March 4, 2018//-Most of the world’s poor live in rural areas. In 2013, an estimated 767 million people were living under the international poverty line of $1.90 a day.
Although rural poverty has significantly declined during the past two decades, 80 percent of the poor live in rural areas. There are also wide regional variations in the distribution of the poor, most notably in Sub-Saharan Africa and South Asia, according to the latest Independent Evaluation Group (IEG) report reviewing the World Bank Group’s contribution to poverty reduction in the rural nonfarm economy (RNFE) from FY04 to FY14.
Definition
Rural nonfarm activity is defined both spatially, by activity that takes place in rural areas, and functionally, by a set of activities that do not constitute primary agricultural production. Rural nonfarm activities include value chain activities, such as agroprocessing, transport, distribution, marketing, and retail, as well as other economic activities in the rural space, such as tourism, manufacturing, construction, mining, and other self-employment activities (handicrafts, bakeries, mechanics, kiosks, and so on).
Although agriculture has traditionally accounted for a large share of rural household income—over 80 percent of all rural households farm to some extent— empirical evidence points toward the existence of a large and growing RNFE. Rural nonfarm activities, accounting for 35 percent to 50 percent of rural income in developing countries, are an important part of rural poor households’ complex income strategies, the report prepared by the IEG team led by Lauren Kelly and Andrew Stone.
Madam Kelly is a Senior Evaluation Officer in the Sustainable Development Unit, with a focus on Rural Livelihoods and Poverty Reduction, while Mr Stone is an Advisor to the Director for Sustainable, Financial and Private Sector Development in the Independent Evaluation Group.
For the landless and the very poor, who are often employed as farm laborers, sustainable income gains at the household level are generally associated with additional wages earned from rural nonfarm employment opportunities.
However, households that rely solely on farm labour tend to be among the poorest. In rural areas, agricultural workers are more than four times more likely to be poor compared with people employed in other sectors.
Research has demonstrated that the rural nonfarm sector can, and often does, contribute to economic growth, household income diversification, rural employment, poverty reduction, and a more spatially balanced population distribution.
Emerging evidence shows that in some cases rural diversification and secondary town development are leading to faster poverty reduction and more inclusive growth patterns than large-scale urbanization. But for the poor to benefit from opportunities in the RNFE, including opportunities presented by mobility, they will need to overcome a host of institutional connectivity, human, social, and capital constraints.
Various studies show there is a positive correlation between increased access to rural services and resources and the ability of the poor to benefit from the RNFE.
World Bank Group Strategies Related to the RNFE Have Shifted
Prior to and during the evaluation period, the World Bank approved and implemented two successive rural development strategies. The later strategy, Reaching the Rural Poor, had a chapter on fostering the growth of the RNFE.
Midway through the implementation of this strategy, and on the heels of the global food crises (2008), the World Bank Group shifted its approach in the agriculture and rural space. Partly in response to findings from the Independent Evaluation Group’s (IEG’s) 2007 Report on World Bank Assistance in Sub-Saharan Africa: An IEG Review that the agriculture sector has been neglected, the World Bank adopted an agriculture action plan (roadmap) for Africa, then for all regions.
But as stated in IEG’s agriculture evaluations, the broader aims of the World Bank’s rural development strategy, including an analysis of the contribution of rural nonfarm income-generating activities to poverty reduction, were not evaluated.
The World Bank Group’s agriculture action plans (FY10–12 and FY13–15) include the RNFE as a strategic pillar that recognizes the production and expenditure linkages between the farm and the nonfarm sector and the potential labor-smoothing and wage benefits that could be obtained by removing excess labor from the farm.
Embedded in the action plan’s approach are five priority interventions to enhance RNFE development: (i) a systematic analytic approach to the rural investment climate, (ii) attention to rural livelihoods, (iii) the provision of skills upgrading and rural education, (iv) investment in rural infrastructure, and (v) addressing youth employment.
Interviews with World Bank staff at headquarters and at the country level revealed that a key challenge of implementing the RNFE pillar of the World Bank’s agriculture action plans was that many of the enabling conditions needed to grow the rural nonfarm economy lie outside of the span of control of any single Global Practice (GP).
This evaluation also found that the agriculture action plans lack a partnership approach for the development of the RNFE, whereas a number of partners were identified in the agricultural space. For example, several instances of collaboration have been identified, but country missions determined untapped opportunities to leverage partnerships to achieve complementarities in linking the rural poor to more productive opportunities in the RNFE.
The World Bank Group’s current approach in the agriculture sector and the RNFE is largely rooted in analysis conducted for the 2008 World Development Report: Agriculture for Development (WDR), which recommended that when crafting policy, the World Bank Group should consider the specific growth pathways of client countries—with particular attention to their dependence on agriculture and the nature of rural poverty.
The 2008 WDR introduced a “three worlds” lens of agrarian, transitional, and urbanized countries, which facilitates observing some systematic differences in the country context and in the World Bank Group portfolio, as well as the relationship of the RNFE to the farm, urban, and global economies.
