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Chapter 1. Promoting farm/non-farm linkages in developing countries - Benjamin Davis, Thomas Reardon, Kostas Stamoulis and Paul Winters


Evidence from developing countries points towards the growing importance of non-farm activities in the income-generating portfolio of rural households (Lanjouw and Stern, 1993; Estudillo and Otsuka, 1998). From an extensive review of the literature, Reardon et al. (1998) show that rural non-farm activities account for 42 percent of the income of rural households in Africa, 40 percent in Latin America and 32 percent in Asia. It is critical to determine how such activities can be promoted, given the importance of non-farm income as a mechanism whereby rural households can maintain their livelihoods and as a possible path out of poverty. Particular attention should be paid to ways in which spin-off activities in the non-farm sector can be promoted in the presence of agricultural growth. Spin-off activities can emerge from backward and forward production linkages with agriculture, or through expenditure linkages that come with rising agricultural income.

In this volume, several case studies of farm/non-farm linkages are presented in which spin-off activities already exist. The purpose of the case studies is to explore the ways in which spin-off activities were promoted and to consider how the activities might be further supported. The case studies focus particularly on the following aspects:

To give adequate consideration to the importance of these instruments, attention was paid to the differences in promoting spin-offs in low-income countries such as Ghana and Ethiopia as opposed to middle-income countries such Peru and Mexico. The challenges in the former group include limited local demand and limited investment funds for spin-off activities; the challenges in the latter group are for spin-off activities to stay local, because there are often incentives for farmers to buy inputs from non-local sources and for processing to take place outside local areas.

The purposes of this introductory chapter are to lay the groundwork for the case studies and to summarize the results. The chapter is set out as follows: Section 2 gives a brief conceptual framework, explaining the types of spin-off activities that are linked to agriculture, Section 3 provides an overview of the six case studies presented in this volume and Section 4 notes the key points from the case studies concerning actions taken to spur spin-offs in terms of institutions, organizations and technologies.


The literature identifies two major types of farm/non-farm linkages: production and expenditure. Production linkages can be further divided into backward and forward linkages, or, to use an alternative terminology, up-stream and down-stream linkages. Backward production linkages refer to linkages from the farm to the part of the non-farm sector that provides inputs for agricultural production, for example agrochemicals. Forward production linkages refer to the part of the non-farm sector that uses agricultural output as an input. The distribution and processing of agricultural outputs are fundamental components of forward production linkages.

Expenditure linkages refer to the fact that households deriving income from one type of activity, farm or non-farm, are likely to spend that income on products of other activities. Farmers buy non-farm products with income generated from agriculture. Local entrepreneurs and wage earners use income from the sale of non-farm products to buy food and other agricultural outputs. Expenditure linkages can be divided into consumption and investment linkages. Consumption linkages refer to expenditures related to household consumption; investment linkages refer to expenditure used to finance farm or non-farm activities. Investment linkages can be particularly important within households. Returns on farm activities may be invested to initiate or expand non-farm activities and vice versa.

Different types of spin-off activities will emerge, depending on the structure of the agricultural sector and the type of growth that is occurring. If agriculture requires significant external inputs, growth in backward production linkage activities are to be expected. If output from agriculture requires processing before it can be sold, or if there is significant value added by processing, forward production linkages are to be expected. If there is sufficient growth in the agricultural sector to induce rural income growth, expenditure linkages will induce growth in consumption and possibly investment. Dynamic agricultural sectors are more likely to have multiple and diverse linkages. Growth in horticultural production, for example, with output exported or sold to urban markets, is an extreme case where substantial input requirements, high-value output and significant cash income are likely to create numerous local linkages. At the other extreme, staple products are less likely to create local linkages because they provide little cash income and tend to be low-input and consumed without processing. An exception is cassava, discussed in Chapter 7.

