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Agricultural Economics
Volume 26, Issue 1,
October 2001
, Pages 1-23
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Abstract
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.
Introduction
The rural non-farm sector is a poorly understood component of the rural economy of developing countries and we know relatively little about its role in the broader development process. This gap in our knowledge is the product of the sector’s great heterogeneity, coupled with inadequate attention at both the empirical and theoretical level. A common view is that rural off-farm employment is a low productivity sector producing low quality goods, expected to wither away as a country develops and incomes rise. A corollary of this perspective is that government need not devote resources to promoting the sector, nor be concerned about negative repercussions on the rural non-farm sector arising from government policies directed at other objectives.
To some extent, opinion has been swinging away from this position. Arguments for paying attention to the non-farm sector generally center around the sector’s perceived potential in absorbing a growing rural labor force, in slowing rural–urban migration, in contributing to national income growth, and in promoting a more equitable distribution of income.
In most developing countries the bulk of the population lives in rural areas, and this population continues to grow at a substantial rate. Given limits to arable land, this growth in the rural labor force will not be productively absorbed in the agricultural sector. Either migration to urban areas or the development of non-farm employment in rural areas must take up the slack.
Most countries have seen a rapid increase in the level of urbanization. Over the period 1960–1980, rural out-migration and urban in-migration have been estimated at 1 and 1.8% annually for 40 developing countries with available data (Williamson, 1988). For some countries the rates have been much higher. For example, during the 1970s, Nigeria and Tanzania are estimated to have had 7.0 and 7.5% increases in urban population annually with over 60% due to rural–urban migration (Todaro, 1994).
Enterprises tend to congregate in urbanized areas in most countries, and to be large in scale, suggesting that there are substantial economies of scale, scope or agglomeration. A large local market, a locally available skilled workforce, a wider variety of production inputs, technological spillovers and lower costs to the provision of infrastructure are a few examples of the latter and they are real (social) benefits of concentration.
There are, however, reasons for industry to thrive in urbanized environments which do not reflect benefits to society. Some of these are created by governments. Requiring firms to obtain licenses for production or foreign exchange makes it advantageous for them to locate near government offices. The provision of high quality physical and social infrastructure in urban areas to an extent not warranted on the basis of lower costs is a phenomenon commonly observed in developing countries (and often ascribed to the presence of a political elite in cities). This lowers the relative costs of urban-based production in a way which is socially costly.
Perhaps most important, however, in causing a divergence between private decision-making and social benefits is the fact that firms do not incorporate most of the negative externalities, such as congestion, pollution and higher land values, that they impose when they decide to locate in a city. Most governments have voiced concern about this increasing concentration in UN surveys and many have expressed an interest in promoting economic activity in rural areas to encourage the population to stay in the countryside. This concern is shared by donor agencies and particularly non-governmental organizations (NGOs) who have become active in programs of credit, training and technical assistance to both rural and urban small-scale enterprises (see Meyer, 1992, Meyer, 1998 and Section 5).1
In addition to the problems of urbanization, it has been argued that rural enterprises are more productive, when appropriately measured, than are urban firms. Just as private location decisions need not be optimal from the perspective of society as a whole, production technology choices at the level of the firm can also be governed by incentives at odds with social priorities. It is often pointed out that for a number of reasons, often artifacts of government policies, relative factor costs diverge between rural and urban areas. The factor costs faced by rural-based enterprises are thought to more accurately reflect the social opportunity costs of those factors and hence the labor-intensive technologies used in rural locations are more socially “appropriate”. That is, they are more productive when inputs are measured in terms of their real, social, costs. Even if such activities do not generate very high labor income, in an environment with seasonal or permanent underemployment, any utilization of labor can contribute to raising total income. The oft-cited example of China’s labor-intensive township and village enterprises (TVEs) as the “engine of growth” behind that country’s remarkable growth performance during the past decades, suggests that even at conventional market prices the potential contribution of the sector to overall economic performance should not be underestimated.
Finally, there are distributional reasons to be interested in the non-farm rural sector (given that redistribution via taxes and transfers is politically and administratively costly in all countries). First, to the extent that rural industry produces lower quality goods which are more heavily consumed by the poor, good health of this sector has indirect distributional benefits via lowering prices to the poor. Second, it can provide a source of employment to the poor who, because they are small landholders or are landless, cannot find sustenance in agriculture. Third, through diversification it also supplies a way of smoothing income over years and seasons to people who have limited access to other risk coping mechanisms such as savings/credit or insurance. Fourth, growth in the non-farm sector can tighten agricultural labor markets, raising wages and/or reducing underemployment. As rural poverty in many countries is concentrated among landless agricultural laborers this tightening of labor markets can have a pronounced impact on poverty levels.2
Evidence concerning the productivity and distributional characteristics of the sector is examined in turn in 2 Characteristics of the non-farm sector — productivity, 3 Characteristics of the non-farm employment sector — inequality and poverty alleviation. Section 4 considers the dynamic potential of the sector, and in conclusion, Section 5 examines the role for policy. But first we look at some aggregate statistics which demonstrate that, while perhaps not the center of attention, the rural non-farm sector is large, and even growing, in most developing countries.