The 2008 WDR emphasized the need for improved enabling conditions for the RNFE, including the investment climate, skills and basic education in rural areas, and the need to think spatially.
Effectiveness of the World Bank Group in Growing the RNFE to Reduce Poverty
This evaluation asked a key question: “How successfully has the World Bank Group contributed to the creation of sustainable income-generating opportunities for the rural poor within the RNFE?
And, what attributable effects has this had on reducing poverty? ” The portfolio review revealed that multiple GPs are engaged in activities in the RNFE. Although only 40 percent of the activity is situated under the Agriculture GP, there is no one GP or unit with coordinating responsibility.
Instead, there have been multiple global solution groups, communities of practice, and International Finance Corporation (IFC) departments with products in the space. It also found that there has been a bifurcated approach in the World Bank to the RNFE issue.
In general, projects that have focused on reaching the rural poor have been effective in reducing vulnerability and increasing access to services but not in supporting the sustained income or employment that will lift them out of poverty.
This includes approaches such as rural livelihoods, community-based approaches with a productive aim, and social safety nets with a productive inclusion theme, all of which have been implemented in mainly agrarian and early transition economies.
On the other hand, projects with a growth aim, including agricultural value chain projects and productive partnerships— implemented across all three worlds—have frequently achieved increased sales, revenues, and incomes; however, reach to the rural poor is often not evident (poverty is not targeted or tracked).
In these projects, there are likely spillover or secondary effects, but these are not measured. IEG found that efforts in the World Bank to bridge this divide have asked instruments adept at reducing vulnerability to achieve income and employment goals that are not in their comparative advantage.
Social safety nets, for example, are increasingly incorporating productive activities to stimulate earned income, as are projects in the Agriculture GP. But these approaches are somewhat “siloized,” suggesting a need to think more flexibly about how to draw from the tool kit of interventions to arrive at new, more tailored approaches.
Another phenomenon observed was “discontinuous change”: a sudden shift from one approach to another with different target groups but without a clear plan to fill the social or productive gap left by the change.
There are also regional concentrations of approaches observed. IFC’s RNFE portfolio of investments and advisory projects in the agricultural and food sectors was found to be primarily in urbanized and transitioning economies.
IEG’s portfolio analysis, which included an examination of up- and downstream linkages—found that a number of IFC investments in agrarian areas were working to strengthen value chain development across several of its segments, both up- and downstream, and that this type of engagement was increasing over time.
Where IFC’s investments in food processing projects have had strong links to rural areas and smaller urban centers, they have generally generated positive rural employment outcomes and demonstrated links to the RNFE.
However, large international client engagements, often conducted through lead firms, have lacked measurable benefits for the poor. Further, corporations with substantial market power may disadvantage small producers in the value chain.
IFC’s support for microfinance, or the continued extension of microfinance to rural areas, alongside the development of alternative financial instruments, presents an observable connection to the rural poor and the RNFE.
The Global Agriculture and Food Security Program (GAFSP) has helped IFC take risks with an array of financing options that, when combined with GAFSP, have allowed riskier investments in rural frontier, fragile, and conflict-affected areas.
Sex-disaggregated data across the RNFE portfolio increasingly record women’s participation in World Bank Group– financed projects, but few projects record women’s access to economic opportunities, and none record the distributional benefits by gender.
Value-chain activities require better upfront diagnostics of women’s roles, including their relative access to assets, services, and markets as well as bargaining power with actors across the value chains.
RNFE In-Country Strategies and Analytics
At the country level, IEG’s country case studies across the three worlds found that most of these had not pursued an integrated strategic approach to developing the RNFE. Bangladesh offers an important exception, and beginning in FY16, so does Indonesia’s new Systematic Country Diagnostic.
In general, the country case studies found that rural services have been delivered as part of sector programs but not as part of a spatially oriented approach to the rural economy (both farm and nonfarm).
Such an approach would take into account a country’s stage of structural transformation and would include an analysis of such dynamics as rural-to urban migration, remittances, and (in many countries) increasing youth unemployment and the aging of rural populations.
A broader review of RNFE content in the existing Systematic Country Diagnostic for agrarian and transitioning countries found that there was good coverage of the topic from a rural poverty reduction perspective, including an analysis of the way that different income groups participate in farm and nonfarm employment and associated binding constraints.
Yet, specific conclusions were lacking on how to more effectively use the RNFE as a poverty reducing platform. Critical to guiding integrated country approaches to the RNFE is the application of consistent diagnostics.
The World Bank has been a leader in researching and documenting the rural nonfarm sector and in analyzing its relationship to poverty. However, on the diagnostic and analytics side, there is a wide gap in knowledge that has been addressed occasionally but not systematically.
Pilot initiatives, financed mostly by trust funds, have not been institutionalized. Where such country-level diagnostics have been conducted, they have valuably informed country strategies and programming.
