Rural Livelihood Diversification 2020

Rural livelihood Diversification:
Determinants, Challenges, Constraints
& Opportunities
By Dr. Melkamu T. Wazza
Wolaita Sodo University & PBTAfrica College
Lecture Note, 2020
Email: melkamtw@gmail.com
Mob: 091120 6853

COURSE OUTLINE
1. Rural Livelihood Diversification
 Basic Concepts: What is?
 Diversification Strategies/Activities
 Why RL Diversification? Decision dichotomy
 Household Economic Model
 Push and Pull Factors
 Extent of Diversification
 Advantages and Disadvantages
2. Determinants of Rural Livelihood Diversification
 Seasonality
 Risk
 Labor Markets
 Credit Markets
 Asset Strategies
 Coping Behaviour
3. Challenges and Constraints of Rural
Livelihood Diversification
 Challenges
 Constraints
4. Opportunities for LhD
5. Policy Priorities and Way outs
 Human Capital
 Infrastructure
 Credit Policy (Micro-Credit)
 Enabling Environment for
Grassroot Initiatives
 Targeting and Support

RLD is defined as ‘the process by which HHs construct a
diverse portfolio of activities and social support capabilities
for survival and in order to improve their standard of living’
(Ellis, 1999)
[Rural] LD refers to those individual, HH and community level
strategies and objectives that are pursued alongside, or in
lieu of, traditional agricultural activities to diversify income
streams and reduce risk (Persha, 2017).

Using their own assets
(farm land) in the
production of goods
• Crop Production
• Livestock Rearing
On-Farm
Activities
• Wage/Salary employment
• Trade (livestock; livestock
products; crops; manufactured
commodities…
• Self-employed enterprises
hairdressing, carpentry,
tailoring, trading, brewing,
food processing, charcoal
trading, masonry, Hand crafts,
brick making, sewing…
• Ecotourism
Non-Farm
Activities
• Working on the others
farm land in the form
of sharing
• Wage work in
agriculture
Off-Farm
Activities
Livelihood Strategies & Activities

Only On-Farm (Farming/No Diversification)
1. On-Farm Plus Off-Farm
2. On-Farm Plus Non-Farm
3. On-Farm Plus Off-Farm Plus Non-Farm

Pastoral HH income sources may be classified into three main categories.
1.Pastoralism (No Diversification)
The income from pastoralism consists of milk off-take for own
consumption and sales, livestock slaughter for own consumption,
livestock sales, and miscellaneous income from sales of hides
and skins. (Source: Berhanu, Colman, & Fayissa, 2008)
2.Dryland farming (Diversification)
 Since farming and pastoralism are essentially different
activities, farming is considered as a form of pastoralist
income diversification; farm income is a non-pastoral income.
3. Non-farm non-pastoral activities (Diversification)
 All other non-pastoral activities are, hence, classified as non-farm non-
pastoral activities.

Country/
Region
% Non-
Farm HH
income
References
LDCs 30 - 45 Haggblade, Hazell and
Reardon, 2005
SSA 30 - 50 Reardon, 1997
Southern
Africa
80-90 May, 1996; Baber, 1996
Ethiopia 25 World Bank, 2009
Pakistan,
Bangladesh,
Sri Lanka
15
(by
remittances)
Von Braun and Pandya-
Lorch, 1991
Regions in
Ethiopia
% Non-
Farm HH
income
References
Sidama 56 Yohannes Yona &
Tafese Mathewos,
2017
Oromiya 8 van den Berg &
Kumbi, 2006
Tigray 35 Woldenhanna &
Oskam, 2001
Harari 20 Tefera, Perret, &
Kirsten, 2005
Central and
Southern Regions
of Ethiopia 13 Matsumoto, Kijima,
& Yamano, 2006

1.Necessity:
Examples:
•Dispossession of a tenant family from its access to land,
•Fragmentation of farm holdings on inheritance,
•Environmental deterioration leading to declining crop yields,
•Natural or civil disasters such as drought, floods or civil war
resulting in dislocation and abandonment of previous assets,
•Loss of the ability to continue to undertake strenuous agricultural
activities due to accident or ill health.
 Why individuals and households pursue diversification? (Ellis, 2000)
involuntary and desperate reasons for diversifying

2.Choice:
Example:
•Educating children to improve their prospects of obtaining
nonfarm jobs
•Saving money to invest in nonfarm businesses such as
trading,
•Utilising money obtained off the farm to buy fertilisers or
capital equipment for the farm enterprise.
voluntary and proactive reasons for diversifying.

