The Rural Non-Farm Economy in South Asia and Transition

Countries

Research funded by DFID under the DFID/WB Collaborative Programme on Rural

Development

UN-FAO, Rome, Italy

23rd April 2004

Junior Davis and Felicity ProctorNatural Resources Institute, UK

Presentation Structure

1. Introduction to the research

2. Importance of the RNFE in economic development

3. Can the RNFE drive local economic growth?

4. Implications for policy and programme interventions

1 Introduction to the Research

What is the RNFE?

• The RNFE is all those activities associated with waged work or self-employment in income generating activities that are not agricultural but are located in rural areas.

Objectives of the Research

§ Gain improved understanding of the dynamics of the RNFE in providing employment and income diversification opportunities.

§ Gain improved understanding of the factors which enable or prevent rural households to engage in non-farm economic activities.

Study Areas

• In South Asia: Madhya Pradesh and Orissastates were chosen following discussions between DFID India, the World Bank and central government officials. These two states are amongst the poorest in India.

• In Transition Countries: Armenia, Georgia and Romania were chosen following discussions between DFID, the World Bank and government officials.

Research Sites for CEE/CIS

GeorgiaArmenia

Romania

Approach (l)

• Understand the rural non-farm economy through information and analysis on household assets, activities, and incomes.

– Formal household-level surveys in each country

– Qualitative research – focus groups, case studies and participant observation in each country

– Rural non-farm enterprise surveys in each country

– Small town, local governance and village level studies

Approach (ll)

• Used qualitative and quantitative methods in same survey areas

• Relative proximity or non-proximity to town• Relative access or lack of access to land and

other natural resources• Level of economic development• Ethnic and religious variation• Presence or absence of refugees from outside

communities (Armenia & Georgia)

2. Importance of the RNFE in social and economic development

Rural non-farm income shares by region

44Transition Countries40Latin America29- South35- East32Asia36- West45- East/South42Africa

Average ShareRegion

Key diversification trends in Orissa and Madhya Pradesh

• Household heads that have declared themselves as income earners have on average 1.5 sources of income.

• Approximately half have a non-farm income source.

• Agriculture remains by far the main livelihood activity, but diverging trends across areas.

• Main motivations/forces driving diversification vary across locations: e.g. distress-push in Orissa and demand-pull in Madhya-Pradesh.

• The importance of construction and trading activities is increasing while the significance of NTFP collection is declining.

Why are urban centres important to village households in Orissa & Madhya Pradesh ? (l)

98100100Total

6600Repair Services

6410Education

121200Transport Services

222100Consumption

473220Financial services

560168Employment

582252Input purchases

12169260Health services

2700090Marketing

Voting3rd reason(%)

2nd reason(%)

1st Reason(%)

Why are urban centres important to village households in Orissa & Madhya Pradesh? (ll)

• Small towns invariably act as local administrative and service centres, and as critical distribution points for imported production and consumption goods.

• Small towns in study areas are offering an avenue for local economic diversification into non-farm economic activities, but mainly through self-employment rather than wage employment.

• Small towns can play a critical role in local economic development by mediating between local producers and the wider economy.

Key diversification trends in Armenia, Georgia and Romania

• Households derive on average 45% of their income from non-farm sources. Agriculture remains the main source of income.

• In transition countries a key element of NF income is social transfers (particularly for the poor).

• Those households with diverse sources of income (particularly access to NF income) appear best placed to cope with poverty & livelihood insecurity

• NF enterprise is associated with on average higher education levels

• Local and non-tradable activities predominate: retail trading and service related activities.

• In Armenia and Georgia, diversification increases with household income; whilst in Romania, diversification is largely linked to distress-push motivations.

RomaniaEarned income non-farm shares

0%

20%

40%

60%

80%

100%

poorest 2 3 4 richest

p.c. income population quintile

share in earned household income

migration

job

non-farm enterprise

other farm-based

agriculture

ArmeniaEarned income non-farm shares

0%

20%

40%

60%

80%

100%

poorest 2 3 4 richest

p.c. income population quintile

share in earned household income

migration

job

non-farm enterprise

other farm-based

agriculture

Images of non-farm activities in Georgia & Romania

Washing laundry for neighbours at the village sulphur bath near Tsinubani-Gurkeli, Akhaltsikhe, Southern Georgia

The old & young: gypsies in Transylvania, Romania

Social capital and networks

• Caste, ethnic and religious networks. Refugees and ethnic minorities are often excluded from significant networks

• Kin networks. Breadth of kin networks very important in accessing job and migration opportunities

• Patronage networks. Often in tnomenklaturanetworks from the communist period important in SME development.

Employment linkages between small rural towns & the local village economy• Survey towns are generating few wage employment

opportunities for local village households.