Addressing Constraints in the Enabling Environment
As identified in the literature review, there are several binding constraints that critically affect the ability of the rural poor to find and capitalize on opportunities to pursue rural nonfarm income through labour and entrepreneurship.
As established in the approach paper, this evaluation covers four of these, namely rural roads, rural skills, rural finance, and gender. It also reports on others identified that have been included in other IEG evaluations such as IEG’s Access to Electricity Evaluation (2015) but notes that work on water and sanitation (including urban and rural water) and essential health services (including in rural areas) are ongoing evaluations.
Rural transport infrastructure: The World Bank committed $18.6 billion toward rural road building and improvements between 2004 and 2014. Yet the outputs of these interventions are far better documented than their impacts.
In a third of all cases, rural transport projects included objectives to link the poor to economic activities, but did not track this. Rural connectivity has been enhanced in transitioning countries that have strategically used both transport and agriculture finance, but this has not occurred in the agrarian economies.
Agrarian economies have borrowed $1 billion from their agriculture projects to support critical market access infrastructure—mainly through community-based approaches—but data on location, quality, and connectivity and, ultimately, on economic impacts, is lacking.
Skills and literacy: The delivery of basic rural education, literacy, and numeracy is critical for the rural poor to access more productive opportunities in the RNFE.
However, staff report little dialogue between the Agriculture and Education GP teams on how to best deliver relevant skills related to the RNFE, coupled with a paucity of evidence on the effectiveness of skills training.
Where skills training is a component of identified RNFE projects, they have not been well integrated and effectively measured in terms of their outcomes. Several innovations related to developing RNFE-related skills have been supported by the World Bank and could be further studied, tested elsewhere, and more strategically applied. Rural finance.
IEG’s recent financial inclusion evaluation found that sustainable delivery of financial services to the rural poor faces persistent obstacles. Financial services are harder to deliver in rural areas, particularly where populations are widely dispersed or geographically remote.
To deliver sustainable, low-cost services, the World Bank and its partners would need to research, pilot, and scale up innovative business models and approaches to reach underserved clients.
World Bank support has extended a certain level of financial services to the poorest segments of rural societies, but subsidization raises questions about sustainability, crowding out, and potential for politicization.
IEG found that IFC investments often reach countries that have high exclusion rates, but only a fraction caters to the lower end of the retail segment.
Recommendations
- At the corporate level, the World Bank and IFC should clarify its approach to the RNFE, and as part of it, how the World Bank Group engages across its institutions, GPs, and partnerships to promote nonfarm economic development to reduce poverty in the rural space.
As part of this approach, options should be differentiated by the state of rural structural transformation, and guided by lessons learned across the RNFE portfolio.
- To bridge the identified gap, the World Bank and IFC should more flexibly and relevantly select and design projects in a manner tailored to the specific stage and nature of a country or area’s structural transformation and adapted to the needs and dynamics of the target rural population.
To encourage this, the World Bank Group should increase the pooling of knowledge and cross-fertilization across GPs, regions, and units to build on and adapt ongoing approaches and to develop new ones.
- The World Bank Group should work to close knowledge gaps about what works to reduce rural poverty within the RNFE. The World Bank should conduct evaluations (either systematically, through a representative sample, or through clusters) of poverty- and growth-oriented projects to learn more about the mechanisms by which they influence the development of the RNFE and their impact on poverty. Recommendation 4: IFC should include in its value chain analysis, and monitoring and evaluation, a consideration of poverty and gender impacts, including income and employment for the rural poor; either systematically, or on a sample or cluster basis including through a strategic use of its external evaluations.
In its value chain projects, IFC should more explicitly articulate the risks of market power and their mitigants in its project documentation.
- In countries where the rural economy is a key part of the solution to ending poverty, the World Bank Group should (in partnership with donors and client countries) collect information on both formal and informal rural enterprises and their constraints and performance to help better inform the Systematic Country Diagnostic.
RNFE diagnostics should include information for household-based enterprises as well as micro, small, and medium enterprises.
Local capacity building and ownership (for example, through national statistical offices) are a critical part of this. They could be achieved by extending existing enterprise surveys to strengthen coverage of secondary cities and to include smaller enterprises in countries where existing surveys are limited in their coverage.
This could be complemented by household surveys building on the experience of the Living Standards Measurement Study–Integrated Surveys on Agriculture to document entrepreneurial and work experience in rural enterprises.
- The World Bank Group should strengthen and deepen gender analysis during project preparation of rural nonfarm projects and more consistently use the results of this analysis, to address gender-related binding constraints to female labor force participation in the RNFE.
Project design should incorporate measures to address these constraints, and select indicators to track progress made toward gender-related economic outcomes.
Written from the latest Independent Evaluation Group (IEG) report reviewing the World Bank Group’s contribution to poverty reduction in the rural nonfarm economy (RNFE) from FY04 to FY14.
