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The rural non-farm sector has gained increasing importance over the past decades. In much of Africa, this has had limited effect on the poor, who face entry barriers to non-farm activities. As a result, the nonfarm economy does not reduce poverty but increases inequality instead. Some, but not all, evidence for Ethiopia, however, contradicts this general pattern: the poor do participate in the nonfarm economy, but apparently this does not lift them out of poverty. The present paper analyses the relation between non-farm income and inequality in Oromia, the largest state of Ethiopia, where most households rely on rainfed agriculture for their livelihood. The traditional development approach of providing technology and infrastructure to increase agricultural production has not succeeded in curbing the trend of increasing poverty, and alternative sources of productive employment must be sought in order to support the additional workforce created by population growth. The question is whether the focus of policy should be on improving access of the poor to existing nonfarm activities or on improving the profitability of these activities. We use two complementary methodologies to answer this question: i) econometric estimates of household participation in the non-farm sector; and ii) Gini decomposition of income inequality by sou rce. The results indicate that general growth in the non-farm sector will benefit the poor and that no targeted measures ro increase access of the poor are required.


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