The non-farm “sector” includes all economic activities in rural areas except agriculture, livestock, fishing and hunting. Since it is defined negatively, as non-agriculture, it is not in any sense a hom*ogeneous sector. Judgements about the viability and importance of the rural non-farm sector hinge crucially on what is meant by “rural”. We will illustrate in this paper, e.g., non-farm activity undertaken by farm households as independent producers in their homes, the subcontracting of work to farm families by urban-based firms, non-farm activity in village and rural town enterprises, and commuting between rural residences and urban non-farm jobs. For example, Basant (1994) finds, in a survey of rural employment in the Indian State of Gujarat, that 25% of rural male non-agricultural workers commuted to urban areas for work.
Many different definitions of rural are used in the collection of census and survey information, making comparisons across countries difficult. Typically the distinction between rural and urban employment is based on the place of residence of workers, so those who commute to a job in a nearby urban center are considered to be rural workers. Rural is most often defined to include settlements of about 5000 or fewer inhabitants. However, the definitions of a rural locality, based on population size and/or functions and characteristics of the settlement such as whether it has a school or hospital, or happens to be the seat of local government, do vary. For example, in Table 1, which displays aggregate statistics for a number of countries based on their own definitions of rural, the definitions range from Mali and Zimbabwe, which designate as rural only settlements with less than 3000 and 2500 inhabitants, respectively, to Mauritania, which includes settlements with under 10000, to Taiwan, which excludes only cities over 250000 and two suburban counties surrounding Taipei (for further definitions, see Haggblade et al., 1989). Clearly, a more limited definition of rural lowers the percentage of employment which is found outside of agriculture.3
A number of features of the data suggest that the percentage of rural employment found in the non-farm sector may be underestimated for all countries. The figures in Table 1 refer in most cases only to primary employment. As will be discussed below in Section 3, one of the important roles of non-farm activities is to provide work in the slack periods of the agricultural cycle. Thus primary employment status will be an underestimate of the actual percentage of labor hours which are devoted to non-farm activities. After surveying farm management surveys and time allocation studies of African farm households, Haggblade et al. (1989) conclude that 15–65% of farmers have secondary employment in the non-farm sector and 15–40% of total family labor hours are devoted to income-generating non-farm activities. Note that this is income-generating activities. Much of non-farm activity in all developing countries, especially that of women, is unremunerated work, such as clothing production, food processing and education for the household, which is not included in employment figures. As countries develop, more of these tasks are commercialized and more non-farm employment appears in the statistics (although the problem never disappears, see Thomas, 1992). This is a second reason to expect an underestimate of non-farm activity. Finally, since rural enterprises are typically small and dispersed there is reason to think that they may simply be missed in surveys. (Anderson and Leierson, 1980, note that in some African countries under-remuneration has been as high as 40%.)
Bearing these considerations in mind, it is clear from Table 1 that the non-farm sector is substantial in many countries — both in terms of income and employment — and has, in the aggregate, been growing over time. For example, in China non-agricultural employment grew from 11% of total rural employment in 1980 to 20% by 1986.4 As indicated in Table 1, the non-farm sector is composed of services, commerce and transport, construction and mining, and manufacturing. There is some evidence to suggest that there is a shift in composition towards services and away from manufacturing in the smallest localities as development proceeds (see below).
Section snippets
Measures of productivity — theory
An important question when considering the potential contribution of non-farm activity to development is whether such activity is efficient in converting resources into output relative to its urban counterpart or agriculture. In studies of productivity three measures are commonly used. The first two are partial measures: labor productivity, which measures the value added by an activity (gross output deducting intermediate inputs, but not deducting capital and labor costs) per unit of labor
Characteristics of the non-farm employment sector — inequality and poverty alleviation
As described in the previous section, some activities in the non-farm sector provide workers with low returns even relative to casual agricultural wage labor. This is particularly true for non-farm labor performed by women. Such employment may nevertheless be very important from a welfare perspective for the following reasons: off-farm employment income may serve to reduce aggregate income inequality; where there exists seasonal or longer-term unemployment in agriculture households may benefit
Dynamic potential
In the 1960s, Hymer and Resnick (1969) formulated a model to explain the purported decline of rural non-farm activities under colonialism. They envisaged an initially self-sufficient economy producing both agricultural goods and other goods and services, labeled Z-goods, for local consumption. With the advent of colonial links there would arrive, on one hand, new opportunities for exporting cash crops and natural resources, and on the other, cheap and higher quality manufactured goods available
Policy implications: lessons and experience
This section considers what, if any, role there might be for government intervention in the non-farm sector. Governmental efforts to support the development of small-scale enterprises and specifically rural enterprises have traditionally taken the form of project assistance which is directed at targeted groups. These efforts have a fairly long history. Financial support programs were launched in Mexico, Venezuela and Argentina in the 1950s, and in Brazil, Chile and Colombia in the 1960s. These
Acknowledgements
An earlier version of this paper was prepared as a background paper for the World Bank’s 1995 World Development Report, Workers in an Integrated World (Lanjouw and Lanjouw, 1995). The authors thank the editor and two referees for helpful suggestions, and are also grateful for detailed comments from Gus Ranis and Dominique van de Walle. They also thank Harold Alderman, Robin Burgess, Emmanuel Jimenez, Jesko Hentschel, Alain de Janvry, Ashok Kotwal, Ramon Lopez, Keijiro Otsuka, Jean-Phillipe
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