# **2.1 Households and Nonfarm Enterprises**

The empirical evidence on the size and economic significance of the Ethiopian nonfarm enterprise sector is very limited, and largely suggests there is little diversification beyond agriculture in rural areas. For a comprehensive overview the reader is referred to Guenther et al. (2007). Little is known about the size of the sector. However, based on a small number of case studies cited by Guenther et al., the current guess has been that some 10 to 35 percent of rural households in Ethiopia may be engaged in nonfarm enterprise activities. If a third or so of the rural households run enterprises, then it could be that the nonfarm sector is more important than traditionally thought. However Guenther et al. conclude that more analysis is required to establish the economic significance of the sector.

Our data reveal that in the regions covered by the RICS-AgSS, 25% of all households participate in the nonfarm enterprise sector (see Table 1). There are nontrivial, but not dramatic, differences in participation rates across regions: the proportion of households participating in the sector ranges from 0.19 in Amhara to 0.36 in the SNNP region. Table 1 further shows that nonfarm enterprise profits on average account for 21% of total income among households that participate in the sector. Moreover, less than 3% all households rely _exclusively_ on income from the nonfarm enterprise. The majority of nonfarm enterprises are thus run part-time, either in parallel with agriculture or periodically as a substitute for agriculture. We have unusually rich data on the time spent running nonfarm enterprises, and the cyclicality of enterprise activities over the year. We return to these issues below.

Table 2 shows the sectoral composition of the nonfarm enterprise sector across the four regions covered by the survey. In all regions except Amhara, most enterprises are in the trade sector, followed by manufacturing and lastly services. In Amhara, most enterprises are in manufacturing, closely followed by trade.<sup>1</sup> Figure 1 shows that the enterprises in our sample tend to be located in, or close to, the community where the owner lives. It also shows that local consumers or passers-by are the most important customers for 44% of the firms. This confirms that the nonfarm economy is highly localized.

Summary statistics on household characteristics, distinguishing households with and without nonfarm enterprises, are shown in Table 3. Women play an important role in the nonfarm enterprise sector. Nearly half (47%) of all enterprises are owned by households headed by women, yet only about 25% of the households in the sample are headed by women. This implies that almost every second household headed by a woman operates a nonfarm enterprise, while only about 1 in 6 households headed by men would own a nonfarm enterprise. In addition, households which own a nonfarm enterprise tend to be headed by better educated and younger heads, and tend to live closer to markets and roads (of course the direction of causality is ambiguous here, as location decisions are likely to be endogenous to entrepreneurship).

> 1 Furthermore, the manufacturing sector is especially sizeable in the zones in Amhara which were visited by the RICS.

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