Economic Diversification

of the Rural Economy

DECENT WORK IN THE RURAL ECONOMY

POLICY GUIDANCE NOTES
Rural economic diversification, both within agriculture and into non-agricultural
activities, has significant potential to reduce poverty, increase coping mechanisms
in face of crop failure or price volatility, and improve food and livelihood security
of rural households. While approximately 20 to 50 per cent of the rural population
in Africa, Asia and Latin America is employed in non-farm work, a large share
of the population continues to depend on agriculture for their livelihoods. A
dynamic agricultural sector should therefore be at the centre of rural development
strategies, creating better jobs in the sector and, at the same time, enabling the
growth of non-farm activities in the rural economy. To secure the potential of
economic diversification for poverty reduction and decent work, three main policy
priorities are suggested: strengthening family farms; developing the food product
markets, breaking down the barrier of risk for the producer; and implementing
this in the framework of territorial policies that strengthen rural-urban linkages
through the promotion and development of the service functions of small cities
and country towns. The International Labour Organization (ILO) has relevant
technical expertise in sectoral policies, training, local economic development,
value-chain analysis, small enterprise development, policy-making and social
dialogue, thus it can contribute to this agenda for economic diversification in
rural areas.
 Economic Diversification of the Rural Economy

1. Rationale and justification

The rural economies of lower-income countries remain areas of seven developing countries (Kenya, Madagascar,
characterized by the significant weight of largely subsistence- Mali, Mexico, Morocco, Nicaragua and Senegal), 93 per cent
driven agriculture. According to surveys conducted in 26 rural of surveyed households own a farm.1

Table 1. Agricultural employment and productivity by national income level, latest year available
Agricultural employment Agriculture Cereal yield Agricultural productivity
(% of total employment) (% of GDP) (kilograms (value added per worker,
per hectare) 2005 $)
2010-12 2012 2013 2013

World 30.5 3 3,851 1,201

Low income countries - 28 2,146 336

Middle income countries 37.6 10 3,752 1,060

Lower middle income 43.1 17 3,101 937

Upper middle income 29.5 8 4,400 1,159

High income countries 3.5 1 4,916 18,497
Source: World Bank: World Development Indicators 2014 (Last updated date 16 Dec. 2014).

Poverty is generalized in rural areas. The proportion of the If countries are to reduce poverty rapidly, developing a
population below the national poverty line in rural areas dynamic If countries are to reduce poverty rapidly, developing
ranges between 84 per cent in Zimbabwe and 42 per cent in a dynamic agriculture sector and diversifying into non-
Papua New Guinea. It is on average 2 to 3 times higher than agricultural activities must be key objectives.2 The development
urban poverty, except in Viet Nam and Cameroon, where of non-farm economic activities is largely a consequence of
it is 4.5 times higher. In such a context of poverty, people growth of agricultural production. For example, in South-East
in rural areas of low and lower middle income countries Asian economies, it was the prosperous agricultural sector
concentrate on minimizing risks and seeking food security that ultimately generated surplus wealth, which helped to
by producing food for self-consumption. fund investment in industrial enterprises. The prospects for
economic diversification and the shift from farm to non-farm
sectors are thus brightest in well-connected rural regions
Good with rapidly growing agricultural sectors.
infrastructure

Rural economic
diversification
Dynamic
agricultural sector

1 B. Losch, S. Fréguin Gresh and E. White: Rural Transformation and Late Developing Countries
in a Globalizing World. A Comparative Analysis of Rural Change, Final Report of the RuralStruc
Program, Revised Version, Washington, DC, World Bank, 2011.
2 UNCTAD: The Least Developed Countries Report 2014: Growth with structural transformation:
a post-2015 development agenda, Geneva, 2014.