Word of caution on the Dichotomy
The division of the determinants of diversification into these two main
types is misleading concerning the range of experience it seeks to
assign to one process or another.
Choice, or the lack of it, does not obey a definable breakpoint between
two mutually exclusive states.
There are many instances where individual choice may be socially
circumscribed at standards of living well above the survival minimum, as
occurs, for example, for women in some cultural settings.
More generally, diversification obeys a continuum of causes, motivations
and constraints that vary across individuals and HHs at a particular point
in time, and for the same individuals or HHs at different points in time.

Household Economic Model (Farm HH Model) and Diversification
HH production is the production of goods and services by the members of
a HH, for their own consumption, using their own capital and their own
unpaid labor (Duncan Ironmonger, 2001).
In the HH production function, time plus market goods and services
combine to produce the so-called basic commodities, or nonmarket goods.
Basic commodities according to Becker’s Theory of the HH
Production (1965) are, for example, children, health, pleasure,
sleeping or seeing a play.
A HH chooses the best combination of these commodities, i.e., a
combination which will maximize the HH utility function (Baker, 1965; Cited
in Bergstrom 1997).

Household Economic Model (Farm HH Model) and Diversification
The HH economic model predicts diversification as a function of on-farm
returns to labour time compared to off-farm/non-farm earning opportunities.
With a given asset base i.e., land plus farm infrastructure and equipment, and
a given total amount of labour time, the HH makes comparisons between the
return to using more of that time on the farm or deploying it in nonfarm wage or
other income-generating activities.
Factors that increase the return to time spent on farm activities would tend to
reduce the motivation to diversify. EX: increase in the prices of farm outputs
or a rise in farm productivity
Conversely, a rise in off-farm or nonfarm wage rates (remunerative
opportunities) would increase the motive to diversify.

Push and Pull Factors for Diversification
Push Factors:
i.Performance of Agriculture: production failure that may cause inter-seasonal
and other transitory drops in farm income, chronic food insufficiency, and
fluctuations in farm income
ii.Incomplete markets for factors, including, but not limited to, missing or
incomplete land, credit, and insurance markets. In such cases, individuals and
HHs diversify their sources of income to self-insure themselves and provide
working capital
Pull Factors:
i.Higher non-farm earnings: if earnings from non-agricultural employments
are assessed to be higher than earnings from farm employment.

Contribute to the Sustainability of a RLDs
•A diverse portfolio of activities improves its long-
run resilience in the face of adverse trends or sudden shocks.
•Increased diversity promotes greater flexibility
because it allows more possibilities for substitution between
opportunities that are in decline and those that are
expanding.
1

Reduce the adverse effects of Seasonality
Diversification can contribute to reducing the adverse
effects of seasonality by utilizing labor and generating
alternative sources of income in off-peak periods
•Seasonality causes peaks and troughs in labor utilization on
the farm Labor smoothing
•Seasonality creates food insecurity due to the mismatch
between uneven farm income streams and continuous
consumption requirements Consumption smoothing
2

Risk Reduction
The more diversification comprises activities that
display uncorrelated risks between them (confront
different risk profiles), the more successful it will be.
•Example: The factors (e.g. climate) that create risk for one
income source should not be the same as those (e.g. urban job
insecurity) that create risk for another.
3

Enable Higher Income
•It can do this:
 By making better use of available resources
and skills and
 By taking advantage of spatially dispersed
income earning opportunities.
4

Enable Asset Improvement
 To put assets to productive use
•Cash resources obtained from diversification may be
used to invest in, or improve the quality of, any or all of
the five classes of assets, for example, sending children to
secondary school or buying equipment like a bicycle that can be
used to enhance future income generating opportunities.
5

Provide Environmental Benefits
1.By generating resources that are then invested in
improving the quality of the natural resource base
2. By providing options that make time spent in
exploiting natural resources, e.g. gathering activities in
forests, less remunerative than time spent doing other things.
6

