IDEAS home Printed from https://ideas.repec.org/a/eee/wdevel/v45y2013icp119-136.html
   My bibliography  Save this article

The Effects of Risk and Shocks on Non-Farm Enterprise Development in Rural Ethiopia

Author

Listed:
  • Rijkers, Bob
  • Söderbom, Måns

Abstract

This paper assesses the impact of risk and shocks on non-farm enterprise development in rural Ethiopia using a matched household–enterprise–community dataset augmented with precipitation based measures of risk. The likelihood of running a non-farm firm and the returns to running such firms co-vary with agricultural productivity shocks. Diversification into non-farm activities thus provides limited protection against fluctuations in agricultural performance. This may explain why ex-ante risk has no impact on the likelihood of running a non-farm firm. It nonetheless hampers non-farm enterprise development by repressing investment and inducing sorting into less capital-intensive activities.

Suggested Citation

  • Rijkers, Bob & Söderbom, Måns, 2013. "The Effects of Risk and Shocks on Non-Farm Enterprise Development in Rural Ethiopia," World Development, Elsevier, vol. 45(C), pages 119-136.
    • Handle: RePEc:eee:wdevel:v:45:y:2013:i:c:p:119-136
    DOI: 10.1016/j.worlddev.2012.10.013
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0305750X12002574
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.worlddev.2012.10.013?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Stefan Dercon & Pramila Krishnan, 1996. "Income portfolios in rural Ethiopia and Tanzania: Choices and constraints," Journal of Development Studies, Taylor & Francis Journals, vol. 32(6), pages 850-875.
    2. Bezu, Sosina & Barrett, Christopher B. & Holden, Stein T., 2012. "Does the Nonfarm Economy Offer Pathways for Upward Mobility? Evidence from a Panel Data Study in Ethiopia," World Development, Elsevier, vol. 40(8), pages 1634-1646.
    3. Dercon, Stefan & Christiaensen, Luc, 2011. "Consumption risk, technology adoption and poverty traps: Evidence from Ethiopia," Journal of Development Economics, Elsevier, vol. 96(2), pages 159-173, November.
    4. Stefan Dercon & Pramila Krishnan, 2000. "In Sickness and in Health: Risk Sharing within Households in Rural Ethiopia," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 688-727, August.
    5. Stefan Dercon, 0. "Fate and Fear: Risk and Its Consequences in Africa," Journal of African Economies, Centre for the Study of African Economies, vol. 17(suppl_2), pages -127.
    6. Jan Willem Gunning & Paul Collier, 1999. "Explaining African Economic Performance," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 64-111, March.
    7. Christina Paxson & Norbert Schady, 2005. "Child Health and Economic Crisis in Peru," The World Bank Economic Review, World Bank, vol. 19(2), pages 203-223.
    8. Kurosaki, Takashi & Fafchamps, Marcel, 2002. "Insurance market efficiency and crop choices in Pakistan," Journal of Development Economics, Elsevier, vol. 67(2), pages 419-453, April.
    9. World Bank, 2005. "Ethiopia : Well-Being and Poverty in Ethiopia, The Role of Agriculture and Agency," World Bank Publications - Reports 8707, The World Bank Group.
    10. Stefan Dercon, 2009. "Rural Poverty: Old Challenges in New Contexts," The World Bank Research Observer, World Bank, vol. 24(1), pages 1-28, April.
    11. Soderbom, Mans & Teal, Francis, 2004. "Size and efficiency in African manufacturing firms: evidence from firm-level panel data," Journal of Development Economics, Elsevier, vol. 73(1), pages 369-394, February.
    12. Rijkers, Bob & Costa, Rita, 2012. "Gender and Rural Non-Farm Entrepreneurship," World Development, Elsevier, vol. 40(12), pages 2411-2426.
    13. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
    14. Rijkers, Bob & Söderbom, Måns & Loening, Josef L., 2010. "A Rural-Urban Comparison of Manufacturing Enterprise Performance in Ethiopia," World Development, Elsevier, vol. 38(9), pages 1278-1296, September.
    15. Abel, Andrew B. & Eberly, Janice C., 1999. "The effects of irreversibility and uncertainty on capital accumulation," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 339-377, December.
    16. Shaohua Chen & Martin Ravallion, 2010. "The Developing World is Poorer than We Thought, But No Less Successful in the Fight Against Poverty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(4), pages 1577-1625.
