NON-FARM INCOME DIVERSIFICATION IN RURAL GHANA Determinants and Implications for Income Distribution and Welfare

ABSTRACT

Rural households in developing countries have for a long time been perceived as farm households, and that they receive their income predominantly from agriculture. There is growing evidence however in the rural livelihoods literature to show that rural households in developing countries derive a significant proportion of their incomes from non-farm activities, and income from this source is growing. In addition, nonagricultural activities constitute the main occupation of an increasing number of rural households. National level household survey data indicates that Ghana is not different in this regard. This study investigates the patterns as well as the determinants of nonfarm income diversification (participation, income and portfolio of income activities) among rural households in Ghana using GLSS 5 data. It also examines the effect of non-farm income on income distribution and household welfare. Results show that non-farm activities constitute an important source of employment and income for rural households in Ghana. Non-farm income accounted for 41 percent of rural household income in 2005/06, with more than 50 percent of rural households having at least one non-farm income activity. Education and land are important for the type of income strategy adopted by households. Education is important for a purely non-farm wage employment income strategy or combination of non-farm wage and other strategies. For a purely non-farm wage income strategy, the effect of education is evident only after the mean years of education of the household exceeds six years. Households with land above 20 hectares derive income from three main strategies: on-farm only; on-farm and non-farm self-employment only; and onfarm and non-farm self- and wage-employment only. xOverall the study obtains robust results for participation (number of non-farm activities), income shares and income strategies regressions. Education, household size and composition, wealth status (poorest 40% relative to richest 20%), access to credit, electricity and markets are main the determinants of non-farm income diversification in rural Ghana. On the effect of non-farm income on income inequality, the study finds that in aggregate, non-farm income worsened income inequality. In terms of its components, while non-farm self-employment income reduced income inequality, non-farm wage income on the other hand, worsened income inequality in rural Ghana. The results of the effect of non-farm income diversification on welfare indicate that participation in non-farm activity has a positive effect on household welfare. For instance, participation in non-farm activity increases welfare by approximately 10% above that of a household that does not participate in non-farm activity. The welfare level of households with two non-farm activities is 21% above that of households that do not participate in non-farm activity . The results also indicate that households combining on-farm activities with other offfarm activities or are engaged in purely non-farm activities are better off than households deriving income purely from on-farm activities. The findings call for a rethinking of strategies that have traditionally focused on improving agriculture as the solution to rural poverty. Strategies to promote rural economic activities need to take into account the heterogeneity in the asset positions across rural households and the multiplicity of activities in which they are engaged to generate income. A key determinant of non-farm income diversification is education. Enhancing better access to education and narrowing education inequality among rural households would go a long way to create opportunities for effective participation innon-farm activities and to alleviate rural poverty. Access to credit and electricity are important for non-farm self-employment (small and micro enterprises) activities. Policy should therefore aim at enhancing access to small credits to bridge the gap in physical assets endowments between asset-rich and asset-poor households. The policy of rural electrification must also be effectively implemented to promote village/ cottage industries. Improving the physical infrastructure like roads and markets would help in the growth of non-farm employment opportunities. Policy should aim at promoting access to well developed infrastructure. This study however does not advocate for a promotion of non-farm activities as a substitute for agriculture, but rather highlights the potential complementarities that may exist between the two