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Economic Diversification of the Rural Economy

2. Scope and definitions

The rural economy encompasses a diversity of livelihoods; farm economy (RNFE) has also rapidly expanded, leading
it is not limited only to the agricultural sector and production to increased income and stability for rural populations.6
of primary goods.3 Broadly, the rural economy may be Studies on growth linkages suggest that each dollar of
categorized into: the agricultural/farm sector producing additional value added in agriculture generates between
primary goods; and the non-agriculture/non-farm sector, US$0.6 to US$0.8 of additional income in the RNFE in Asia
which includes all non-agricultural economic activities that and US$0.3 to US$0.5 in Africa and Latin America.7 Today,
generate income for rural households.4 Thus, non-farm the impact of economic diversification of rural economies
sector activities are highly heterogeneous, including mining, through the growth of the RNFE as a response to a productive
manufacturing, utilities, construction, commerce, tourism, agricultural sector is increasingly recognized as an important
transport, and financial, personal and government services. driver for structural transformation in developing countries.8
Economic diversification of the rural economy refers to the
shift from agriculture to non-farm sector activities within The creation and sustainability of production and consumption
rural areas, or to the diversification of economic outputs linkages between sectors is an important component of
within these sectors. economic diversification in rural areas.9 Farm and non-farm
economies are linked though production activities and
There is considerable evidence that agricultural growth also indirectly through linkages of income or investment.
and productivity is an important engine to ensure such a Production linkages could occur when agricultural sector
transformation.5 Increasing the productivity of the agricultural growth leads to expanding inputs and services into the
sector has significant multiplier effects in stimulating other non-farm sector, or when non-farm sector activities -- like
sectors of the rural economy. In areas where there has been agro-processing and distribution that rely on farm inputs
a robust growth in the agricultural sector, the rural non- -- increase demand for farm products.10

Table 2. Growth linkages: Agriculture to Non-farm Sector, by sector

Linkage to Agriculture Secondary Sectors Tertiary Sectors (Trading and Services)
(Construction and Manufacturing)
Production: Forward linkages Processing and packaging industries. Transport and trade
Construction of storage and marketing
facilities
Production: Backward linkages Agricultural tools and equipment Agricultural and veterinary services. Agrochemicals.
Input supply
Expenditure: Consumption Household items and home improvements Domestic services. Transport. Sale of consumer goods

Source: D. Start, The Rise and Fall of the Rural Non-farm Economy: Poverty Impacts and Policy Options, Development Policy Review, Vol. 19 (4), pp. 491-505, 2001.

6 Ibid.
7 S. Haggblade, P. Hazell and P. Dorosh: “Sectoral growth linkages between agriculture and the
rural non-farm economy”, in Haggblade, Hazel and Reardon (eds.): Transforming the Rural
Nonfarm Economy (Baltimore, Johns Hopkins University Press, 2007), pp. 141-182.
8 ILO: “Why agriculture still matters”, in World Employment Report 2004–05, Geneva, 2005,
pp. 127-182.

3 J.R. Davis and D. Bezemer: “Key emerging and conceptual issues in the development of the RNFE 9 The growth literature identifies two major types of farm/non-farm linkages: production and
in developing countries and transition economies”, NRI Report No. 2755, Chatham Maritime expenditure. Forward production linkages occur when a part of the non-farm sector uses
(Kent), Natural Resources Institute of the University of Greenwich, DFID and the World Bank, agricultural output as an input. Backward production linkages refer to linkages occurring when
July 2003. the non-farm sector provides inputs for agricultural production, for example agrochemicals.
Expenditure linkages can be divided into consumption and investment linkages: consumption
4 J.R. Davis: “The Rural Non-Farm Economy, livelihoods and their diversification: Issues and linkages refer to expenditures related to household consumption; investment linkages refer to
options”, NRI Report No. 2753, Chatham Maritime (Kent), Natural Resources Institute of the expenditure used to finance farm or non-farm activities. B. Davis, T. Reardon, K.G. Stamoulis
University of Greenwich, DFID and the World Bank, July 2003. and P. Winters: “Promoting farm/non-farm linkages in developing countries”, in B. Davis, T.
Reardon, K.G. Stamoulis and P. Winters (eds.): Promoting farm/non-farm linkages in rural
5 S. Haggblade, P. Hazell and T. Reardon: “The Rural Non-farm Economy: Prospects for Growth development: case studies from Africa and Latin America, Rome, FAO, 2002, pp. 1-9.
and Poverty Reduction”, in World Development (2010, Vol. 38, Issue 10, October), pp. 1429-
1441. 10 Davis and Bezemer, 2003, op. cit.