Gender Benefits
 By improving the independent income-generating
capabilities of women
This, in turn, is expected to improve the care & nutritional status of
children since a high proportion of cash income in the hands of
women tends to be spent on family welfare.
For this to occur, activities need to be promoted in the rural areas that are
accessible to women, which means, usually, located close to sites of residence
and corresponding with types of work to which women have equal or better
access qualifications than men.
7

Poverty and income distribution
Diversification can be associated with widening
disparities between the incomes of the rural poor and
the better-off.
•This occurs because the better-off are able to diversify
in more advantageous labor markets than the poor, and
this in turn reflects asset poverty (Ellis,1999)
1

Reduction in Farm Output
 Some types of diversification may result in stagnation on
the home farm
•This typically occurs when there are buoyant distant labor markets for
male labor, resulting in depletion of the labor force required to
undertake peak farm production demands such as land preparation
and harvesting.
2

Harmful effects on Environment
• As with agriculture, the effects of diversification on environmental
resource management are mixed and context-specific.
•For settled agriculturalists, non-farm earning opportunities can
result in neglect of labor-intensive conservation practices if
labor availability is reduced.
• Diversification contributes positively to livelihood sustainability because it reduces proneness
to stress and shocks. However, sustainable rural livelihoods need not equate with
the sustainability of all components of underlying ecological systems due to
substitutions that occur between assets during processes of livelihood adaptation over time.
3

Adverse Gender Effects
• Men and women have different assets, access to resources, and
opportunities, which, mostly, is in favor of the male.
• In general, therefore, diversification is more of an option for
rural men than for women. In this sense, diversification can
improve HH livelihood security while at the same time trapping
women in customary roles: women may be even more relegated to the
domestic sphere and to subsistence food production.
4

On balance, the positive effects of diversification
appear to outweigh its disadvantages.
The tend to be beneficial impacts
of wide applicability (e.g. risk reduction, mitigating
seasonality), while the typically
occur when labor markets happen to work in particular
ways in particular places.

1.Seasonality
2.Risk
3.Labor Markets
4.Credit markets
5.Asset strategies
6.Coping
behaviour

Seasonality is an inherent feature of rural livelihoods
(Chambers et al., 1981; Sahn, 1989; Agarwal, 1990).
The cyclical levels of activity implied by seasonality
apply to:
Farm families
Landless rural families that depend on agricultural labour markets for
survival,
Agricultural input supply such as fertilizer delivery
Agricultural output service such as crop marketing
Trading activity: cyclical along seasonal lines, and for some perennial crops
with a single annual harvest e.g., coffee

As a means of survival, what happen to a vulnerable family when definite
outcomes in relation to income streams are replaced by probabilities of occurrence?
The family do not “put all their eggs into one basket” rather diversifies
its portfolio of activities in order to anticipate and to ameliorate the threat to
its welfare.
Diversification on-farm cropping systems: mixed cropping and field fragmentation
take advantage of complementarities between crops, variations in soil types and
differences in micro-climates that ensure risk spreading with little loss in total income
Off-farm and nonfarm diversification: EX: wage work in the agricultural slack
season may both diversify and raise total HH income; different HH members of different
skills in different labour markets (Walker & ryan, 1990; Blarel et al., 1992).

Labour markets offer nonfarm opportunities for income
generation differentiated by other considerations such as
education, skills, location and gender.
Work opportunities vary according to skills (e.g. in trading,
vehicle repair, brick making), education (e.g. for salaried jobs
in business or in government), and by gender (e.g. male wage
work in construction or mines vs female opportunities in trading
or textile factories).

The availability of funds to carry out timely purchases of cash inputs into agricultural
production, as well as to buy capital equipment like ploughs or water pumps, affects
productivity in small-farm agriculture.
Credit market failures provide another motivation for diversifying livelihoods with
the aim of utilising cash funds generated outside agriculture in order to purchase
agricultural inputs or make farm equipment purchases (Binswanger, 1983; Reardon, 1997) .
This strategy has the potential to overcome:
The absence of lending facilities in rural areas,
Avoid paying high rates of interest on such funds as may be available from public or
private sector financial institutions, and
Avoid also placing the individual/family in a subordinate social relationship with a
private moneylender.