The non-farm economy that emerges or fails to emerge in the presence of agricultural growth is conditional on incentives to potential investors and capacity to undertake such activities. Incentives are largely driven by the profitability of an activity, which will depend among other things on the macroeconomic framework, output and input prices and the risk associated with the activity. The capacity to invest in non-farm activities will be determined by the vector of assets - human, physical, financial, social and public - owned by the individual, household or community. Incentives and capacity to invest are strongly influenced by institutions (rules of the game) and organizations (players in the game) and by the technologies available. This means that the state and civil society play an important role in determining how the non-farm economy responds to agricultural growth.

The direction taken by the non-farm economy depends on local conditions, even with appropriate incentives and a degree of investment capacity. Spin-off activities may not stay local if farmers purchase inputs from distant sources, if output is processed in remote locations and if farmers use income from goods imported into the region. The ability of a locality to capture the benefits of the non-farm economy depends on local incentives and capacity, which are directly influenced by government policy. As agriculture is modernized, the concept of “local” is bound to become larger because of economies of agglomeration in local intermediate cities and metropolitan areas. How the expansion occurs and how great it becomes can be influenced by government policy.

The types of linkages are explored in each of the case studies in this volume. Attention is given to incentives, to capacity to invest in non-farm activities and to the influence of local conditions.


Six study regions, three in Latin America and three in sub-Saharan Africa, were identified as being suitable cases for examining non-farm employment spin-offs. Studies from these regions form the basis of each chapter. An overview of each study is given here.

Chapter 2 (J. Edward Taylor and Antonio Yunez-Naude) examines farm/non-farm linkages in Mexico using two methodologies: a village/town social accounting matrix (SAM) and a village/town computable general equilibrium (CGE). These models allow detailed examination and understanding of linkages between the farm and non-farm sectors and calculation of multiplier effects. The results indicate that although demand linkages are important, the largest of these is with markets outside the local economy: a large share of inputs, consumption and investment goods purchased by rural households is supplied by regional urban centres. Village households are diversified away from agriculture, mainly through family participation in labour markets outside villages, through wage work or through migration to distant urban centres or abroad. They find that where technological and other constraints limit the supply responsiveness of agriculture, measures must be enacted to improve supply response if farm/non-farm linkages are to be strengthened.

Chapter 3 (Fernando Rello and Marcel Morales) also focuses on Mexico, in particular on the state of Querétaro. This state is chosen because of the dynamic nature of the agricultural sector, which is largely a product of the proximity of Mexico City and Querétaro’s strong links with the hinterland. The chapter presents several case studies on agro-industrial systems, which embody the characteristics and development of the systems. The chapter examines the geographic linkages between agriculture and small and medium-sized towns and intermediate cities. One of the main points made by the paper is the importance of agro-industries in forging links, quite often in conjunction with public agencies and non-governmental organizations (NGOs). NGOs and certain public agencies have become particularly important because of the institutional vacuum created by the withdrawal of the state in a number of areas in Mexico. An important and expanding institutional development noted in the case studies is the use of contract farming for certain commodities. NGOs and public agencies have helped to facilitate these types of relationships. Finally, the paper notes that links between the farm and non-farm sectors depend on the scale of transactions, with smaller purchases such as seed, animal feed and repairs made from small towns, mid-level products such as fertilizers and agrochemicals from medium-sized towns and large purchases such as tractors and trucks from intermediate cities.

Chapter 4 (Javier Escobal and Victor Agreda) examines recent institutional innovations in two regions of Peru that have altered the relationship between farmers and agro-industrial firms. These institutional innovations included contract farming and share contracts in which managerial services were traded for labour services and land. The results indicate that the innovations were successful in improving the quality of farm/non-farm linkages. The success of these innovations has been partially the result of a combination of public goods and services and sufficient private assets, including managerial ability. In the case of asparagus, however, contracts tended to favour large producers at the expense of small producers. In the case of cotton, on the other hand, the emergence of farmer companies increased employment of smallholders and their incomes. The results indicate that the benefits of institutional innovation depend on several factors, including the crop characteristics, characteristics of farmers, public goods and services available and NGO involvement.

