Problem and objectives. Non-farm rural diversification is gaining prominence in the debate on rural development since the end of the 1990s. The expansion of non-farm employment and the diversification of incomes are important policy objectives because they offer a solution to the employment and structural problems of a shrinking agricultural sector. Development policies focusing on the rural non-farm sector aim at offering employment options and reducing urban migration. They can contribute to poverty reduction, economic growth and a more equal income distribution. This research is based on a household survey including 240 randomly selected rural households in the regions of Gorenjska and Pomurska in Slovenia as well as Gevgelija and Kumanovo in Macedonia. The study was financed by a research grant of the European Union (EC-PHARE-ACE Project P98-1090-R). An additional qualitative component of the empirical research was done within the DFG-Project HE 1416/10-1. Since empirically based insights on diversification dynamics in transition countries are hardly available, the objective of this research is to contribute to filling this gap. The analysis focuses on diversification strategies and determinants of the decision-making process of rural people in regard to non-farm employment. It aims at formulating policy measures to promote the rural non-farm sector. The methodology combines an inductive and deductive approach with qualitative and quantitative components. For the statistical analysis primarily logistic regression models are applied. Rural non-farm diversification in Slovenia and Macedonia. Rural households in the research area are highly dependent of non-farm incomes which contribute to the household income portfolios with 44% in Slovenia and 49% in Macedonia. The contribution of agricultural incomes increases from the poorest income group to the better-off. While better-off households are relying more on self-employment, wage employment as well as non-earned income components play a more important role for the poor. As expected the poverty risk between the two countries differs: The risk to be poor is about 60% higher in Macedonia than in Slovenia. Rural household incomes in Macedonia are also less equally distributed. Decomposed Ginicoefficients based on non-farm incomes point at their positive effect on the income distribution. Decreasing agricultural incomes lead to distress-push diversification, which is expected as the predominant answer of rural households to the shock of transformation. A low income level in the agricultural sector was found to be the main determinant of the diversification level in both countries. The analysis of diversification strategies indicates that coping strategies as well as risk-minimising strategies prevail. Both these strategies are a result of distress-push dynamics. Accumulation strategies, which point at demand-pull dynamics and entrepreneurship, are less common. Attitudes towards agriculture seem to influence diversification decisions in particular. While attitudes towards non-farm activities are predominantly positive, they vary towards agriculture. Negative attitudes towards agriculture are wide-spread among the younger generation. In the age group from 16 to 25 years the proportion of negative attitudes is high in both countries, but the share in Macedonia with 50% is twice as high as in Slovenia. With regard to norms non-farm activities are often seen as a means to enhance prestige while in regard to agriculture the opinion often was: ‘Young people nowadays feel ashamed to work in agriculture’. Important constraints of diversification in Macedonia are the non-farm labour market, low wages, insecurity and late wage payments. In both countries capital and credit availability are named as the most important reasons for not starting a business in the non-farm sector. As expected, Macedonian households consider themselves more constrained in this regard compared to Slovenian households. In both countries rural people are rather risk-averse and the majority is not willing to take up a loan at all. A lack of skills, knowledge and information are seen as less decisive by the households. According to expert interviews these factors are underrated though in their importance for constraining access to nonfarm employment. The pressure to adapt income strategies is lower in Slovenia in general. When looking at individual employment strategies it becomes apparent that in both countries there is a declining trend of agricultural and combined employment while non-farm employment alone is increasing. In Slovenia the high level of diversification at the household level is stabilising while the structural problems in the agricultural sector persist. In contrast, the level of diversification in Macedonia is expected to further increase even though the willingness to give up agricultural activities altogether is significantly higher than in Slovenia. This leads to the conclusion that in a more favourable economic situation this trend might intensify and thus facilitate structural adjustment in Macedonia. Policy recommendations. A promotion of the rural non-farm sector is an important policy objective as non-farm employment has a positive impact on rural incomes, particularly in poorer households. In the researched areas in Slovenia and Macedonia a positive effect of non-farm incomes on the income distribution has been found. This underlines the importance of the non-farm sector as an essential component of a poverty-oriented rural development policy. It should be stressed though that the implementation of policy measures should focus on sustainability. Mere distress-push dynamics usually go along with overly small micro-businesses which cannot provide a basis for economic growth. Thus demand-pull driven employment dynamics are more suitable for sustainable rural development promotion. To overcome one of the most important constraints in regard to entrepreneurship policy-makers should focus on rural financial markets and provide a conducive framework for affordable longterm credits. To encourage investments it is also necessary to overcome the wide-spread feeling of insecurity and economic stress by building up reliable economic institutions. A general lack of ideas, creativity and entrepreneurial spirit points at the need of training, information centres and advisory services, which could motivate rural households to start non-farm businesses. In the long term rural development policies should aim at overcoming the unfavourable small-scale agricultural structure which is the main cause of distress-pushed diversification – particularly if full-time employment in the nonfarm sector is not available. For this it is essential to support education and knowledge-building, and to offer expert advice. The intention should be to enhance entrepreneurship, creativity and the willingness and ability to take economic risks. Furthermore, the success of any effort to improve rural development policies depends on locally developed strategies, since the heterogeneity of the non-farm sector calls for decentralised political concepts. With these prerequisites the non-farm sector will be able to absorb labour released from agriculture, and the necessary structural adjustment of the agricultural sector can take place.