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Introduction

The traditional role of agriculture in farm household

diversification in rural economies is clearly visible as

these farm households across the developing and developed

world earn an increasing share of their income from nonfarm

sources. And the specialized nonfarm households that emerge

often diversify into multiple business activities. Decisions

affecting nonfarm enterprise creation, closure and growth are

thus commonly taken within the confines of a multi-activity

rural household. Thus, the nonfarm enterprise dynamics fit

into a household decision-making environment that helps to

shape labor and capital allocations across activities, as

well as outcomes. Consequently, a fuller understanding of

nonfarm enterprise dynamics requires an assessment of the

household decision-making environment within which these

decisions are frequently made. Household motives for

diversification, as well as the opportunities available to

them, differ significantly across settings and income groups,

suggesting an important distinction between: (1)

diversification undertaken for accumulation objectives,

driven mainly by “pull factors”; and (2) diversification

undertaken to manage risk, cope with shock, or escape from

agriculture in stagnation or in secular decline, hence driven

by “push factors.” These terms of push and pull factors are

found in many household and regional case studies that have

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examined patterns of household income diversification in the

developing world. While diversification driven by pull

factors is usually associated with an upward spiral of

incomes and assets for the households thus engaged, the

diversification by push factors sometimes extracts a

household from poverty, but can be merely a holding pattern

or one of immiseration (even “growth with immiseration” as

Barrett 1998 puts it) as the household adds the equivalent of

subsistence-level nonfarm activity to a risky and poor

agricultural income base. It thus becomes important for

policymakers to understand the nature and patterns of

household income diversification, and distinguish the factors

that drive households into nonfarm activity, and thus inform

program and policies.

The Problem

The pursuance of agriculture in rural areas does not only

bring about positive effects. It also thus brings about

negative effects. Therefore, we would be looking at the role

of agriculture in helping some poor households to be less

dependent on agriculture and diversify their source of

income.

The Statement of Purpose

The purpose of this study is to examine how agriculture has

enable farm households to diversify their sources from which

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they generate their incomes in order to sustain their

livelihoods. This will be done by answering the following key

question: How has agriculture led to farm household

diversification in rural economies? In order to come out with

such an analysis, we would be answering the following

implementing questions?

1. What is the economic role of agriculture in rural

economies?

2. What are the factors enhancing farm households

diversification in rural economies?

3. What are the challenges faced by farm households

diversification in rural economies?

4. What are the policies to encourage farm household

diversification in rural economies?

5. What are the Multiplier effects of agricultural

activities in rural economies?

The role of agriculture in rural areas in Austria

Agriculture has created employment

opportunities in rural areas. Almost or all of the

inhabitants of the rural areas rely on agriculture as a

source of employment for them and for the survival of their

households. In a census conducted in the rural areas of

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Australia in 2006, 246 600 people indicated that they were

employed in agricultural production at

the farm level, representing 2.7% of national

employment . Agriculture accounts for 4% of employment in

South Australia (OECD 2009). The sectoral composition of

rural areas should be viewed alongside the

institutional structure of businesses, as this may be

important in terms of contributing to the dynamism of the

economy. The rural economy is an important source of

small businesses and new start-ups (Defra, 2007c).

Rural areas of England account for approximately 19% of the

population and around 25% of the business stock, resulting in

more businesses per head in rural compared to urban areas. In

terms of business start-ups per 10 000 of population (OECD

2009), rural areas are roughly equal to or better than the

English average for business start-ups. However, rural

businesses tend to be smaller than in urban areas, a higher

proportion have no employees and while they have the highest

growth aspirations, they are actually the most likely to

have stayed the same size. Lack of managerial skills is cited

as a key limiting factor for rural businesses, and this is a

factor that applies both to agriculture and other sectors

(SBSAU, 2006).

The economic role of agriculture in

rural areas has facilitated a more increased use of the

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available land in most rural economies. This land may not be

used only for on-farm activities but also for off-farm

activities such as craft making. For example, in 2003, 43%

of the total New Zealand land area was used for

agricultural production, including land for grazing,

grassland, arable land and land used for horticulture. A

further 7% was in planted production forest. Plantation

forestry accounts for over 15% of land area in Bay of Plenty,

Gisborne and Marlborough. The smaller share of land used for

agricultural or forestry production in West Coast, Tasman and

Nelson, and Southland reflects a larger proportion of

conservation protected areas within these regions (OECD

2009).