Rural HHs take a longer-term view of livelihood security than merely
taking advantage of currently available income earning opportunities.
Therefore, an additional motive for diversification, not covered by
consumption, security, or purchase of recurrent farm inputs, is that of
making investments in order to increase income-generating capabilities in the
future (to enhance future livelihood prospects ⁓
The five main asset categories jointly determine the asset status and
livelihood robustness of HH survival strategies.

1.Risk Management
Ex ante income management
A deliberate HH strategy to
anticipate failures in individual income
streams by maintaining a spread of
activities (Walker & Jodha, 1986)
Risk strategies imply forward
planning to spread risk across a
diverse set of activities, in the
context of subjective evaluations
about the degree of risk attached to
each source of income.
2.Coping Behavior
 Ex-post consumption maintenance in
the wake of crisis/disaster
 Coping refers to the methods used by
HHs to survive when confronted with
unanticipated livelihood failure.
 The involuntary response to disaster
of unanticipated failure in major
sources of survival.
 Correspond closely to the notion of
diversification through necessity
 Ex: drawing down on savings, using
up food stocks, gifts from relatives,
community transfers, sales of livestock
or other asset sales...

Determinants
of RLD
Magnitude and Direction
of the Effect
Possible Reasons Sources
Sex/
Gender
•Female: Negatively &
Significantly
•(HHs headed by female are
less likely to participate in off-
farm)
• Gender disparity resulting from culture:
Women mobility not culturally accepted
• Factors that females are assigned to care the
child, perform home works and other social roles
(Gecho et. al, 2014;
Bekele, A. E., 2008;
Ellis, F., 2004)
Lorato, 2019
(Nduma et al. 2001
cited in Watson &
Binsbergen, 2008)
Age •Negatively & Significantly
(Farmers with old age are
less likely to diversify
• As the HH heads get older, they become inactive and
expected to be risk averse and more farm experience;
hence depend more only on their own farm income;
• Young HHs are relatively better educated, have
better access to technologies, and look alternative
livelihood opportunities
Lorato, 2019
(Gebru, Ichoku,
Ogbonnia, & Eze,
2018)
•Positively & Significantly
• Old aged are more likely diversify
the LD strategies into non-farm
activities
• Multiplicity of LD strategies
increases with advancing age
• More children create pressure on the need
of basic necessities and hence diversify
• More children in turn help to have
available labor to engage in diverse
activities.
• Gecho et. al, 2014;
• Tedla, 2019
• Khatun, D. & B.C. Roy,
2012;
• Adugna &Wagayehu
(2012)

Determinants
of RLD
Magnitude and
Direction of the Effect
Possible Reasons Sources
Livestock
ownership
(TLU)
Negatively & Significantly
(HHs having larger size of livestock
are less likely to diversify into non-
farm, off-farm and combining non-farm
and off-farm activities equally)
• Herd size creates better opportunity to earn
more income from livestock production
• Diversify if their objective is to increase asset
holding
• Bekele, A. E., 2008;
• Lorato, 2019
Information
access
Positively & Significantly
(access to telephone
communication, radio or other
information source have
increased the probability
diversifying their livelihood)
• Access to media may improve rural
youths’ information on non-farm
opportunities.
• Tedla, 2019;
• Okoyo, & Fekadu
(2015)
Urban
linkage
Having urban linkage increased
the likelihood of youth
participation
• Having friends/relatives in the urban area
improves the rural youths’ information and
facilitation of conditions on nonfarm
livelihood diversification opportunities
• Tedla, 2019;
• Yenesew, Okoyo &
Fekadu (2015) as

