Non-Farm Enterprises in Rural Africa: New Empirical Evidence - Working Paper

Probably the biggest takeaway from Nagler and Naude's "Non-Farm Enterprises in Rural Africa: New Empirical Evidence" is the recognition that 'Africa is not a country', or as they put it: Heterogeneity. They compare data from six countries and data diverges significantly as dynamics are tied to local context, not only at national level but also at sub-national. Nevertheless, the issue of non-farm enterprises remains key in many African (and other) countries, and this paper highlights it quite well.

 

Abstract:     

"Although non-farm enterprises are ubiquitous in rural Sub-Saharan Africa, little is yet known about them. The motivation for households to operate enterprises, how productive they are, and why they exit the market are neglected questions. Drawing on the Living Standards Measurement Study -- Integrated Surveys on Agriculture and using discrete choice, selection model and panel data estimators, this paper provide answers using data from Ethiopia, Niger, Nigeria, Malawi, Tanzania, and Uganda. The necessity to cope following shocks, seasonality in agriculture, and household size can push rural households into operating a non-farm enterprise. Households are also pulled into entrepreneurship to exploit opportunities. Access to credit and markets, household wealth, and the education and age of the household head are positively associated with the likelihood of operating an enterprise. The characteristics are also associated with the type of business activity a household operates. Rural and female-headed enterprises and enterprises with young enterprise owners are less productive than urban and male-owned enterprises and enterprises with older owners. Shocks have a negative association with enterprise operation and productivity and a large share of rural enterprises does not operate continuously over a year. Enterprises cease operations because of low profits, a lack of finance, or the effects of idiosyncratic shocks. Overall the findings are indicative that rural enterprises are "small businesses in a big continent" where large distances, rural isolation, low population density, and farming risks limit productivity and growth."

Some points to note from the study:

- entrepreneurship have had a very urban focus, and when it comes to the rural areas the focus is on agriculture. The study show the importance of non-farm enterprises in smothing shocks and providing additional income

- Most livelihoods and entrepreneurship interventions focus on the individual. However,
in this context, enterprises are a household activity (both in decision making and operation), specially taking into account distribution of labor according to seasonality (planting and harvest), number of available workers and household tasks (and gender-based allocations).

- Response to shocks (drought, price, conflict) is a major reason for enterprise creation, however not all shocks have the same effect on the choice of sector. Many differences are country specific (different responses to the same kind of shock). Moreover, productivity of enterprises born out of necessity (shock response) is lower than those out of choice. This may help us rethink the programming 'mix' regarding both prevention and response to crisis.

- In some cases, education was positively correlated with entrepreneurship, probably due to the fact that educated individual do not have a comparative advantage in a rural setting where waged employment is limited and therefore reallocate into self-employment. The role of education (or the kind of) in rural settings have to be thought further.

- Each non-farm sector has its own profile. The variables studied (education, number of adults in the household, age and credit access) have different effect depending on the sector: agribusiness, sales, trade, restaurant, professional services, etc...

- Distance to population centers. Highlighting the importance of rural secondary towns and cities, as enterprises located up to 10 km from a population center are the most productive (on average urban enterprises are more productive than rural). Productivity drops significantly when they are more than 50 km away. Large gains in poverty reduction have actually been linked to secondary cities rather than major cities or capitals.

-Youth. Younger households are not only less productive but also less probable to engage in non-farm entrepreneurship in comparison with middle age groups. To note this is talking about household heads, and not necessarily individual engagement in activity.

- Seasonality and enterprise life. Agriculture remains the key driver in many rural settings and non-farm enterprises adapt to that cycle. Enterprises, in many cases, appear/grow and disappear /decrease according to the planting and harvesting needs, and not necessarily seen as permanent activities

- Exit reasons. The most self-reported reasons of enterprise termination are low profitability, lack of finance, unreliable supplies, as well as the impact of  death or illness in
the family (specially in settings with limited insurance or social protection)

While this paper provides and overview might be good for getting ideas where to look further, we would be better off going into country specific studies when it comes to programming and policy recommendations/development.