Rural Non-Farm Enterprises Operate Mainly in Survival Mode Paula Nagler and Wim Naudé Annual Bank Conference on Africa, Paris, 23 June 2014 AGRICULTURE IN AFRICA TELLING FACTS FROM MYTHS

Page 2 Outline Introduction Conventional Wisdom New Empirical Evidence – How prevalent are non-farm enterprises in rural Africa? – Why do households operate non-farm enterprises? – How many months per year and where do the households operate them? – How productive are rural non-farm enterprises? – Why do they cease operations? Conclusion: Myth or Fact? Rural Non-Farm Enterprises Operate Mainly in Survival Mode

Page 3 Introduction Faster poverty reduction 3% annual growth in labor supply 170 million new labor market entrants between 2010 and 2020 Rural non-farm enterprises need to create 65 million new jobs Can they create enough jobs?  If they operate mainly in “survival mode” then this may be unlikely Rural Non-Farm Enterprises Operate Mainly in Survival Mode

Page 4 Conventional Wisdoms Most rural non-farm enterprises are operated due to necessity Most are informal and create largely jobs for family members Enterprise growth is rare Credit constraints are a significant obstacle for entrance and growth  Empirical evidence limited Rural Non-Farm Enterprises Operate Mainly in Survival Mode

Page 5 How Prevalent are Rural Non-Farm Enterprises? New Empirical Evidence Source: Authors' calculations based on LSMS-ISA data. Notes: Weighted country shares are calculated using survey weights, total share includes population weight. Enterprises are ubiquitous in rural Africa with diverging importance between countries Average number of enterprise per household shows large variety

Page 6 What is their Contribution to Rural Household Income? Source: Authors' calculations based on RIGA data (weighted shares). Notes: Rural Areas only. Importance of self-employment also shows large variety: from 9% in Malawi to 36% in Niger Agriculture contributes the largest share of income in all four countries Compared to urban areas (not incl. in figure): income from self- employment is smaller in rural areas New Empirical Evidence

Page 7 What Type of Non-Farm Businesses are Operated? Source: Authors' calculations based on LSMS-ISA data (weighted shares). Notes: rural areas only. New Empirical Evidence

Page 8 Do Non-Farm Enterprises Create Permanent or Temporary Jobs? Source: Authors' calculations based on LSMS-ISA data (weighted shares). Notes: Enterprises that are less than one year in operation are excluded. Number of months per year a rural enterprise was operating in the year preceding the survey Signicant proportion of rural enterprises operated less than 6 or 12 months per year Only between 42% and 64% operated continuously during the year  Indication for seasonality in agriculture New Empirical Evidence

Page 9 Why Do Rural Households Operate Non-Farm Enterprises? Push Factors Food shortage Shocks Household size (surplus labor)  Malawi and Niger: households that experienced food shortage during the previous year were 3% and 10% less likely to operate an enterprise Pull Factors Education (measured here by the ability to read and write) Access to credit Wealth (measured here by reported assets)  Ethiopia and Malawi: households with access to credit were 9% and 7% more likely to operate an enterprise  Credit market failures may limit utilization of opportunities New Empirical Evidence

Page 10 How Productive are Non-Farm Enterprises?  Urban enterprises are more productive But the urban-rural dichotomy may obscure important geographical patterns of productivity dispersal Further findings: – Female headed households operate less productive enterprises – Small difference between waves New Empirical Evidence NigeriaUganda

Page 11 How Productive are Non-Farm Enterprises? Consider the case of the four regions of Uganda, and the distance of enterprises from secondary towns. Consistent with Christiaensen et al. (2013) proximity to a secondary towns increases enterprise productivity. Enterprise Productivity and Survival

Page 12 Productivity Dispersal Among Types of Businesses Substantial dispersal in the productivity levels of different types of enterprises Transport and restaurants services are more productive than sales or agribusiness More productive businesses are activities where credit and capital may be vital Enterprise Productivity and Survival Ethiopia Source: Author’s calculations based on LSMS-ISA data.

Page 13 What Determines the Productivity of Enterprises? Heckman two-step sample selection model If households are pushed into entrepreneurship due to shocks and uncertainty in farming: Expectation that they enter relatively low-risk, but also low productive types of businesses Productivity is negatively influenced by – Rural (location), female (gender), idiosyncratic shocks, distance Productivity is positively influenced by – Ability to read & write (education), age (experience), months in operation per year Access to credit has an ambiguous effect in Malawi – Increases the probability of entry into non-farm entrepreneurship – But associated with lower enterprise productivity Enterprise Productivity and Survival

Page 14 Why Do Enterprises Cease Operations? The LSMS-ISA data: limited information on the survival of enterprises In the literature on enterprise survival Africa (focus on urban areas) it has been established that – Managerial and technical skills, finance and social networks, the macroeconomic and business environment, as well as firm age and size determine the likelihood of enterprise survival – Significant proportion of enterprises do not exit the rural market due to economic or business reasons, but due to personal reasons We have answers of why non-farm enterprises were discontinued in the case of Uganda Enterprise Productivity and Survival

Page 15 Why Do Enterprises Cease Operations? Enterprise Productivity and Survival Source: Author’s calculations based on LSMS-ISA data (weighted shares). Table: Reasons for enterprise exit (in %) - Uganda

Page 16 Myths or Facts? Fact: Enterprises as risk-management tool – Rural enterprises are often started as a risk-management and risk-diversification strategy by households facing a risky environment with market imperfections Fact: “Informal is normal” – Almost all non-farm enterprises are informal  norm Myth-ish: Enterprises are only “survivalist” – Informal enterprises with higher productivity exist in rural areas: tier 1 and tier 2 type of enterprises (mark duality also in the informal sector) Myth-ish: Micro-finance is a panacea – Micro-finance cannot solve the problems of development in the rural non-farm enterprise sector – Micro-insurance and social protection may have important efficiency-improving impacts Conclusion

Thank you for your attention AGRICULTURE IN AFRICA TELLING FACTS FROM MYTHS