Income diversification and household welfare: empirical evidence for Ghana

About 65% of the population in Sub-Saharan Africa lives in rural areas and due to the strong dependency on agricultural production mainly the rural population is affected by income shortfalls. To cope with this situation, households are deriving several strategies to spread these risks and smooth their income. One of these strategies is the participation in nonfarm employment due to its independency on agricultural risks, but researchers have already indicated that households may face various entry barriers to the nonfarm sector. The study indicates that households perceiving their environment as risky expand their extent of nonfarm employment, whereas the endowment with valuable physical capital seems to serve as a risk-coping strategy on its own. The most important entry barriers revealed by the study are the educational level of the household head as well as the household’s amount of savings. Additionally, due to the poor availability of nonfarm activities in rural areas, households living in rural areas are less likely to participate in the nonfarm sector, but with increasing remoteness, the participation probability enhances. In the last stage of the study, the causal effects of participation in nonfarm employment on the household’s wealth as well as poverty status are examined. The empirical results show that especially female headed households and households living in rural areas are the main beneficiaries from nonfarm employment. The participation in nonfarm activities not only increases the household’s per-head expenditures, but also has the potential to reduce and even eliminate poverty. Policy makers are recommended to remove entry barriers to the nonfarm sector mainly by improving the quality of schooling and the enrolment ratio as well as the access to microcredits, and females and the rural population should be the main target group