Although governments and development agencies see farming as an important engine for job creation, rural non-farm businesses do not seem to generate enough work.
In Sub-Saharan Africa most people live in rural areas where population growth is adding millions of people each year to the labour pool. Understandably governments and development agencies have prioritized farming for job creation. Not surprisingly 2014 is the African Union’s “Year of Agriculture and Food Security“. Because smallholders do most of the farming, it is also the UN’s “International Year of Family Farming”.
Small family farms are however doing a lot more than just tilling the land. Homes and markets are bustling with entrepreneurs. They are active in everything from entertainment to hairdressing to repairs. So whether rural non-farm businesses can contribute significantly to job creation and income generation is a valid question.
When this question was asked fifty years ago the answer was negative: these small rural businesses were seen as survivalist activities in a risky environment. They were expected to become less important over time as rural inhabitants would either find work in larger commercial farms, or in factories and service firms in urban areas. This never happened. Non-farm businesses are still common in rural Africa and their prevalence and nature have not changed much since the 1960s. Today many governments and donors think that non-farm enterprises have the potential to create jobs for the rural population.
In a recent IZA Discussion Paper, we have come to a more pessimistic conclusion. We provide new data and analyses based on the World Bank’s LSMS-ISA surveys. These surveys cover over 24,000 rural households in Ethiopia, Malawi, Niger, Nigeria, Tanzania and Uganda for 2005-2012. We find that more than 40 per cent of households operate non-farm businesses, contributing more than a third to household income in some cases. While this sounds good, our findings also show that rural households mostly start non-farm businesses due to push-factors such as food shortages, surplus family labour and shocks. Where they do spot opportunities (pull-factors), they are more likely to succeed if the household head is older and better educated, and has access to credit. These are not characteristics associated with young labour market entrants.
Non-farm businesses are also largely confined to the residence: about half operate in or around the home. Almost all are informal, and largely employ only family members. Many enterprises also run for a few months per year only. Hence, despite the fact that they are still common, it is safe to say that rural non-farm businesses are not engines of growth and job creation.
The continued ubiquity of non-farm businesses reflects Africa’s failed structural transformation. We find that urban households are on average 16 percentage points more likely to start a business. Urbanization and promotion of good urban management is likely to have better returns in terms of job creation than many of the romantically-inspired rural development initiatives of (well-meaning) donors and NGOs.