Nonfarm Enterprises in Rural Ethiopia: Improving Livelihoods by Generating Income and Smoothing Consumption?

Abstract

In developing countries highly dependent on agriculture, non-farm enterprises
(NFEs) are often lauded as income diversification opportunities, helping to
smooth income in the farming off-seasons. Using data from the first wave of the
Ethiopia Socioeconomic Survey (ESS), a nationally representative survey of
rural and small town Ethiopia, we explore the role NFEs play in seasonal
income generation, consumption smoothing, and risk mitigation. We find that
NFEs are in fact pro-cyclical with agriculture, with the most productive months
of NFE operation coinciding with the harvest season and crop sales. This procyclicality
appears to be driven by demand-side factors, where increases in
community income through crop sales generate higher demand for NFE goods
and services. We also find no evidence that households operating NFEs are
better able to ward off incidence or duration of food insecurity in the face of
shocks, suggesting NFEs do not insure temporally vulnerable households
against risks.