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Ethiopia: Diversifying the Rural Economy. An Assessment of the Investment Climate for Small and Informal Enterprises

Author

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  • Loening, Josef
  • Mikael Imru, Laketch
Abstract
The Rural Investment Climate Assessment (ICA) is one of the first studies of small and informal firms in rural and semi-urban areas in Ethiopia. Little was known about the nature and size distribution of small, rural firms, the constraints they face when trying to expand or even to survive, the significance of their impact on the broader rural economy, and the policies, reforms and public investments that could spur investment by rural non-farm enterprises. One quarter of all households in rural Ethiopia own and operate a small enterprise. For these households, the income they earn from the business contributes about 40 percent of their total household income, indicating that the nonfarm sector in rural areas is significantly larger than was previously thought. The Rural ICA finds that participation on small and informal enterprise in rural areas contributes to achieving growth and food security as well as in reducing poverty and inequality. Among the recommendations of the Rural ICA is a call for the development of rural market towns. Small, fragmented markets are the major constraint to business performance and growth. In small market towns demand is higher, transaction costs are lower, competition is stronger, and there are more incentives to invest. Although, overall, nonfarm enterprise productivity and profits are low, enterprises in rural towns are as productive as informal small enterprises in urban areas - and about 50 percent more productive than enterprises in remote rural areas. As the Ethiopian economy develops, with higher productivity and better performance in agriculture, the nonfarm sector will also grow and become increasingly important as an alternative employer of labor and source of livelihood in rural areas. This suggests the policy priority should not be 'either agriculture or the nonfarm sector' but a balanced approach.

Suggested Citation

  • Loening, Josef & Mikael Imru, Laketch, 2009. "Ethiopia: Diversifying the Rural Economy. An Assessment of the Investment Climate for Small and Informal Enterprises," MPRA Paper 23278, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:23278
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    References listed on IDEAS

    as
    1. Fafchamps, Marcel & Quisumbing, Agnes, 2005. "Assets at marriage in rural Ethiopia," Journal of Development Economics, Elsevier, vol. 77(1), pages 1-25, June.
    2. Klugman, Jeni & Loening, Josef, 2007. "Welfare Impacts of Food Price Inflation in Ethiopia," MPRA Paper 24892, University Library of Munich, Germany.
    3. Mukherjee, Anit & Zhang, Xiaobo, 2007. "Rural Industrialization in China and India: Role of Policies and Institutions," World Development, Elsevier, vol. 35(10), pages 1621-1634, October.
    4. Haggblade, Steven & Hazell, Peter B. R. & Reardon, Thomas, 2009. "Transforming the rural nonfarm economy: Opportunities and threats in the developing world," Issue briefs 58, International Food Policy Research Institute (IFPRI).
    5. M. Fafchamps & A. R. Quisumbing, 2002. "Control and Ownership of Assets Within Rural Ethiopian Households," Journal of Development Studies, Taylor & Francis Journals, vol. 38(6), pages 47-82.
    6. Shiferaw T. Feleke & Richard L. Kilmer & Christina H. Gladwin, 2005. "Determinants of food security in Southern Ethiopia at the household level," Agricultural Economics, International Association of Agricultural Economists, vol. 33(3), pages 351-363, November.
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    Citations

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    Cited by:

    1. Fox, Louise & Sohnesen, Thomas Pave, 2013. "Household enterprises in Mozambique : key to poverty reduction but not on the development agenda ?," Policy Research Working Paper Series 6570, The World Bank.
    2. Lili Wang & Yi Wen, 2018. "Escaping the Middle-Income Trap: A Cross-Country Analysis on the Patterns of Industrial Upgrading," Working Papers 2018-1, Federal Reserve Bank of St. Louis.
    3. Ali, Merima & Peerlings, Jack H.M., 2011. "Farm Households Entry and Exit Into and From Non-farm Enterprises in Rural Ethiopia: Does Clustering Play a Role?," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114220, European Association of Agricultural Economists.
    4. Alan de Brauw & Valerie Mueller & Tassew Woldehanna, 2018. "Does Internal Migration Improve Overall Well-Being in Ethiopia?," Journal of African Economies, Centre for the Study of African Economies, vol. 27(3), pages 367-367.
    5. M. J. Hossain & A. Debnath & M. F. Imam & M. A. Islam & F. Elahi, 2019. "Effects Of Non-Farm Income On Poverty And Inequality In Rural Bangladesh," Bangladesh Journal of Agricultural Economics, Bangladesh Agricultural University, vol. 39(1&2), December.
    6. Mandefro Seifu & Jema Haji & Temesgen Keno & Dawit Diriba, 2023. "Determinants of nonfarm livelihood diversification: evidence from farmers in Ilu Abba Bora zone, Southwestern Ethiopia," SN Business & Economics, Springer, vol. 3(8), pages 1-16, August.
    7. Al-Amin, A.K.M. Abdullah & Hossain, M.J., 2019. "Impact of non-farm income on welfare in rural Bangladesh: Multilevel mixed-effects regression approach," World Development Perspectives, Elsevier, vol. 13(C), pages 95-102.
    8. Reeg, Caroline, 2015. "Micro and small enterprises as drivers for job creation and decent work," IDOS Discussion Papers 10/2015, German Institute of Development and Sustainability (IDOS).
    9. Fox, Louise & Sohnesen , Thomas Pave, 2012. "Household enterprises in Sub-Saharan Africa : why they matter for growth, jobs, and livelihoods," Policy Research Working Paper Series 6184, The World Bank.

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    More about this item

    Keywords

    Ethiopia; enterprise performance; informal sector; rural-urban linkages;
    All these keywords.

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure

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