As noted above, agriculture plays a

dominant role in land-use and in some regions it continues to

play an important role in the local economy. However, it is

increasingly the case that in economic terms “rural” is no

longer synonymous with “agriculture”, and “agriculture” is no

longer synonymous with “rural” (OECD 2006a). Data from 20

countries for 2000 indicate that − even in regions that

qualified as “predominantly rural” under the OECD

classification − an average of just 9% of the workforce was

engaged in agriculture, the remainder being employed in

industry or services (OECD 2006a).

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The Production function of agriculture

is another economic role which generally refers to particular

characteristics of agricultural production processes and its

outputs, and more specifically the existence of multiple

commodity and non-commodity outputs that are jointly produced

by agriculture. Some non-commodity outputs may exhibit the

characteristics of externalities or public goods (OECD,

2001). From the Austrian perspective, Wiesinger and Dax

(2004), for example, investigate elements of agricultural

multifunctionality in terms of externalities. In addition to

positive external effects, the authors also consider the

possible negative external effects caused by agricultural

land use and activities. The multiple functions of

agriculture listed above obviously relate to the positive

external effects as well as non-commodity outputs, both of

which farmers are usually not paid for.

In the other economic of agriculture

in rural economies, we look at the Economic function of

agriculture in rural economies where agriculture has led to

the generation of incomes by these farm households which has

enabled them to begin thinking of diversify their source of

income from on-farm to off-farm means of generating incomes.

However, this economic function also holds in the sense that

when this farm produce are harvested, they are taking to

nearby rural market where sales is carried by buyers from

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outside the rural economy thus also helping to generate what

is termed “new money” in that rural community and it is this

money which helps the farmers to sustain their livelihood and

also begin thinking of how to engage in other businesses

rather than agriculture. As a result, the economic function

of agriculture in rural economies cannot be undermined.

Another aspect is the increase in

the Gross Domestic Product (GDP) as a result of agriculture

in rural economies. Agriculture accounts for less than 5% of

GDP in majority of rural economies in OECD countries.

However, it continues to account for a proportionately larger

share of employment, and, in a few cases, for more than 10%

of total employment. Agriculture and forestry occupy the

majority of the land area in most countries across the OECD

area. According to statistics from the U.N. Food and

Agricultural Organization, agricultural land use accounted

for roughly 37% of the total land area of OECD countries; if

the use of land for forests is included, the figure rises to

68%.

Agriculture has played an important role in

the spatial function of rural economies where there has been

the development of road infrastructure, open space and

settlement for living. This road infrastructure enables the

transportation of farm produce from the farms to the market

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without which the farm produce may be damaged upon arrival in

the market thus the agriculture has played a large role in

the development of road infrastructures in rural areas and

also the effective functioning of the export market in these

rural communities. Also, this road infrastructure also

enables farmers to settle by their farms in order to enable

them pay more attention to their agricultural activities

which at times requires more attention.

However, various methods have been applied to

measure the multifunctional role of agriculture, but

quantification remains difficult. One main challenge refers

to measuring the value of non-commodity outputs because

markets for these goods tend to function inefficiently or are

non-existent. Moreover, Dissemond et al. (2003) argue that

standard measurement methods, for example those based on the

theory of economic externalities, are unsuitable and suggest

using a system theoretic approach that more appropriately

capture causal relationships as well as different actors

involved. While many studies are qualitative, quantitative

studies are rare and their results greatly depend on the

quantification method applied (e.g. Pevetz et al. 1990; Schmid and

Sinabell, 2004). Quantitative results about agricultural

multifunctionality are often at a highly aggregate level and

do not specifically refer to rural areas. As such,

conclusions about the multifunctional role of agriculture in

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rural economies are difficult. In the context of the EU-

funded project “Towards a policy model of multifunctional

agriculture and rural development” (TOP-MARD), Dax et al.

(2005) provide an overview of studies that attempt to

quantify the multifunctional role of agriculture in Austria.

What are the factors enhancing farm households

diversification into non-agricultural activities in rural

economies?

A major factor explaining household

diversification into non-agricultural activities is a desire

to obtain an alternative source of income. Studies have shown

and is continuing to show that on-farm, non-agricultural

enterprises and off-farm employment were important strategies

adopted by farm households facing cyclical commodity prices,

periodic rises in farm input prices and climatic events such

as prolonged drought. ―This pluriactivity helped to maintain

farm household incomes, while it defended farm equity and

provided greater opportunity for retirement and family

succession. (Taylor and McClintock, 2004).