    17. Harold Alderman & Christina H. Paxson, 1994. "Do the Poor Insure? A Synthesis of the Literature on Risk and Consumption in Developing Countries," International Economic Association Series, in: Edmar L. Bacha (ed.), Economics in a Changing World, chapter 3, pages 48-78, Palgrave Macmillan.
    18. Songqing Jin & Klaus Deininger, 2009. "Key Constraints for Rural Non-Farm Activity in Tanzania: Combining Investment Climate and Household Surveys," Journal of African Economies, Centre for the Study of African Economies, vol. 18(2), pages 319-361, March.
    19. Suresh de Mel & David McKenzie & Christopher Woodruff, 2009. "Returns to Capital in Microenterprises: Evidence from a Field Experiment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(1), pages 423-423.
    20. Robert M. Townsend, 1995. "Consumption Insurance: An Evaluation of Risk-Bearing Systems in Low-Income Economies," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 83-102, Summer.
    21. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    22. Rose, Elaina, 2001. "Ex ante and ex post labor supply response to risk in a low-income area," Journal of Development Economics, Elsevier, vol. 64(2), pages 371-388, April.
    23. Sosina Bezu & Christopher Barrett, 2012. "Employment Dynamics in the Rural Nonfarm Sector in Ethiopia: Do the Poor Have Time on Their Side?," Journal of Development Studies, Taylor & Francis Journals, vol. 48(9), pages 1223-1240, September.
    24. Jonathan Morduch, 1995. "Income Smoothing and Consumption Smoothing," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 103-114, Summer.
    25. Bliss, C. J. & Stern, N. H., 1982. "Palanpur: The Economy of an Indian Village," OUP Catalogue, Oxford University Press, number 9780198284192, Decembrie.
    26. Arne Bigsten & Mans Söderbom, 2006. "What Have We Learned from a Decade of Manufacturing Enterprise Surveys in Africa?," The World Bank Research Observer, World Bank, vol. 21(2), pages 241-265.
    27. Rosenzweig, Mark R & Binswanger, Hans P, 1993. "Wealth, Weather Risk and the Composition and Profitability of Agricultural Investments," Economic Journal, Royal Economic Society, vol. 103(416), pages 56-78, January.
    28. Marcel Fafchamps, 2003. "Rural Poverty, Risk and Development," Books, Edward Elgar Publishing, number 3127.
    29. Deininger, Klaus & Jin, Songqing & Sur, Mona, 2007. "Sri Lanka's Rural Non-Farm Economy: Removing Constraints to Pro-Poor Growth," World Development, Elsevier, vol. 35(12), pages 2056-2078, December.
    30. Yesuf, Mahmud & Bluffstone, Randy, 2007. "Risk aversion in low income countries: Experimental evidence from Ethiopia," IFPRI discussion papers 715, International Food Policy Research Institute (IFPRI).
    31. McKenzie, David J & Woodruff, Christopher, 2006. "Do Entry Costs Provide an Empirical Basis for Poverty Traps? Evidence from Mexican Microenterprises," Economic Development and Cultural Change, University of Chicago Press, vol. 55(1), pages 3-42, October.
    32. Fafchamps, Marcel, 2010. "Vulnerability, risk management and agricultural development," African Journal of Agricultural and Resource Economics, African Association of Agricultural Economists, vol. 5(1), pages 1-18, September.
    33. Barrett, C. B. & Reardon, T. & Webb, P., 2001. "Nonfarm income diversification and household livelihood strategies in rural Africa: concepts, dynamics, and policy implications," Food Policy, Elsevier, vol. 26(4), pages 315-331, August.
    34. Ruth Vargas Hill, 2010. "Investment and Abandonment Behavior of Rural Households: An Empirical Investigation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 92(4), pages 1065-1086.
    35. Mead, Donald C. & Liedholm, Carl, 1998. "The dynamics of micro and small enterprises in developing countries," World Development, Elsevier, vol. 26(1), pages 61-74, January.
    36. Dollar, David & Hallward-Driemeier, Mary & Mengistae, Taye, 2005. "Investment Climate and Firm Performance in Developing Economies," Economic Development and Cultural Change, University of Chicago Press, vol. 54(1), pages 1-31, October.
    37. Dercon, Stefan (ed.), 2004. "Insurance Against Poverty," OUP Catalogue, Oxford University Press, number 9780199276837, Decembrie.
    38. Lanjouw, Jean O. & Lanjouw, Peter, 2001. "The rural non-farm sector: issues and evidence from developing countries," Agricultural Economics, Blackwell, vol. 26(1), pages 1-23, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yonas Alem & Jonathan Colmer, 2015. "Consumption smoothing and the welfare cost of uncertainty," GRI Working Papers 118b, Grantham Research Institute on Climate Change and the Environment.