ØThe vast majority of surveyed firms employ up to 5 workers only.

ØA significant proportion of the workforce in micro and small enterprise units consists of family labour.

ØMost workers recruited from outside town reside in nearby towns, not villages.

• Many entrepreneurs/managers found it difficult to identify ways in which the wider economic context impacts upon their business => growth of these enterprises is limited irrespective of the policy, regulatory, institutional and infrastructural environment.

3. Can the RNFE Drive Local Economic Growth in South Asia

and Transition Economies?

Potential activities driving ruraleconomic growth (I)

EXPORT OF TRADABLE GOODS AND SERVICES TO NON-LOCAL MARKETS IS CRITICAL FOR LOCAL

ECONOMIC GROWTH

Potential activities driving ruraleconomic growth (II)

Potential dependent on natural resource base

• Agriculture: potentially high consumption and production linkages.

• Extractive industries, forestry and fisheries: typically low consumption and production linkages.

• Tourism: potentially high but very localised consumption and production linkages.

Potential not dependent on natural resource base

• Manufacturing (excluding agro-processing)

Can rural non-farm activities drive rural economic growth?

• Yes, in some cases:agro-processing, timber processingtourism (location specific)mining (location specific)other manufacturing (rare)

• However, most non-farm economic activity is local/ non-tradable: retail trade, barbers, repair services, domestic services, local transport, construction, public services, etc

• But, some non-tradable activities facilitate the development of tradable activities which are potential drivers of growth: finance, input supply, equipment repairs, transport, etc

4. Implications for Policy and Programme Interventions

General Recommendations (I)

• Need to emphasise both the conditions under which jobs are created (policies, regulations, infrastructure, agricultural development) and the factors that enable individuals to access employment and income opportunities (finance, business/management/ technical skills, market information and linkages).

• Need to develop holistic approaches to rural development, in which agricultural development is pursued in tandem with efforts to widen the diversification options available to rural households.

General Recommendations (II)• Some public policies and investment impact upon

both farm and non-farm economic activity (e.g. road infrastructure), other have a specific influence on the RNFE (e.g. business regulatory environment).

• Need to identify local drivers of growth (both agric. and non-agric) and develop sub-sector/ cluster approaches to their development.

• These activities will typically cater for non-local sources of demand, enjoy favourable market prospects, add value to locally available raw materials, and generate significant direct and indirect employment.

General Recommendations (III)

• Local drivers of economic growth are likely to cut across rural and urban spatial boundaries.

• Small and medium size rural towns are likely to offer an appropriate entry point for programme and investment interventions due to their critical role in linking the village economy to wider markets.

• Understand migration patterns/ labour market and encourage the productive use of remittances.

General Recommendations (IV)

• Positive change at the policy and programme level will require significant institutional change based on multi-stakeholder dialogue.

• This will necessarily entail the development of mechanisms for genuine and effective multi-stakeholder dialogue, co-ordination and collaboration:

• between the public and the private sectors.

• across a range of government agencies and departments

• allocation of roles and functions between local, regional and national levels

General Recommendations (V)

• For example, policy fora structured around key sub-sectors or themes may offer an appropriate mechanism for mobilising relevant stakeholders, improving co-ordination and co-operation, sharing information, identifying constraints and opportunities, and lobbying for change.

• This and other forms of inter-institutional engagement need to be accompanied by initiatives aimed at addressing the institutional and capacity gaps in the public and private sector.

General Recommendations (VI)

• Donor agencies are well positioned to help mobilise a wide range of local stakeholders, develop local capacity, and promote much-needed cultural change within the public sector. They have an important role to play as catalyst of change.

Some areas that deserve special consideration (I)

• Need for coherence between urban and rural planning. And new models of local economic development/ territorial development.

• Local economic infrastructure – hard and soft (roads, energy, information technology and systems). Planning for infrastructure is often done at too local a level.

• Development of private sector associations and organisations (co-operatives, farmer groups, business associations, chambers of commerce).

Some areas that deserve special consideration (II)

• Training in the context of local employment and resource centres.

– Target not only those who already have good networks but also those with potential talent but without effective networks because of lack of kin (refugees), membership of a minority.

– Target not only individuals but groups of individuals (neighbours) who wish to set up enterprises together; e.g. group marketing schemes

• Business advisory services.

Some areas that deserve special consideration (III)

• What can be done to secure the distress-push non-farm activities of the poor, where appropriate ?

§ Secure regulatory environment: labour protection, taxation

§ Secure and safe environment

Thanks for your attention!

For reports and working papers see:The Natural Resources Institute website

http://www.nri.org/rnfe/index.html

For related work under this project undertaken in Latin America see:

http://www.rimisp.org/