An important driver for this was

the subsidy reform programme that began in New Zealand

in 1984, the impact of which has been well documented. One

of the initial farmer responses (along with a reduction in

capital expenditure, labour force, fertilizer, etc) was to

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seek off-farm employment. ―It was often only where off-farm

work was available that many farm-households were able to

survive. (Smith, 2006). A number of coping strategies were

adopted by farmers in the face of unfavourable ‗terms of

trade‘at the farm gate. The Strategies being deployed

include intensification or ―going organic on the

business side and off-farm work on the family side.

The variety and complexity of coping strategies

adopted on the family farm reflect its dual nature as a

business and household unit. (Joseph, Lidgard and Bedford,

2001).

Cash and in-kind non-farm income

contributes substantially to total household income. In rural

economies, rural non-farm income is considered key to rural

development policies aimed at increasing the incomes of small

farmers in addition to creating more employment opportunities

in rural areas. The creation of off-farm jobs also narrows

the income gap between rural and urban households, as well as

among farm households in rural areas.

None-farm income has a positive impact

on farmers’ well being. These positive impacts are to tighten

the labor market that the poor depend on; to help manage

risks by providing employment in during the off-season,

making full use of agricultural assets, or providing part-

time, home-based work which fits well with women’s other

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domestic work; to add value to farm activities (processing,

trade, storage, etc.); and to provide opportunities to learn

new skills.

Participation in agricultural and non-

agricultural wage employment is positively related to

household size. This makes sense, because larger households

can maintain their farm and household activities, while still

sending one or more members to work for others. Furthermore,

male-headed households are more likely to participate in wage

employment.

Although there are no cultural restrictions in the region for

women to enter the labour market, female-headed households

are often those where the husband left or passed away, so

that women have to spend more time on farm and household

duties to maintain a minimum subsistence level.

Age has a differential impact on

participation in agricultural and non-agricultural wage

employment, which might potentially be explained by different

physical fitness requirements across sectors. Manual

agricultural labour is often harder than work in other

sectors, so that older people are at a disadvantage.

Likewise, education has differential impacts. While schooling

does not seem to be important for agricultural wage

labourers, it significantly increases the probability of

finding work in non-agricultural sectors (Zhu and Luo, 2006).

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Accordingly, the average wage rate is lower in agriculture

than in other sectors. Noteworthy is also the highly

significant negative effect of market distance for

participation in agricultural wage employment. This is

probably related to higher agricultural labour demand in

areas close to the market, where farm production is often

more commercialized than in settings further remote.

Participation in self employment is mostly determined by

asset and Credit access was excluded from all the models

because it is endogenous and does not provide any insights

about financial constraints to enter off-farm activities.

Strikingly, farm size does not show a significant effect in

any of the models, which confirms that participation in off-

farm employment, is not primarily a response to household

land constraints.

While it is likely that poor and small-

scale farmers pursue a distress-push diversification to some

extent, there also seems to be a significant element of

demand-pull diversification, especially among the better-off.

The off-farm sector is quite heterogeneous, and households

appear to have unequal access to different parts of this

sector. The probit analysis confirms that poor households and

those who are disadvantaged in terms of education and

infrastructure are particularly constrained in their ability

to participate in more lucrative Off-farm activities.

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Increasing farm household income by

elevating agricultural income is limited. In Korea, farm

households have a small arable land area (1.43 ha on

average), there is only limited room to increase agricultural

productivity given the large number of older, less educated

farmers in Korean agriculture and limits on the level of

price support for agricultural products in an international

context. Therefore, the Korean government emphasized the

promotion of non-farm income.

Finally, improved accessibility in terms

of both transport and communication links have increased the

opportunities for farm households to diversify into non-

agricultural activities. Faster and cheaper transport has

played an important role in closing the distance between

rural and urban areas (Pool et al., 2005). The internet has

been successfully used to market both agricultural

products ( e.g. many vineyards use the internet as a

medium through which their wine can be purchased) and

non-agricultural (e.g. farm stay accommodation)

Farm household diversification into

nonfarm activities emerges naturally from diminishing or

time-varying returns to labor or land, from market failures

(e.g., for credit) or frictions (e.g., for mobility or entry

into high-return niches), from ex ante risk management, and

from ex post coping with adverse shocks. Where returns to

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productive assets vary across time (e.g., land, labor or

livestock across dry and wet seasons) or among individuals

within a household or households within a community, data

aggregated across time, individuals, or households will

exhibit diverse assets, activities and incomes even if there

is complete Ricardian specialization according to comparative

advantage. Such aggregation likely accounts for a substantial

proportion of the diversification reported in empirical

studies.