    2. Bethuel Kinuthia & Abdelkrim Araar & Laura Barasa & Stephene Maende & Faith Mariera, 2019. "Off-Farm Participation, Agricultural Production and Farmers’ Welfare in Tanzania and Uganda," Working Papers PMMA 2019-01, PEP-PMMA.
    3. Yonas Alem & Jonathan Colmer, 2015. "Consumption Smoothing and the Welfare Cost of Uncertainty," CEP Discussion Papers dp1369, Centre for Economic Performance, LSE.
    4. Grimm, Michael & Hartwig, Renate & Lay, Jann, 2017. "Does forced solidarity hamper investment in small and micro enterprises?," Journal of Comparative Economics, Elsevier, vol. 45(4), pages 827-846.
    5. Nicolas Pazos & Marta Favara & Alan Sánchez & Douglas Scott & Jere Behrman, 2022. "Long-term effects of rainfall shocks on foundational cognitive skills: Evidence from Peru," PIER Working Paper Archive 23-001, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    6. Van den Broeck, Goedele & Kilic, Talip, 2019. "Dynamics of off-farm employment in Sub-Saharan Africa: A gender perspective," World Development, Elsevier, vol. 119(C), pages 81-99.
    7. Katharina Grabrucker & Michael Grimm, 2021. "Is There a Rainbow after the Rain? How Do Agricultural Shocks Affect Non‐Farm Enterprises? Evidence from Thailand," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(5), pages 1612-1636, October.
    8. repec:cep:stieop:59 is not listed on IDEAS
    9. Kuldeep Singh & Madhvendra Misra, 2021. "Developing an agricultural entrepreneur inclination model for sustainable agriculture by integrating expert mining and ISM–MICMAC," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 23(4), pages 5122-5150, April.
    10. Yonas Alem & Jonathan Colmer, 2015. "Consumption Smoothing and the Welfare Cost of Uncertainty," STICERD - Economic Organisation and Public Policy Discussion Papers Series 059, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    11. Alem, Yonas & Colmer, Jonathan, 2015. "Consumption smoothing and the welfare cost of uncertainty," LSE Research Online Documents on Economics 63816, London School of Economics and Political Science, LSE Library.
    12. Wang, Jing & Lyu, Kaiyu & Lv, Xinye & Feil, Jan-Henning, 2021. "Rainfall Risk and Nonfarm Self-Employment in Rural China: Does Digital Finance Have a Role to Play?," 2021 Conference, August 17-31, 2021, Virtual 315326, International Association of Agricultural Economists.
    13. Uchenna R. Efobi & Ibukun Beecroft & Scholastica N. Atata, 2019. "Female Access and Rights to Land, and Rural Non‐farm Entrepreneurship in Four African Countries," African Development Review, African Development Bank, vol. 31(2), pages 179-189, June.
    14. Jonathan Colmer, 2021. "Temperature, Labor Reallocation, and Industrial Production: Evidence from India," American Economic Journal: Applied Economics, American Economic Association, vol. 13(4), pages 101-124, October.
    15. Friebel, Guido & Leinyuy, Jibirila & Seabright, Paul, 2015. "The Schubert Effect: When Flourishing Businesses Crowd Out Human Capital," World Development, Elsevier, vol. 68(C), pages 124-135.
    16. Nkechi S. Owoo & Wim Naudé, 2017. "Spatial proximity and firm performance: evidence from non-farm rural enterprises in Ethiopia and Nigeria," Regional Studies, Taylor & Francis Journals, vol. 51(5), pages 688-700, May.
    17. Colmer, Jonathan, 2018. "Weather, labor reallocation and industrial production: evidence from India," LSE Research Online Documents on Economics 88695, London School of Economics and Political Science, LSE Library.
    18. Nagler, Paula & Naudé, Wim, 2014. "Young Entrepreneurs in Rural Africa: Prevalence, Determinants, Productivity," IZA Discussion Papers 8564, Institute of Labor Economics (IZA).
    19. Nagler, Paula & Naudé, Wim, 2014. "Non-Farm Entrepreneurship in Rural Africa: Patterns and Determinants," IZA Discussion Papers 8008, Institute of Labor Economics (IZA).
    20. Mintewab Bezabih & Andrea Mannberg & Eyerusalem Siba, 2014. "The land certification program and off-farm employment in Ethiopia," GRI Working Papers 168, Grantham Research Institute on Climate Change and the Environment.
