The Determinants and Impacts of Income Diversification in Rural Ethiopia: The Case of Communities in Southern Nations, Nationalities, and Peoples Regional State
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2003-07
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Abstract
This study examines the determinants and impacts of rural household income diversification.
The analysis of this study is based on data taken from “Ethiopian Rural Households
Surveys”(1997 and 1999) conducted by the Department of Economics, Addis Ababa
University. To analyse the determinants of household's choice among different livelihood
strategies and the level of income diversity, multinomial logit model that corrects selection
bias was estimated for five distinct livelihood strategies. The effects of income diversification
on rural equity and consumption insurance against idiosyncratic income shock were
nalysed using Gini decomposition technique and linear regression model, respectively.
The results indicated that the asset endowment of the household has a significant effect on
households’ choice of livelihood strategy and the level of income diversity. They also show
that the effect of asset on livelihood choice and income diversity is dependent on the type of
asset as well as on the particular livelihood strategy. Empirical evidences revealed that farm
land holding, distant to market, involvement in cash crop production, ox holding, use of
agricultural extension and possession of senior secondary education by head lower the
likelihood of involvement in livelihood diversification.
On the other hand, labour supply, livestock holding, junior secondary education attainment of head and age of head increase the odds of pursuing livelihood diversification relative to purefarm strategy. The variation in level of income diversity for more attractive strategies was explained by access to credit, livestock endowment, farmland size, transfer income,
involvement in cash crop production, and household composition (number of adult male and
female members). Similarly, the variation in level of income diversity for easy entry strategies was explained by laobur supply and frequency of market. Generally, the study shows the importance of liquid assets (livestock, cash crop, credit, transfer income), access to markets, demographic characteristics (composition, gender, size), and education in choice of different livelihood strategies and their effects on level of income diversity.
The analysis of Gini decomposition technique revealed that the rural equity effect of
diversification is dependent up on the type of livelihood strategy, level of income diversity
and village characteristics. Regarding the effect of sources of income, wage employment and off farm business have inequality increasing effect as opposed to crop farming and livestock rearing which have inequality decreasing effect. The finding also showed that higher level of income, lower rural inequality, better consumption smoothing could be achieved at higher level of income diversity. Again, the findings indicated that the impacts of diversification on income, rural inequality and consumption smoothening vary across livelihood strategies. Our estimation results for consumption insurance showed that households who involved farm easy off farm strategy are the most vulnerable to income shocks followed by pure-farm strategy.
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Economic Policy Analysis