Additional explanations turn on

incomplete markets (e.g., for land, labor, credit, or

insurance). Missing land markets, for example, can help

explain why a skilled blacksmith who inherits land spends

scarce time farming although his comparative advantage lies

in smith work. Were land markets operative, he might rent out

or sell his land and devote all his time to blacksmithing.

But in the absence of land markets, and in the presence of

labor market imperfections that preclude his simply hiring

others to work his land for him, his optimal use of labor

time may well include time spent on relatively less

productive farming, else his land asset returns nothing to

him. Observed diversification of labor activities and income

for this hypothetical individual would then be attributable

primarily to the absence of markets.

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.Challenges of diversification in rural areas

The Weak entrepreneurial skills,

insufficient knowledge about the new activity and the

mentality of most farm households has limited their ability

to diversify on-farm activities for non-farm activities. Most

farm households in rural economies has the zeal and

excitement to get into another means of source of generating

income but lacks the foresight or insight knowledge about the

functioning of that particular source of income generation. A

result of which will lead to most of these farm households

failing in their quest to diversify their income generating

sources.

Most farm households in their quest to

diversify their source of income from on-farm to non-farm

income sources lack the sufficient human and physical capital

with which to carry about other businesses. Human capital in

business is a serious complement in a business entity because

you must be able to understand what the business demands and

knows what to do in order to keep the business floating but

the adequate of these human capital in most rural economies

has impeded the effective operation of off-farm income

generating activity by the rural areas. In continuation,

there are some businesses which require a lot of physical

capital with which to operate the business just like in the

case of warehousing which needs wage labour for the packing

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of goods. The lack of money with which to cater for the

services of the labour force impedes the ability of farm

households to diversify their sources of incomes.

The Lack of information about the demand

for certain type of goods is another challenge faced by rural

economies in their process of diversification. Market

information is crucial about the success of certain types of

businesses. There are certain businesses which operate on a

seasonal basis and require a lot of information about the

period which it is available. In most rural economies, there

is the acute lack of information about the market demand on

certain types of products thus the inhabitants of the rural

areas with the lack of information about market demand

ventures into the businesses which are not in demand at that

particular period of time a result of which will result in

their folding out of business.

The presence of various local competitors

in the market is a serious challenge to the survival of newly

diversified source of income in farm households. Other local

competitors. However, new businesses coming into the market

face serious competition from already existing operators who

had been in the domain for a certain period of time before

the coming of most farm households. These old business

operators will try to do everything possible in order to

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ensure that the new businesses diversified into by the farm

households find it hard to survive and adapt to the

conditions of the market.

Finally, government policies pose a

serious challenge to the smooth of new business by most farm

households. There are some goods which are considered as

contraband and illegal to be sold or require the issuance of

special licenses before they go on sale. However, the

complexity of the government mechanism renders it extremely

difficult for most farm households to acquire such rights and

licenses with which to operate such business this hindering

the effective functioning of most farm household businesses.

Also, some challenges may be more acute in

rural areas than elsewhere. When taking up alternative income

sources, agricultural holdings in rural areas may be

particularly confronted with challenges related to location.

With regard to renewable energy as an alternative income-

generating activity, there emerges the problem of the

distance to markets. Similar problems seem relevant for

direct marketing activities. While consumers may not find

their way to remote farm shops, neither are consumers of the

respective agri-food products or other non-agricultural

products easily reachable. While selling opportunities are

limited in rural areas, this means that changes in consumer

preferences and trends are more difficult to identify. Even

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if situated in a favourable location to centres or cities,

there must of course be consumers that demand and are willing

to pay for the respective products to ensure the

sustainability of the direct marketing activity.

Next to the aforementioned examples, other specific

challenges of income diversification for farmers in rural

areas could be thought of but evidence is missing. Studies

explicitly analyzing challenges of income diversification in

rural areas are not available.

Policies to encourage diversification of farm household inrural economies

Government policies can act as a stimulus

to the diversification of economic activities of farm

households in countries where diversification is a policy

objective. The OECD has examined the impact of selected

policies and countries (OECD, 2009a). Over the last twenty

years, a number of policy measures designed to encourage

diversification, have been introduced in certain OECD

countries. These include grants for processing and marketing

of agricultural products, afforestation and the development

of other activities such as tourism and craft-related

enterprises.

Vocational training and business

development schemes have also been used to encourage

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diversification. Facilitation activities, such as the

provision of information, industry organization and market

creation have also been employed. However, public expenditure

on measures specifically designed to promote diversification

has tended to be modest in comparison to other expenditures

on agriculture, such as price and income support.

