The rural non-farm sector has traditionally been viewed as a low-productivity sector which produces low quality goods. It is often expected to wither away as a country develops. Recent years have seen a shift away from this position towards recognition that the rural non-farm sector can, and often does, contribute to economic growth, rural employment, poverty reduction, and a more spatially balanced population distribution. This paper reviews the literature on the conceptual and empirical underpinnings of this more recent perspective, focussing on the experience in developing countries. The paper documents the size and heterogeneity of the sector, pointing to evidence that in many countries the sector is expanding rather than declining. The issues associated with measuring the sector's economic contribution are discussed, followed by empirical assessments for several countries and regions. The distributional impact of non-farm earnings is examined and it is found that a pro-poor impact, while by no means inevitable, can be considerable. The sector's trajectory over time, in different settings, is reviewed and the scope for, and experience of, various policy interventions is discussed. © 2001 Elsevier Science B. V. All rights reserved.