Diversification into Non-Farm Activities in Ethiopia: Determinants and Income Distribution Effects. Application of a Two-Part and Regression Based Inequality Decomposition

This study investigates the determinants of income diversification for non-farm activities using a two-part model and a breakdown of income inequality using Gini and regression-based inequality decompositions using data from the Ethiopian Rural Household Survey (2009). Results of the Gini decomposition show that the largest share of income came from farm income followed by non-farm income. Non-farm income was distributed more equally compared to farm income. The relative contribution of each source of income to the overall income inequality is indicated as: farm income 0.44, non-farm 0.05 and off-farm 0.03. Non-farm wage employment accounted for the largest share of non-farm income and made the largest contribution to overall income inequality. Moreover, non-farm wage employment tended to decrease income inequalities while non-farm self-employment had the opposite effect on inequalities. The results of the determinants of diversification show that female-headed households were more likely to participate in rural non-farm activities and gather higher incomes from non-farm activities as compared to male-headed households and that the level of non-farm incomes increased with an increase in formal education. Our findings suggest that although most rural households participated in the farm sector, rural development policies aimed at reducing inequalities should pay attention to non-farm income generating activities. Policies directed at the rural non-farm economy can be an additional option for minimizing problems associated with droughts, shortage of land and poverty.