Non-farm Household Enterprises in Rural Africa: New Empirical Evidence

COMMON WISDOM #15: Non-farm enterprises in rural Africa are often operated due to economic necessity and survival. Consequently they tend to have low-productivity levels, do not create many jobs, and do not drive structural transformation in Africa.

SCORE: 3 - Factish

FINDINGS:

• Forty-two percent of rural households operate a nonfarm enterprise, contributing between 8% (Malawi) and 36 percent (Niger) of average household income
• Most of these enterprises are informal, operate only seasonally, and create few jobs
• Many perform poorly, but a few perform very well. Enterprises operated by younger people, women, and those further away from urban centers are less productive, as are those operated in response to a shock (drought, flood, illness).
• Households are pushed into operating a nonfarm enterprise when they have difficulty coping with shocks or dealing with agricultural seasonality, or when household members need employment. Much heterogeneity exists across countries in the extent and frequency of these determinants, and many enterprises are not operational throughout the year (see figure).
• Positive business opportunities—particularly for households living closer to denser markets—often lead rural households to operate enterprises. The better educated and those who can obtain credit are more likely to start businesses, suggesting that access to human and physical capital matters.
• Lack of profitability or financing, as well as idiosyncratic shocks such as illness or death, can cause rural enterprises to cease operations. 

The study generally confirms the common perception that Africa’s rural household enterprises operate largely in survival mode, although a small portion of them are highly productive.

POLICY MESSAGES:

The paper suggests policies that improve the business environment, that assist households in rural areas to manage and cope with risk, and that strengthen the capabilities of individuals to be entrepreneurial. It also recommends improvements in data collection on rural enterprises.

SUMMARY

The issue

African rural nonfarm household enterprises are commonly perceived as operating largely in survival mode, but little is known about the truth of this perception and the economic roles of such enterprises. Such knowledge is needed because informal household enterprises in rural Africa may have to absorb large parts of the estimated 65 million new labor market entrants by 2020. This paper describes these enterprises, investigates household motives to operate them, analyzes their productivity, and assesses their continuity over time.

Drawing on the Living Standards Measurement Study–Integrated Surveys on Agriculture, this study examines the birth, life, and death of rural household nonfarm enterprises in Ethiopia, Niger, Nigeria, Malawi, Tanzania, and Uganda.

Determinants

Several factors are associated with households starting a nonfarm enterprise as well as with the type of business operated:

• When households are large and agricultural activities season bound; when they must cope with shocks such as drought, floods, and illness; and when they lack social protection and insurance schemes, households can be pushed into operating a nonfarm enterprise. However, positive business opportunities—especially for rural households that live close to a market—also encourage households to form such enterprises.
• Wealthier households and households headed by older, more educated men tend to be more engaged in nonfarm enterprises.
• Credit and education are closely associated with agribusiness and trade, as well as operating a bar or restaurant, which tend to be capital intensive.
• Households that have experienced a shock tend to operate businesses that are easier to enter, such as agribusiness and trade.
• Distance to a population center is less important for professional services or bars and restaurants that serve local clients.

Productivity

A link exists between motivation to operate a nonfarm enterprise and the subsequent productivity of that enterprise:

• Enterprises operated by necessity seem less productive than those operated because of an opportunity arising from market proximity. The latter tend to attain better capacity use by operating throughout the year, seek credit more often, and have better-educated owners.
• Rural nonfarm enterprises seem on average less productive than urban enterprises, perhaps because they face greater risk and susceptibility to market failure. 
• Nonfarm enterprises in regions with a history of violent conflict are less productive.
• Female-owned enterprises are less productive, although their productivity may be underestimated because of constraints on women’s time and imprecise productivity measures.
• Enterprises owned by young adults seem significantly less productive. Given Africa’s youthful population and the millions of young people entering rural labor markets annually, additional support for such enterprises may be needed.

Survival and Exit

Although starting an informal enterprise in rural Africa is relatively uncomplicated, raising its productivity so that it can grow and survive is challenging:

• Rural enterprises are more likely than urban enterprises to cease operations because of idiosyncratic shocks such as illness or death.
• Many rural household enterprises operate for only part of the year, thus reflecting coping or seasonality (see figure).
• Rural enterprises are more likely to operate intermittently than are their urban counterparts. 

Policy Implications

The findings suggest policies should support enterprise owners through education and training, access to credit for business expansion, or possibly development of clusters. Microinsurance schemes and social protection policies are needed to protect households from negative external events—especially those with enterprises headed by younger owners. Policies that both support entrepreneurs and cushion them from external events will have a stronger effect on enterprise creation and productivity, thereby contributing to higher survival rates and job creation.

Despite the low productivity and high failure rate of rural household enterprises, opportunities exist. Proximity to markets increases productivity, especially for better-educated owners with wealth and access to credit. Continued investment in rural education and access to credit, coupled with social protection to cushion shocks, may help these enterprises increase productivity and grow.