Advertisement

Diversification into Non-Farm Activities in Ethiopia: Determinants and Income Distribution Effects. Application of a Two-Part and Regression Based Inequality Decomposition

  • Gutu Gutema
Chapter
Part of the Economic Studies in Inequality, Social Exclusion and Well-Being book series (EIAP)

Abstract

This study investigates the determinants of income diversification for non-farm activities using a two-part model and a breakdown of income inequality using Gini and regression-based inequality decompositions using data from the Ethiopian Rural Household Survey (2009). Results of the Gini decomposition show that the largest share of income came from farm income followed by non-farm income. Non-farm income was distributed more equally compared to farm income. The relative contribution of each source of income to the overall income inequality is indicated as: farm income 0.44, non-farm 0.05 and off-farm 0.03. Non-farm wage employment accounted for the largest share of non-farm income and made the largest contribution to overall income inequality. Moreover, non-farm wage employment tended to decrease income inequalities while non-farm self-employment had the opposite effect on inequalities. The results of the determinants of diversification show that female-headed households were more likely to participate in rural non-farm activities and gather higher incomes from non-farm activities as compared to male-headed households and that the level of non-farm incomes increased with an increase in formal education. Our findings suggest that although most rural households participated in the farm sector, rural development policies aimed at reducing inequalities should pay attention to non-farm income generating activities. Policies directed at the rural non-farm economy can be an additional option for minimizing problems associated with droughts, shortage of land and poverty.

Keywords

Heckman sample selection Two-part model Non-farm income Inequality Diversification Rural Ethiopia 

