15, September, 2014

Harnessing the Potential of the Nonfarm Economy for Smallholders in Latin America

Latin American countries have implemented a range of strategies to boost the rural nonfarm economy, with positive impacts on local economic growth and poverty reduction.

While the rural nonfarm economy has been long neglected by policymakers across the developing world, over the last decade this sector has been attracting growing interest and high expectations in Latin American countries due to its increasing share in rural household incomes, relatively low capital requirements for farmers and its potential to contribute to poverty reduction. While the existence of a strong agricultural sector is a common driver of nonfarm activities within countries across the region, Latin American experience also shows that new opportunities are emerging in rural areas, suggesting that sustainable growth of the rural economy may also rely on other economic activities. Strengthening the rural nonfarm economy requires the ability to identify key opportunities for growth within a specific territory, create incentives and reduce risks for investors. In order to do so, Latin American countries have primarily focused on improving access to markets, investing in rural infrastructure and building human capital. This Brief begins by exploring the role and characteristics of the rural nonfarm economy in Latin America, and elsewhere, before describing the different strategies employed within the region, including examples from Brazil, Peru and Mexico. Finally, the Brief examines the factors that have enabled the emergence and growth of the rural nonfarm sector in Latin America and highlights key lessons for policymakers and practitioners in other regions.

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Key Lessons:

  • The growing nonfarm economy is bringing about a new set of opportunities for rural households to diversify their income base and move out of poverty.
  • Policy and programmes must prioritise the choices and needs of poorer households to ensure that growth in the nonfarm sector is more inclusive.
  • Investment in rural infrastructure represents an opportunity to incentivise public and private investment in nonfarm activities by reducing transaction costs and risks.

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