    21. Ruoyan Zhang & Ru Chen, 2023. "The regulatory effect of cooperation degree in increasing tobacco farmers’ income by mitigating production risk shocks," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 94(4), pages 1323-1344, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rijkers, Bob & Söderbom, Måns & Loening, Josef L., 2010. "A Rural-Urban Comparison of Manufacturing Enterprise Performance in Ethiopia," World Development, Elsevier, vol. 38(9), pages 1278-1296, September.
    2. Renata Baborska & Emilio Hernandez & Emiliano Magrini & Cristian Morales-Opazo, 2020. "The impact of financial inclusion on rural food security experience: A perspective from low-and middle-income countries," Review of Development Finance Journal, Chartered Institute of Development Finance, vol. 10(2), pages 1-18.
    3. Stefan Dercon, 2002. "Income Risk, Coping Strategies, and Safety Nets," The World Bank Research Observer, World Bank, vol. 17(2), pages 141-166, September.
    4. You, Jing, 2014. "Risk, under-investment in agricultural assets and dynamic asset poverty in rural China," China Economic Review, Elsevier, vol. 29(C), pages 27-45.
    5. Joshua D Merfeld, 2020. "Moving Up or Just Surviving? Nonfarm Self‐Employment in India," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(1), pages 32-53, January.
    6. Nagler,Paula & Naude, Wim & Nagler,Paula & Naude, Wim, 2014. "Non-farm enterprises in rural Africa : new empirical evidence," Policy Research Working Paper Series 7066, The World Bank.
    7. Hurley, Terrance M., 2010. "A review of agricultural production risk in the developing world," Working Papers 188476, HarvestChoice.
    8. Nagler, Paula & Naudé, Wim, 2014. "Young Entrepreneurs in Rural Africa: Prevalence, Determinants, Productivity," IZA Discussion Papers 8564, Institute of Labor Economics (IZA).
    9. Gaurav, Sarthak, 2015. "Are Rainfed Agricultural Households Insured? Evidence from Five Villages in Vidarbha, India," World Development, Elsevier, vol. 66(C), pages 719-736.
    10. Rijkers, Bob & Costa, Rita, 2012. "Gender and Rural Non-Farm Entrepreneurship," World Development, Elsevier, vol. 40(12), pages 2411-2426.
    11. Martijn Boermans & Daan Willebrands, 2012. "Financial constraints, risk taking and firm performance: Recent evidence from microfinance clients in Tanzania," DNB Working Papers 358, Netherlands Central Bank, Research Department.
    12. Rijkers, Bob & Soderbom, Mans & Loening, Josef, 2009. "Mind the gap ? a rural-urban comparison of manufacturing firms," Policy Research Working Paper Series 4946, The World Bank.
    13. Tidiane Kinda & Josef Loening, 2010. "Small Enterprise Growth and the Rural Investment Climate: Evidence from Tanzania," African Development Review, African Development Bank, vol. 22(1), pages 173-207.
    14. Emiliano Magrini & Pierluigi Montalbano, 2012. "Trade openness and vulnerability to poverty: Vietnam in the long-run (1992-2008)," Working Paper Series 3512, Department of Economics, University of Sussex Business School.
    15. Dil Bahadur Rahut & Khondoker Abdul Mottaleb & Akhter Ali, 2018. "Rural Livelihood Diversification Strategies and Household Welfare in Bhutan," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 30(4), pages 718-748, September.
    16. Jean-Louis Warnholz, 2008. "Is investment in Africa low despite high profits?," CSAE Working Paper Series 2008-31, Centre for the Study of African Economies, University of Oxford.
    17. Deininger, Klaus & Jin, Songqing & Sur, Mona, 2007. "Sri Lanka's Rural Non-Farm Economy: Removing Constraints to Pro-Poor Growth," World Development, Elsevier, vol. 35(12), pages 2056-2078, December.
    18. Dil Bahadur Rahut Chhetri & Pradyot Ranjan Jena & Akhter Ali & Bhagirath Behera & Nar Bahadur Chhetri, 2015. "Rural Nonfarm Employment, Income, and Inequality: Evidence from Bhutan," Asian Development Review, MIT Press, vol. 32(2), pages 65-94, September.
    19. Loening, Josef & Rijkers, Bob & Soderbom, Mans, 2008. "Nonfarm microenterprise performance and the investment climate : evidence from rural Ethiopia," Policy Research Working Paper Series 4577, The World Bank.
    20. Hansen, James & Hellin, Jon & Rosenstock, Todd & Fisher, Eleanor & Cairns, Jill & Stirling, Clare & Lamanna, Christine & van Etten, Jacob & Rose, Alison & Campbell, Bruce, 2019. "Climate risk management and rural poverty reduction," Agricultural Systems, Elsevier, vol. 172(C), pages 28-46.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:wdevel:v:45:y:2013:i:c:p:119-136. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/worlddev .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.