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 Economic Diversification of the Rural Economy

The process of economic diversification therefore depends of small farms can serve as an engine for the development
heavily on the productive performance of the agricultural of a vibrant and diversified local economy, while at the
sector, which creates demand and supply for the non-farm same time small farms depend on the local economy for
rural economy. This process is already underway in a number inputs, services and as a market for their products. On the
of transitioning and developing countries, where between other hand, large commercial farms or plantations, though
40 to 70 per cent of rural incomes and jobs are drawn from often characterized by decent work challenges, may not,
the non-farm sector.11 The structure of rural employment need a diversified local economy to flourish as they can
varies across developing regions. Off-farm work employs link up directly to more distant urban markets.
approximately 48 per cent of men in the rural economies
of Latin America, the Caribbean, South Asia, and the Middle 2. Developing food product markets, breaking down the
East and North Africa, 38 per cent in East Asia and the Pacific, barrier of risk for food-crop producers: The risk-averse
and 20 per cent in rural sub-Saharan Africa. For women, strategies of farmers, combined with difficulties in linking
the proportions tend to be lower.12 to international markets, explain the predominance of
food-crop production – mainly cereals and root crops
Patterns of rural employment in developing countries – in the choice of producers. The link to international
demonstrate that most households do not specialize in markets, when it exists, happens primarily via traditional
either agriculture or non-farm activities, but seek incomes export crops (cotton, groundnuts, coffee), which mobilize
from a combination of farm and non-farm sources. Thus, traditional trade circuits. High value-added exports are
household participation in the non-farm economy may be generally very localized, linked to specialized operators
part-time or seasonal.13 The decision to diversify incomes in and benefit only a low proportion of agricultural holdings.
rural households tends to be based on “push factors”, such as Food product markets at the national and sub-regional
risk reduction, reaction to crisis, liquidity to stabilize income levels remain the most accessible. They also benefit from
flows, or due to “pull factors”, i.e. through the realization of strong and sustainable demand. Developing food product
strategic opportunities or complementarity between different markets, and reducing risk for the producer, is central for
productive activities.14 innovation and rural diversification.

To secure the potential of economic diversification for poverty 3. Implementing such an approach must take place in the
reduction and decent work, three main policy priorities framework of territorial policies aiming at strengthening
are suggested:15 rural-urban linkages through the promotion and
development of the service functions of small cities
1. Strengthening small farms, because they employ the vast and country towns, often neglected in favour of larger
majority of the agricultural labour force, represent the metropolitan cities.
largest production and employment potential, and generate
the biggest share of rural incomes. A dynamic development

11 Davis, 2003, op. cit.

12 ILO: Skills for Rural Employment and Development, Skills for Employment Policy Brief, 2014;
World Bank: World Development Report 2008: Agriculture for development, Washington,
DC, 2007; International Fund for Agricultural Development: Rural Poverty Report 2011. New
realities, new challenges: New opportunities for tomorrow’s generation, Rome, 2010.
13 FAO, IFAD and WFP: The State of Food Insecurity in the World 2012. Economic growth is
necessary but not suf¬ficient to accelerate reduction of hunger and malnutrition, Rome, FAO,
2012.
14 C.B. Barrett, T. Reardon and P. Webb: “Nonfarm income diversification and household livelihood
strategies in rural Africa: concepts, dynamics and policy implications”, in Food Policy, Vol. 26,
2001, pp. 315-331.
15 Bruno Losch: “Crisis prevention in Sub-Saharan Africa – Agriculture: the key to the employment
challenge”, in Perspective n°19, Paris, CIRAD, October 2012.

