The income diversification strategies of smallholders in the hills of Nepal

Motivation There is an ongoing debate in development economics about whether resources aiming to improve household welfare should be allocated to general development programmes, such as providing education, or to specific income enhancing programmes, such as promoting certain commodities or practices. Purpose This article contributes to this debate by analysing income levels and income diversification strategies of households that were engaged in growing organic coffee in the hills of Nepal. Engaging in organic coffee production is hypothesized to be an important income enhancing activity for asset‐poor subsistence farmers. Approach and Methods We conducted a structured household survey of 441 coffee growers from Gulmi and Lalitpur districts in Nepal with a focus on the sources of income. The household income diversification was measured using the mean of the household share of each type of income and the share of a given source of income over a given group of households. We modelled the determinants of household income using Ordinary Least Squares and Tobit regressions. Findings We found that most households derive a higher proportion of income from off‐farm sources. The main finding is that education increases household off‐farm income by improving access to domestic and international labour markets, and this reduces dependence on farming. Low‐income households have a higher proportion of income from farming. Across all households, non‐certified coffee production is financially more attractive to farmers than organic production. Policy Implications Our findings suggest that investing in general development, especially education, is more effective than a scheme to promote cash crops as it allows asset‐poor subsistence farmers to engage in regional and international labour markets.