# **1. Introduction**

In the Poverty Reduction Strategy Paper produced by the government of Rwanda (2002), rural development represents one of the pillars for the fight against poverty. In this context, the development of non-farm employment opportunities is emphasized and the definition of specific policies is broadly envisaged. However, the identification of specific measures requires first a better understanding of the non-farm sector in rural Rwanda<sup>1</sup> and the constraints that currently undermine its expansion.

Non-farm sector development generally entails multiple benefits. For instance, the nonfarm sector may absorb a growing rural labor force that cannot be employed in the agricultural sector and it may slow down rural-urban migration. Similarly, non-farm sector expansion may enhance growth and promote a more equitable distribution of income (Lanjouw and Lanjouw, 2001) also by enabling more effective and beneficial income diversification opportunities for rural households (Reardon, 1997).<sup>2</sup> These broad considerations become even more vital in the context of a country such as Rwanda, characterized by a high population density, small and fragmented land holdings, and large discrepancies between land holdings across households. As Clay et al. (1990) note, poorer Rwandans with little access to land would benefit greatly from participating in the non-farm sector, if given appropriate training, capital, and credit. Despite the compelling rationale for furthering non-farm policies in developing countries, the empirical evidence has been mixed. In particular, the development of the non-agricultural sector is at times found to be associated with increased inequality, whereby richer households are better able to benefit from non-farm opportunities. Consequently, any policy recommendations in this area require a good understanding of the specific country context so as to ensure equitable access to non-farm opportunities.

To provide such context, this paper relies on the Rwandan Integrated Household Living Conditions Survey ( _Enquête Intégrale sur les Conditions de Vie des Ménages au Rwanda or EICV)_ conducted by the Statistics Department of the Ministry of Finance and Economic Planning between October 1999 and July 2001 (Ministry of Finance, 2002). While the EICV — a _multipurpose_ household survey — did not focus on the question of interest here, it is nonetheless based on a representative sample of the population and replete with information regarding Rwandan households.

After identifying the main determinants of participation in the non-farm sector, we use propensity score methods to investigate the differences in outcomes (earnings and consumption) between individuals (households) who engage in non-farm sector activities

> 1 By non-farm sector, we mean both self-employment and wage work in non-farm activities. Rural non-farm self-employed and wage employees are defined as individuals who live in rural areas and work in the non-farm sector. We do not have information on where this activity is taking place. This means that some of these individuals may live in a rural area, but work in a urban area.

> 2 Reardon (1997) suggests four possible advantages from wider income diversification: (1) reduction of income risk (due to the uncertainty linked to their farming activities) by ex ante diversification; (2) maintaining food security in the face of low farm productivity or shocks; (3) ex post diversification because of insurance market failure, and (4) earning cash income to finance farm investments in case of credit market failure.

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