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Economic Diversification of the Rural Economy

3. The ILO’s approach

The ILO’s approach to economic diversification in rural areas identifying lessons learned as well as tools and approaches that
focuses on developing the capacity to provide technical advice can then contribute to a national rural employment strategy.
on which sectors have an employment creation potential and
which policies are needed to support the development of The ILO possesses several comparative advantages and
these sectors for the creation of decent work. considerable expertise in technical areas that support
economic diversification in rural areas:
The first element of this strategy – sectoral employment
impact assessments – builds on extensive work done by the • Organizational mandate to promote decent work at all
ILO using Input/Output tables, Social Accounting Matrices levels and in all sectors of the rural economy (established
and Dynamic Social Accounting Matrices, Computable in 1921 and confirmed in 2008 and 2011).
General Equilibrium and Employment Projection models.
The methodologies have been used in various contexts and • Normative capacities with a wide range of tools and
by different ILO programmes and provide results that can standards to support policy-making in the rural economy,
inform policy-making. It is possible to include a special focus including non-agricultural sectors.
on youth (including the link to child labour) and/or women
in these assessments. • Tripartite structure promoting social dialogue and building
on the expertise of the social partners.
The second element – what policy package to support the
• Technical capacities in a number of relevant areas, such as:
development of specific sectors – can take different forms.
Local Economic Development (LED), employment-intensive
One consists in analysing the constraints to sector growth from a
infrastructure investments, entrepreneurship, cooperatives,
decent work perspective and offering policy recommendations
value chains, micro-finance, green jobs, skills and training
to overcome these constraints. A large number of policy areas
for rural empowerment, employment policy (informal
can be covered, such as skills development, enterprises and
employment), occupational safety and health, social
cooperatives development, occupational safety and health,
protection coverage, labour inspection, sectoral policies
social security coverage, labour inspection, etc. The ILO has
and sectoral employment impact assessments.
developed various methodologies for this analysis, among
which the TREE (Training for Rural Economic Empowerment) • Partnerships with UN agencies and other organizations (the
and the STED (Skills for Trade and Economic Diversification) Food and Agriculture Organization of the United Nations,
approach. Another way of approaching the development the International Co-operative Association, the International
of an integrated policy package is to take a geographical Fund for Agricultural Development, the World Tourism
approach and to develop rural employment strategies with Organization, etc.).
the involvement of local stakeholders. Concretely, this consists
in supporting policy planning and programme development
for rural employment at the local level first, with a view to

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 Economic Diversification of the Rural Economy

