
M&E Monitoring and evaluation
MSME Micro, small and medium sized enterprise
NGO Non-governmental organisation
NRI Natural Resources Institute
NSS National Statistical Service
PRA Participatory rural appraisal
PRSP Poverty reduction strategy paper
PRP DFID, RLD Policy Research Programme
Q&A Question and Answer
RLD Rural Livelihoods Department of DFID
RIMISP The International Network of Methodology for the Investigation of Systems of
Produccio'n (RIMISP), South America.
RNF Rural non-farm
RNFE Rural non-farm economy
SLA Sustainable Livelihoods Approaches
SME Small and medium sized enterprise
SWOT Strengths, Weaknesses, Opportunities, and Threats
WB World Bank
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Acknowledgements
This document was commissioned by the UK Department for International Development’s
(DFID’s) Rural Livelihoods Department. It was, edited and co-authored by Dr. Junior Davis
(NRI). The report has been compiled in close collaboration with Felicity Proctor (DFID/World
Bank), Dr. Dirk Bezemer, Mr Tiago Wandschneider, Dr. Steve Wiggins, and a range of
individuals and organisations that have contributed their expertise in promoting rural livelihood
diversification and the rural non-farm economy in developing and transition countries.
I would particularly like to thank a number of colleagues for the time and effort devoted to
drafting and commenting on core sections of the report. These include: Professor Paul Hare
(Heriot-Watt University), Jim Harvey (DFID), Donal Brown (DFID), Andrew Keith (DFID) and
Dr. Gerd Fleischer (GTZ).
While commissioned by DFID, and drawing on the experience of other agencies, this report does
not represent DFID’s thinking and policy or that of other agencies. Full responsibility lies with
the author.
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Executive Summary
This report summarises the findings from more than 55 studies of rural economies and the rural
non-farm economy (RNFE), most of them financed by DFID. It relates these to the existing
understanding of the RNFE in the literature and tries to draw out policy implications.
In brief it reports that:
· The RNFE is an important part of the rural economy in almost every case, providing
between 40 and 60% of incomes and jobs in rural areas;
· Much of RNF activity arises in trading and in the processing of agricultural and other
primary products. Rural manufacturing tends to comprise only a small part of the RNFE;
· Much of the RNFE provides goods and services for the local, rural economy. Little of it is
tradable and earns incomes outside of the immediate rural context. In large part, then, its
growth depends on that of other rural activities, above all, agriculture;
· The RNFE may be seen as divided into much activity that is small-scale, uses little capital,
and which is low productivity and offers low returns, often little better than farm labouring;
and activities that operate at larger scale, with more capital investment, and generating
better returns to labour than can be had in most kinds of farming;
· Since the former category is accessible to the rural poor, the RNFE is essential in mitigating
poverty and preventing destitution, but it is less clear that it can eradicate poverty.
Moreover, since it is the better-off who can generally access the well-rewarded RNF
activities, the RNFE may exacerbate inequalities. But much depends on the ability of RNF
enterprises to create jobs and so distribute the benefits across rural societies. At the same
time, if some rural non-farm activities provide support to growth sectors (e.g. in the case of
agriculture, input supply, equipment manufacturing and distribution, transport, repairs, etc)
then it may indirectly play an important role in poverty alleviation by enabling poverty
reduction elsewhere (in this case in agriculture).
Policy implications include:
· The RNFE cannot be expected, in most cases, to drive the rural economy. There may
however be niche markets to exploit; such opportunities would benefit from targeted
interventions such as reduction of import duties, corporate taxes, and administrative and
bureaucratic requirements; improvement in communications and in transport
infrastructure; and provision of credit, extension and advice services. None of this is
entir