Determinants
of RLD
Magnitude and
Possible Reasons Selected
Sources
Farm
Size
(farmers with large farm size are
less likely to diversify the LD
strategies into farm + non-farm,
farm + off- farm and farm + non-
farm & off-farm activities
• Large farm size helps farmers to
cultivate and produce more
Lemma T, 2003.
Urrehman M et al,
2008.
Education
level
(High educational level are more
likely diversify livelihood strategies
into non-farming and/or off-
farming activities
• Increased capability of finding a job
(skill, experience, knowledge;
information access)
Gecho et. al, 2014;
Khatun, D. & B.C. Roy,
2012; Babatunde, R.O. et
al, 2010; G. W. Gebru and
F. Beyene, 2012
Agro-
ecology
Highland: Positively &
Significantly
The incidence/magnitude of
diversifying the LD into
farming with non-farming
increases as we go from low
land to high land.
• Declining cultivated & grazing land due to high
population pressure in high land area
• Availability of resources (eg. Bamboo tree) in some areas
helps farmers to engage in handcrafts
• Limited cash crops in high land area and this in turn limit
income sources
• Available land holding in low land allow farmers to
produce crops and rear livestock
• Khatun D. and Roy
B.C., 2012.

Determinants
of RLD
Magnitude and
Sources
Total
Annual
Cash
Income
(HHs having large cash
income are more likely to
diversify the into non-farm
and/or off- farm activities)
• Those farmers who have adequate income
sources can overcome financial constraints
to engage alternative LD strategies: higher
income can encourage them to invest in)
Babatunde, R.O. et al,
2010; Isaac, B. 2009;
Sisay, W. A., 2010
Tedla, 2019; Yisehak,
Johan & Janssens,
2014)
Training
(agricultural)
Negative & Significantly
(HHs’ participation in agricultural
training most likely decreases the
likelihood of diversification into
combing non-farm with off-farm
activities.
• Training enhances agricultural production
skills, knowledge and experiences of farmers;
Helps farmers to get better production, and
then this most likely leads to obtain more
income
• Khatun D. and Roy B.C.,
2012; cited in Gecho et
al 2014
Fertilizer
Use;
Improved
Seed
(farmers who have access to
fertilizer/improved seed use are
less likely adopt farming with
off-farming activities)
Using fertilizer/Improved seed most likely
increase the production and productivity of
crops, and this can help farmer to get access to
more food and generate more income
• Sisay, W. A., 2010

Major
Determinants
of RLDbor
Magnitude and
Sources
Dependency
Ratio Negatively & Significantly
(youths with high
dependency ratio are
participated less in non/off-
farm LD diversification
strategies)
• Higher dependency may forced youths to
spend their working time for giving care and
support for and children aged member of the
family
• If there is a raise in dependency ratio, the
ability to meet subsistence needs declines
and the dependency problems make it
necessary to diversify their income.
Tedla, 2019; Khatun
and Roy (2012)
Adugna &Wagayehu
(2012)
Access to
institutional
credit
service
(increased credit access
is related with raised
LD diversification)
• Rural youths are mostly poor in
finance; it is difficult to them to start
their own nonfarm activities and to
engage in agriculture by renting land
Tedla, 2019;
Birhanu & Getachew
(2017)

Major
Determinants of
RLDbor
Magnitude and
Sources
Access
to ROAD
networks &
transportation
service
(Access to roads
increased youth
participation of on-farm
plus nonfarm activities)
• Enable youth to access market
centers and to engage in petty trade
and exchange goods and service
• It can also enable them to participate
in casual works in urban centers
Tedla, 2019; Start and
Johnson, 2004;
Birhanu & Getachew
(2017),
Distance
from the
market
Positively and Significantly
to on-farm plus off-farm,
(Youths who are far from the
market decreased their
participation of on farm plus
nonfarm activities)
Negatively and significantly
related to on farm plus non-
farm livelihood strategies
•Youths in remote areas favor diversifying
their LD on farm plus off farm strategies than
on non-farm strategies.
•Farness to the market center means high
transaction cost for participating in petty
trade, urban based carousal works, and
delivery of services to urban HHs and
supplying of traditional hand crafts.
Tedla, 2019
Birhanu & Getachew
(2017)

Poor asset base & Low HH
average income
Lack of credit facilities,
Lack of awareness (eg. To
adopt modern technologies)
Low Access to land
 Cultural values, Wrong attitude of the
local community & Youth’s job
preference
Fear of taking risk (Risk bhr)
Major Challenges and Constraints of Rural LD
Lack of rural infrastructure
and Poor Marketing linkage
Lack of opportunities in
non-farm sector
Weak extension services
Lack of skill & Knowledge
 (Tedla, 2017; Gecho et al.. 2014; Dibaba,
Girma, & Haile, 2019; Yona & Mathewos, 2017)
Rural HH’s resource allocation decisions are fundamentally constrained by conditions of
livelihood asset endowments and related socio-political and institutional factors.

