welfare effects of RNFE, with the poor benefitting significantly less than the non-poor from both non-farm wage-employment and non-farm self-employment.

# **5. Conclusion**

This paper makes several contributions to the debate about the poverty reduction potential of the rural non-farm employment sector.

The paper first revisits the determinants of participation in non-farm wage employment and non-farm self-employment, using recent and nationally representative panel data from Malawi. The results offer little support for the early view that the poor and least endowed households are more likely to participate in non-farm activities, in order to insure against production risks and meet capital constraints (Bardhan and Udry, 1999). Our results rather indicate the presence of significant barriers to participation, faced by the poorest. These barriers include human, financial, and physical constraints such as education, assets and credit. Different sets of resources seem to matter for participation in either type of non-farm activity. Educated and wealthy households are pulled into non-farm wage employment, while participation in non-farm self-employment is mostly driven by access to credit and wealth. Market access and proximity to better infrastructure and opportunities are important for both non-farm wage employment participation and non-farmself-employment.

Then, using panel data estimation techniques, we find consistent evidence that the RNFE can serve as a potential mechanism to increase welfare and reduce poverty in rural Malawi. Our results are consistent across a wide range of econometric approaches and broad suite of objective and subjective welfare and poverty measures. We conclude that while any causal interpretation of the usually positive correlation between non-farm engagement and wealth requires some care, the context of rural Malawi offers consistent evidence of a positive welfare impact of participation in non-farm activities, and thus the RNFE can be considered as a pathway out of poverty for rural households.

However, our results suggest that more attention should be paid to improving not just access, but also the quality of the non-farm opportunities available for the poorest. Though on average, participation in non-farm wage-employment and non-farm self-employment has a consistently positive effect on welfare, we find strong evidence that even when the poor participate in the RNFE, they benefit significantly less than the non-poor. The existing literature and observations from our data indicate that human, physical, and financial capital are key factors that limit participation in non-farm employment for the poor in rural areas. Addressing dualism along poverty and gender lines as well as other dimensions, is of utmost importance if the RNFE is to be an effective tool for broad-based rural development. Failing to take this into consideration will likely lead to widening inequality instead of shared prosperity. Moreover, given the notable heterogeneity of activities within non-farm employment, future research should delve even deeper into these different types of activities and explore participation in and roles of various subcategories of non-farm wage employment and non-farm self-employment for household welfare.

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