JEL Classification

J12 R13 O15 

References

  1. Adams, R. (2002). Nonfarm income, inequality, and land in rural Egypt. Economic Development and Cultural Change, 50(2), 339–363.CrossRefGoogle Scholar
  2. Barrett, C. B., Reardon, T., & Webb, P. (2001). Nonfarm income diversification and household livelihood strategies in rural Africa: concepts, dynamics, and policy implications. Food Policy, 26(4), 315–331.CrossRefGoogle Scholar
  3. Bigsten, A., & Shimeles, A. (2006). Poverty and income distribution in Ethiopia: 1994-2000. In A. Shimeles (Ed.), Essays on poverty, risk and consumption dynamics in Ethiopia, Economic Studies, no 155. Department of Economics, University of Gothenburg.Google Scholar
  4. Blundell, R., Ham, J., & Meghir, C. (1989). Unemployment and female labour supply. In Unemployment in Europe (pp. 9–36). New York: Palgrave Macmillan.CrossRefGoogle Scholar
  5. Block, S., & Webb, P. (2001). The dynamics of livelihood diversification in post-famine Ethiopia. Food Policy, 26(4), 333–350.CrossRefGoogle Scholar
  6. Canagarajah, S., Newman, C., & Bhattamishra, R. (2001). Non-farm income, gender, and inequality: evidence from rural Ghana and Uganda. Food Policy, 26(4), 405–420.CrossRefGoogle Scholar
  7. Corral, L., & Reardon, T. (2001). Rural non-farm incomes in Nicaragua. World Development, 29(3), 427–442.CrossRefGoogle Scholar
  8. Cragg, J. (1971). Some statistical models for limited dependent variables with application to the demand for durable goods. Econometrica, 39(5), 829–844.CrossRefGoogle Scholar
  9. Dil Bahadur, R., Pradyot, R. J., Akhter, A., Bhagirath, B., & Chhetri, N. B. (2015). Rural nonfarm employment, income, and inequality: evidence from Bhutan. Asian Development Review, 32(2), 65–94.CrossRefGoogle Scholar
  10. Demissie, D., & Legesse, B. (2013). Determinants of income diversification among rural households: The case of smallholder farmers in Fedis district, Eastern Hararge zone, Ethiopia. Journal of Development and Agricultural Economics, 5(3), 120–128.CrossRefGoogle Scholar
  11. Dorosh, P. A., Dradri, S., & Haggblade, S. (2009). Regional trade, government policy and food security: Recent evidence from Zambia. Food Policy, 34(4), 350–366.Google Scholar
  12. Ellis, F. (1998). Household strategies and rural livelihood diversification. Journal of Development Studies, 35(1), 1–38.CrossRefGoogle Scholar
  13. Ellis, F. (2000). Rural livelihoods and diversity in developing countries. Oxford: Oxford University Press.Google Scholar
  14. Escobal, J. (2001). The determinants of non-farm income diversification in rural Peru. World Development, 29(3), 497–508.CrossRefGoogle Scholar
  15. Fields, G. (2003). Accounting for income inequality and its change: a new method, with application to the distribution of earnings in the United States. In W. Solomon Polachek (Ed.), Worker well-being and public policy (Research in Labor Economics, Volume 22) (pp. 1–38). Emerald Group Publishing Limited.Google Scholar
  16. Gordon, A., & Craig, C. (2001). Rural non-farm activities and poverty alleviation in Sub-Saharan Africa. Natural Resource Institute Policy Series No. 14. London: University of Greenwich.Google Scholar
  17. Ground, M., & Koch, S. (2008). Hurdle models of alcohol and tobacco expenditure in South African households. South African Journal of Economics, 76(1), 132–143.CrossRefGoogle Scholar
  18. Haggblade, S., Hazell, P., & Reardon, T. (2010). The rural non-farm economy: Prospects for growth and poverty reduction. World Development, 38(10), 1429–1441.CrossRefGoogle Scholar
  19. Heckman, J. (2013). Sample selection bias as a specification error. Applied Econometrics, 31(3), 129–137.Google Scholar
  20. Lemi, A. (2010). Determinants of income diversification in rural Ethiopia: Evidence from panel data. Ethiopian Journal of Economics, 18(1), 35–69.CrossRefGoogle Scholar
  21. Lanjouw, J. O., & Lanjouw, P. (2001). The rural non-farm sector: issues and evidence from developing countries. Agricultural Economics, 26(1), 1–23.CrossRefGoogle Scholar
  22. Loening, J., & Laketch, M. I. (2009). Ethiopia: Diversifying the Rural Economy. An Assessment of the Investment Climate for Small and Informal Enterprises.. World Bank Economic Sector Work (Vol. 49564). Washington, DC: The World Bank.Google Scholar
  23. Matshe, I., & Young, T. (2004). Off-farm labour allocation decisions in small-scale rural households in Zimbabwe. Agricultural Economics, 30(3), 175–186.CrossRefGoogle Scholar
  24. Morduch, J., & Sicular, T. (2002). Rethinking inequality decomposition, with evidence from rural China. The Economic Journal, 112(476), 93–106.CrossRefGoogle Scholar
  25. Mulat, D., Fantu, G., & Tadele, F. (2006). Towards a more employment-intensive and pro-poor economic growth in Ethiopia: Issues and polices, discussion paper, International Labor Office, No. 22. Ethiopia.Google Scholar
  26. Oaxaca, R. L. (1973). Male-Female Wage Differentials in Urban Labor Markets. International Economic Review, 14(3), 693–709.CrossRefGoogle Scholar
  27. Patrick, H., Okello, J. J., & Obel-Gor, C. (2014). Farm households' participation in rural non-farm employment in post-war Rwanda: Drivers and policy implications. Development Southern Africa, 31(3), 452–474.CrossRefGoogle Scholar
  28. Reardon, T., Taylor, J. E., Stamoulis, K., Lanjouw, P., & Balisacan, A. (2000). Effects of non-farm employment on rural income inequality in developing countries: an investment perspective. Journal of Agricultural Economics, 51(2), 266–288.CrossRefGoogle Scholar
  29. Senadza, B. (2012). Non-farm income diversification in rural Ghana: Patterns and determinants. African Development Review, 24(3), 233–244.CrossRefGoogle Scholar
  30. Shorrocks, A. F. (1982). Inequality decomposition by factor components. Econometrica, 50(1), 193–211.CrossRefGoogle Scholar
  31. Shorrocks, A. F. (1983). Inequality decomposition by population subgroup. Econometrica, 52(6), 1369–1385.CrossRefGoogle Scholar
  32. Tegegne, G. (2000). Non-farm Activities and Production Decision of Farmers: the case of Damotgale and Kachabira woredas, in south region of Ethiopia, Social science research report series, 15, Addis Ababa.Google Scholar
  33. Taylor, E., & Adelman, I. (2003). Agricultural household models: Genesis, evolution, and extensions. Review of Economics of the Household, 1(1), 33–58.CrossRefGoogle Scholar
  34. The World Bank. (2005). Ethiopia: well-being and poverty in Ethiopia: the role of agriculture. Washington D.C. World Bank. Available at: https://openknowledge.worldbank.org/handle/10986/8707.
  35. Wan, G. (2004). Accounting for income inequality in Rural China: A regression based approach. Journal of Comparative Economics, 32(2), 348–363.Google Scholar
  36. Woldehanna, T., & Oskam, A. (2001). Income diversification and entry barriers: Evidence of the Tigray region in northern Ethiopia. Food Policy, 26(4), 351–365.CrossRefGoogle Scholar
  37. Yishak, G., Gezahegn, A., Tesfaye, L., & Dawit, A. (2014). Rural household livelihood strategies: Options and determinants in the Case of Wolaita Zone, Southern Ethiopia. Social Sciences, 3(3), 92–104.CrossRefGoogle Scholar
  38. Zerihun, B. W. (2016). Non-farm diversification and its impacts on income inequality and poverty: Evidence from Rural Ethiopia. Ethiopian Journal of Development Research, 37(2), 69–103.Google Scholar
  39. Zhu, N., & Luo, X. (2006). Nonfarm activity and rural income inequality: A case study of two provinces in China. Policy Research Working Papers No. 3811. Washington DC: The World Bank.Google Scholar

Copyright information

© Springer Nature Switzerland AG 2019

Authors and Affiliations

  • Gutu Gutema
    • 1
  1. 1.Department of Economics, College of Business and EconomicsAddis Ababa UniversityAddis AbabaEthiopia

Personalised recommendations