4. The ILO’s experience to date

The ILO’s experience of technical cooperation projects in rural It needed to assess the employment creation potential of
areas provides important lessons for designing interventions choosing a green growth path as opposed to a conventional
that support economic diversification in rural areas. The ILO’s one.
community-based training programme TREE has been
implemented in some 11 countries to promote income To understand the connections between various sectors
generation and employment creation, particularly among and evaluate the employment impact of a green growth
disadvantaged groups such as women, the unemployed, path on the economy, an Input-Output model was used.
underemployed, poor and informal workers. The approach The tables were extended to include the “green” industries.
taken by TREE, i.e. to link community-determined economic If the industry had a green component, it was separated
opportunities to deliver sector-relevant skills, may serve from the conventional component. This was done using
to address a number of challenges faced by marginalized three methods: a) a process-based method that looks at
groups that face important disadvantages in diversifying their the production process and identifies green production
incomes and accessing productive, decent jobs in the RNFE. systems, b) an output-based method that looks at the final
products and identifies those that are environmentally friendly,
The project “Rural Employment Promotion for Poverty and c) a natural resource conservation method that identifies
Reduction in Lao People’s Democratic Republic (Lao PDR)” industries that contribute to natural resource conservation.
takes a geographical approach, not a sectoral one. It supported An Input-Output model enables the researchers to calculate
the development of a Rural Employment Strategy for Poverty multipliers and help policy-makers to decide on the best
Reduction (RESPR) in Sekong province, launched in November policies to promote sustainable development by focusing on
2011. The RESPR consists of short-term and medium-term industries with the highest multipliers. The report focused
employment strategies and a set of action plans. It involves on output and employment multipliers that were calculated
the Ministry of Labour and Social Welfare, Ministry of Planning using the data from an I-O table provided by the Mauritian
and Investment, National Committee for Rural Development Central Statistical Office (CSO). In order to complete and
and Poverty Eradication, Department of Labour and Social extend the data in the I-O table, primary data was collected
Welfare and Sekong local authorities. In order to ensure from industry associations and public institutions, most of
the effectiveness of the RESPR, six villages in the province which were already involved in environmental protection,
were identified as demonstration sites. The selected villages while secondary data was obtained from the CSO as well.
are also the ones selected for the implementation of the
Sam Sang directive of the government. Thus, the action Multipliers for all industries were calculated.16 Then
plan on employment promotion for the six villages is to be simulations of a conventional and a green growth scenario
implemented in line with other government policies, as well were conducted. The simulation was performed on three of
as within the context of the local environment. It is hoped the four growth poles: sugar agriculture, textiles and tourism;
that this model will be replicated in other provinces in the and also on the energy and electricity industry. The results
Lao PDR in order to generate jobs and income, thereby show that the green scenario could result in the creation
reducing poverty in the rural areas. of 3,648 new jobs while the conventional scenario would
create only 2,262 new jobs. The report concludes that even
Example of sectoral employment impact though this analysis was the first step in estimating green
assessment: Green Job Assessment in Mauritius job creation, more research needs to be done to “(i) refine
production functions of green industrial activities, (ii) assess
Mauritius wishes to become a model for sustainable
negative feed-back loops of negative environmental impacts
development through “the efficient use of resources,
and climate change on employment and output, and (iii)
the reduction, reuse and recycling of waste, a decline in
further introduce decent work indicators in the model”.
pollution, equitable access to resources for all and decent
work”. The Government identified four pillars of development
– sugar agriculture, textiles, tourism and financial services.

16 The report provides a more detailed and technical description of the method that clarifies the
process of calculating the multipliers. See M. Harsdorff and R. Sultan: Green Jobs Assessment:
Mauritius, Geneva, ILO, 2014.

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Economic Diversification of the Rural Economy

5. Practical guidance and resources

Tools Publications
ILO. 2006. Local Development and Decent Work Resource Alarcon, J.; Ernst, C.; Khondker, B.; Sharma, P.D. 2011. Dynamic
Kit (LDDW), (Manila). Social Accounting Matrix (DySAM) Concept, Methodology and
Simulation Outcomes. The case of Indonesia and Mozambique,
—. 2009. Rural skills training: A generic manual on training for Employment Working paper no. 88 (Geneva, ILO).
rural economic empowerment (TREE), Skills and Employability
Department (Geneva). El Achkar Hilal, S.; Meade, D.; Sparreboom, T. 2013.
The Philippines Employment Projections Model: Employment
—. 2011. Analysing the employment impact of public targeting and scenarios, Employment Working Paper No.
investment and sectoral policies: The DySAM methodology, 140 (Geneva, ILO).
Employment Intensive Investment Programme (Geneva).
Ernst, C.; Peters, R. 2011. Employment Dimension of Trade
—. 2012. Skills for Trade and Economic Diversification Liberalization with China: Analysis of the case of Indonesia
(STED), (Geneva). with Dynamic Social Accounting Matrix (Geneva, UN).
—. 2012. Guide for the formulation of national employment
policies, Employment Policy Department (Geneva). Gregg, C.; Von Uexkull, E. 2011. Skills for Trade and
Economic Diversification (STED) in Bangladesh: the case of
—. 2015. Methodologies for sectoral employment impact pharmaceuticals and agro-food (Geneva, ILO).
assessments, Geneva (forthcoming).
Harsdorff, M.; Sultan, R. 2014. Green Jobs Assessment:
Jarvis, A.; Varma, A.; Ram, J. 2011. Assessing Green Jobs Mauritius (Geneva, ILO).
Potential in Developing Countries: A Practitioner’s Guide
(Geneva, ILO). ILO. 2010. Promoting Economic Diversity in Ukraine: The
Role of the Business Enabling Environment, Skills Policies
and Export Promotion (Budapest).