A range of other policies can affect the likelihood that farm

households will attempt to diversify their economic

activities. In a survey carried out by OECD through the use

of questionnaires, it indicates that land-use regulations can

be an important factor, particularly for the development of

activities that require a change of use of existing buildings

or new construction. Differing labour regulations for work

that is classified as agricultural, as distinct from other

work, may also have an impact in certain cases.

In some countries access to other forms of support (e.g. income

support or on-farm investment schemes), may be limited if

farmers devote too much of their time to non-agricultural

activities, or earn too much income from them. This can also

apply to eligibility for preferential treatment for farmers

under social security systems in some countries and for the

treatment of taxation. While such measures may have the aim

of redressing perceived economic disadvantages faced by

farmers, they may act as a disincentive to diversification.

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However, these measures can have other objectives, which

should be taken into consideration.

Multiplier effects of agricultural activities in rural farm

households

Agriculture is closely integrated with

other sectors of the economy. On the one hand, agricultural

holdings demand inputs (production inputs, investment goods,

and services) for their farming activities, and on the other

hand they supply their output either to consumers or to

further processing, both commercial and craftsmanship.

Through these linkages agriculture affects income and

employment in up-stream and down-stream sectors. These

effects in the up-stream and down-stream sectors are indirect

and in addition to the direct effects for farm households. If

income generated by either direct or indirect effects is

spent within the region, further economic effects are

induced. Due to these multiplier effects, agriculture is

often claimed to be a motor for economic development in rural

areas, and the possible multiplier effects should be ideally

included when analyzing the importance of agriculture in

rural areas.

From a policy perspective it is valuable to

know the relative performance of the different levers by

which economic activity in rural areas can be stimulated.

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Agriculture, other (diversified) enterprises on farms, non-

agricultural activities which may be located in rural areas

or even those that are urban-based but have strong links with

rural residents are all candidates. So too are the means of

communication (transport infrastructure, IT facilities, etc.)

that enable economic links to function. When incomes and

employment are discussed, frequently the attention focuses on

quantities. However, when job creation is concerned, it may

be equally important to have regard to qualitative aspects –

the full-time or part-time nature of the employment offered,

its seasonal or constant nature, level of associated pay,

sustainability with respect to economic shocks, and the

biographics of the people for whom opportunity is provided

(gender, age groups, skills levels, ethnic origin etc.) are

all of potential interest. Clearly, the social impact of

public spending that generates jobs for unskilled school-

leavers belonging to rural resident families is potentially

very different from that which encourages an inflow of

population, especially if the in-migration contains a high

proportion of entrepreneurs wishing to take advantage of

perceived quality of goods produced in the countryside.

Agriculture and rural areas have become

more attractive for the younger generation in the rural

areas. Beyond farmers’ heirs staying on farms there is

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migration from urban areas. Before the year 2000, rural areas

were a place of negative net migration. This however had

another twist in the year 2000 as there was positive net

migration from urban to rural areas. It is a very positive

trend in rural areas. First, because young farmers are less

afraid of changes. Second, they are more motivated and

innovative and, third, they are better educated, travel which

offers them different perspectives, and use foreign and urban

samples more easily. Fourth, they have better contact with

the urban culture and lifestyle that enables better co-

operation with town dwellers and creates services for them.

The way of thinking of local government

representatives is changing. They are more assessed by local

society - more confident and conscious of its needs and

expectations from authorities. Local authorities have broader

range of instruments influencing the changes in their

activities like: infrastructure and environmental

investments, soft ones like expertise, trainings, researches,

attracting investments/ new jobs. Moreover, the quest for

transparency limits the briberies and corruption amongst

local authorities.

Conclusion

The contribution of agriculture in farm households play a

role in rural areas through the contribution made by their

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farming activities, on-farm activities that go beyond

production agriculture, and their participation in the

broader rural economy. An important issue, therefore, is the

extent to which policies can help farm households increase

their contributions in these areas or alternatively may act

to constrain that contribution.

Farm households, in common with non-farm households, are

heterogeneous. Their ability to adapt to economic change and

to take advantage of opportunities that this creates will

vary. However, three sets of characteristics are particularly

important: i) human capital characteristics, such as age,

experience, education and training, in addition to personal

characteristics such as intelligence, motivation and

attitudes to risk; ii) the nature of the farm and farm

business – for example, the size of the farm, land quality,

and access to capital; iii) the external environment in which

the farm household operates – for example, access to markets,

quality of infrastructure, off-farm employment opportunities,

and the strength of formal and informal local social

networks. However, the importance of these factors varies

across different rural areas as well as among households.

References;

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