Table:
Rank of perception of
constraining level of
factors on rural
livelihoods activities for
rural livelihood groups
(N=388)
East Gojjam
Zone
Source: (Tedla, 2019)

Though country (region) & context specific, diversification
opportunities are available in terms of:
1.Human Capital:
• Existence of large number of productive age group
• Availability of knowledge and skills on local livelihood strategies
• Availability of significant level of training offered to households by GO and NGOs regarding livelihood
diversification strategies
2.Social Capital
• Instrumental support (significant instruments in agricultural practice: oxen, plough, yoke, money, horses,
donkeys and others)
• Informational support (Household share what they saw on the others farmland, heard from radios and learnt
from the experts of agriculture and so on).
• Emotional support (the provision and verbal expression of empathy, care, love and trust; encouragement,
active listening, reflection, and reassurance)

Cont’d=
3. Financial Capital
• Availability of saving and credit associations
• Awareness creation efforts on saving culture and the associated rise in saving
3.Natural/Environmental Capital
• It consists of renewable resources like agricultural crops, vegetation and wild
life and non-renewable resource like fossil fuel and mineral deposits.
• Attractive areas, recreation areas, mineral resources and wild life habitats as the
critical potential resource in their livelihood diversification.

There is wide scope within existing rural development policies
for support to beneficial forms of diversification.
Improving the institutional context of private decision-
making by, for example, reducing risk, increasing mobility,
minimizing barriers to entry (e.g. licensing regulations), and
ensuring fairness and transparency in the conduct of public
agencies.
Facilitating the poor to improve their assets, and to make
use of those assets to best effect.

The significance of education, both formal academic education
and workplace skills (TVET, Adult literacy, Community
awareness…) for improving livelihood prospects
Poverty is closely associated with low levels of education and
lack of skills.
Innovative approaches to educational delivery at village level:
High demand for education by rising populations vis-à-vis the
cost of updating educational materials another.
The appropriate mix of policies is highly context-specific,
but some general principles are likely to hold:

Infrastructural facilities have a potentially important impact on
poverty reduction by contributing to the integration of national
economies, improving the working of markets, speeding the flow of
information, and increasing the mobility of people, resources and
outputs.
Innovative infrastructural delivery approaches to provision and
maintenance. Reliance on central government and ad hoc project
finance from donors cannot be depended upon.
Decentralization helps to bring the prioritization and the financing
of rural infrastructure closer to rural communities themselves.
Privatization of infrastructural suppliers like electricity and
telephone companies may help to reach remote rural areas

There are now many different models and experiments in micro-credit
provision from which to adapt and to choose appropriate elements for local
solutions.
Micro- credit schemes:
Small-scale group lending
Continued involvement of NGOs. There is also a need to facilitate the
Spread of rural financial and credit institutions
Cooperatives
 Self-sustaining approach on the basis of savings and loans organized
according to conventional banking criteria
Strengthening access of start-up capital to initiate small businesses.

The local level policy context often remains inimical to self-
employment and start-up business. Local enterprise often arises
‘outside’ the regulations, i.e. as an unrecognized informal sector
activity.
Reform (in terms of efficiency, effectiveness, transparency and fairness
of state operations), although proceeding at different speeds in different
countries, is still in its early stages.
The switch from antipathy to supportiveness in the relations between
public administration at local levels and private, non-farm, productive
activity in rural areas need to be secured.

The purpose of targeting is to provide support for those rural
social groups that are most vulnerable to ‘shocks’ that could
lead to insufficient food or destitution, e.g., landless, old,
disabled, etc.
Self- targeting works by providing wages or food in return
for work at levels that can enable the poor to survive, but that
are not so high as to be interesting for the better-off. In effect,
self-targeting provides a diversification option for those
needing to diversify to survive.

Rural Livelihood Diversification 2020

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