# **Introduction**

Mozambique has recorded steady economic growth in the post-civil-war period. During the first decade, growth based on rehabilitation of the economy, especially in rural areas, brought inclusive growth, including the expansion of the share of the economy, employment, and household livelihoods in non-farm activities. This inclusive growth was widely credited with poverty reduction (Fox et al, 2009; World Bank 2011). Since 2003, available data suggest that subsequent growth has been based primarily on natural resource extraction, energy intensive manufacturing such as bauxite processing, and public sector investment projects (e.g. building and staffing schools, expanding economic infrastructure), not on investment and productivity gains in the sectors where the majority of the population is employed (agriculture, small scale services; see World Bank, 2012). This is reflected in a slowdown in the movement of labor out of agriculture since 2003 and limited diversification of household sources of income.

Recognizing the limits posed by a growth model based on mineral extraction and energy intensive manufacturing, the Government of Mozambique developed a new Poverty Reduction Strategy (PRSP) in 2011 (GoM, 2011), placing more focus on agricultural output and productivity, and the creation of jobs in micro, small and medium-sized enterprises (MSMEs). Agriculture is where the majority of the poor spend much of their working hours, so productivity improvements in the family farming sector could certainly help alleviate poverty. Another activity of poor and near-poor households, often complementary to agriculture in rural areas, is self-employment in household non-farm enterprises (HEs). Though the HE sector is much less developed in Mozambique than in other SSA countries, 40 percent of jobs outside of agriculture were in HEs in 2009, and over 30 percent of households reported income from HEs. Self-employment in HEs is much more common than wage and salary jobs in SMEs. Yet this sector was virtually ignored in the PRSP, and has also been ignored in the PRSP follow-on programs and projects.

One reason the HE sector may be ignored is that it is under analyzed in Mozambique, and the contribution to income growth and poverty alleviation under appreciated. The few microeconomic studies which have analyzed this sector at the household level have found evidence that the sector could have the potential to make a significant contribution to poverty reduction in rural and urban areas (Cunguara et al., 2011; Fox, et al., 2008). But a detailed analysis of the sector, including the potential for upward mobility for households which are able to create and sustain such an enterprise is lacking. Likewise, policy makers are mostly unaware of the challenges people face in trying to start and sustain their enterprises, and how they could possibly release them. The purpose of this paper is to fill that gap.

Mozambique is fortunate to have a number of household surveys which could contain data on HEs, including a unique national panel, and two surveys of informal household enterprises. We utilize these surveys to tease out the determinants of household enterprise creation, the relationship of HE creation and sustainability with household welfare levels and mobility, and the factors supporting creation and survival as well as the constraints as reflected by both those who started an enterprise and those who did not. This combined cross section and panel data analysis allows us to reach a more robust set of conclusions on the sector and provide insights for development strategy in Mozambique.

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