—. 2012. Skills Policies for Economic Diversification in the

Former Yugoslav Republic of Macedonia: Enhancing local
skills policies for the food and tourism sectors (Skopje).

—. 2012. Skills for Trade and Economic Diversification in

the Kyrgyz garment sector, Employment Sector, Employment
Report No. 19 (Geneva).

—. 2013. Rural Employment Strategy for Poverty Reduction

in Sekong Province, Lao PDR (Bangkok).

Kucera, D.; Roncolato, L. 2012. Structure matters: Sectoral

drivers of growth and the labour productivity-employment
relationship, ILO research paper no. 3 (Geneva, ILO).

Morris, E.; Bruun, O. 2005. Promoting employment

opportunities in rural Mongolia: Past experience and ILO
approaches (Bangkok, ILO).

OIT. 2013. Modelo de Proyección de Empleo para Colombia

(Lima, ILO).

8
Overview of Policy Guidance Notes
on the Promotion of Decent Work
in the Rural Economy
Supporting inclusive agricultural growth for improved livelihoods and food security
• Decent Work for Food Security and Resilient Rural Livelihoods
• Decent and Productive Work in Agriculture

Promoting economic diversification and triggering productive transformation for rural employment
• Economic Diversification of the Rural Economy
• Promoting Decent Work for Rural Workers at the Base of the Supply Chain
• The Role of Multinational Enterprises in the Promotion of Decent Work in Rural Areas
• Transitioning to Formality in the Rural Informal Economy
• Sustainable Tourism – A Catalyst for Inclusive Socio-economic Development and Poverty Reduction in Rural Areas

Promoting access to services, protection and employment-intensive investment

• Providing Access to Quality Services in the Rural Economy to Promote Growth and Social Development
• Extending Social Protection to the Rural Economy
• Developing the Rural Economy through Financial Inclusion: The Role of Access to Finance
• Employment-Intensive Investment in Rural Infrastructure for Economic Development, Social and Environmental Protection
and Inclusive Growth
Ensuring sustainability and harnessing the benefits of natural resources
• A Just Transition towards a Resilient and Sustainable Rural Economy
• Decent Work in Forestry
• Harnessing the Potential of Extractive Industries
• Water for Improved Rural Livelihoods

Increasing the voice of rural people through organization and the promotion of rights, standards and social
dialogue
• Rights at Work in the Rural Economy
• Promoting Social Dialogue in the Rural Economy
• Building Local Development in Rural Areas through Cooperatives and other Social and Solidarity Economy Enterprises
and Organizations
• Decent Work for Indigenous and Tribal Peoples in the Rural Economy
• Empowering Women in the Rural Economy
• Decent Work for Rural Youth
• Promoting Fair and Effective Labour Migration Policies in Agriculture and Rural Areas

Improving the knowledge base on decent work in the rural economy

• Enhancing the Knowledge Base to Support the Promotion of Decent Work in Rural Areas

For more information please visit [Link]/rural or contact rural@[Link]

Copyright © International Labour Organization 2019 – First published (2019)
This document is part of the Portfolio of Policy Guidance Notes [Link]