Chapter 5 (Tassew Woldenhanna) focuses on farm/non-farm linkages in the marginal Tigray region of northern Ethiopia. The study is different from other studies in Africa, which have tended to focus on dynamic regions. The basis of the study is survey data collected in two regions of Tigray and on secondary data collected from national and regional government offices. The results indicate that backward and forward production linkages are limited and that expenditure and specifically consumption linkages are the strongest form of linkage, as is the case elsewhere in Africa. The analysis found, for example, that 86 percent of total expenditure is on regionally produced farm and non-farm output, and that although non-farm expenditure remains small at 21 percent of the total, it increases in importance as income increases. The results show the importance of income diversification and agricultural productivity and that farmers with off-farm income tend to be more productive. The chapter concludes with a number of policy implications, including the need for institutional support for developing linkages, the importance of rural towns and targeting of specific vulnerable groups for inclusion in the benefits of expanding non-farm activities.

Chapter 6 (Lydia Neema Kimenye) provides a detailed case study of the French bean processing industry in Kenya. The French bean was chosen for the case study because the Kenyan government has singled out horticulture as a high-potential growth area; the sector has been expanding in recent years through the export and frozen-vegetable markets. One of the main features of this market is the dominance of contract farming as the primary means of interaction between farmers and agro-industry. As part of these contracts, farmers tend to get inputs from the processing firms and as a result production linkages in the local region tend to be limited, with output going to the processing firms and inputs purchased in bulk by the processing firms from urban suppliers. The benefits of French bean processing to the local economy tend to come primarily from the income gains of contracted farmers in the region and their expenditures in local markets. Direct employment linkages to processing firms, although not substantial, are potentially helpful to the local economy through expenditures. One of the interesting results of the case study is that one of the processing firms lost a market outlet as a result of quality problems and did not pay its contracted farmers. Although contracting may appear to be a safe market for farmers, it is clearly risky; the negative effects on a local economy can be substantial.

Chapter 7 (Ramatu Al-Hassan and Irene Egyir) examines the cassava subsector in Ghana. Cassava is almost always sold in a processed form, so it has a high potential for non-farm linkages. Ghana has recently expanded its export market for cassava chips, enhancing its value in the market. The focus of the study is two high-potential agricultural regions that produce cassava chips and an alternative local processed cassava product - kokonte in Atebubu and gari in Nkwanta. Because it is a low-input agricultural product, there are limited backward production linkages, but because processing is necessary for the market and because of high transportation requirements, there are substantial forward linkages. One of the benefits of the expansion of the chip market in recent years has been the rise in the price of processed cassava, including locally processed kokonte and gari. Weaknesses in the export market for chips, however, partially for domestic reasons, could limit this market and adversely affect cassava production and linked industries. The study highlights the effects of market changes and the importance of policies to complement private initiatives.


The case studies in this volume offer insights into farm/non-farm linkages and suggest actions that might be taken to promote them. In this section, the findings of the case studies are synthesized and implications are drawn for policy and programme implementation. These implications are divided into the institutional, organizational and technological instruments that can be used.


Contract farming is one mechanism that can help to overcome market and organizational failures and link farmers with agribusiness; it has the potential to provide substantial benefits to farmers, producers and the rural economy. In order to provide these benefits, the state may in some circumstances act as a facilitator, or third party, in triangular contracts. This facilitation might come in the form of credit or technical assistance. An alternative to state involvement is involvement of NGOs or even private entities as third parties. One of the downsides of contract farming is the tendency of agro-industry to purchase inputs from outside the production region, thus limiting local backward linkages. Although contracts may appear to be a low-risk alternative to selling on the spot market, there is a risk that contracting firms may face difficulties and fail to honour contracts. States should assist in developing this type of relationship and must ensure, through legislation and their judicial system, that the rights of contracted farmers are protected.

Evidence from the case studies suggests that entry barriers may limit the ability of some households to participate in non-farm activities. This may exacerbate income inequality, because wealthier households are able to enter into lucrative non-farm activities and expand income, while poorer households remain in low-return non-farm activities. A particular problem is lack of access to credit, which can limit linkages in a number of ways. It may limit the ability of households to enter into non-farm activities or expand their current activities, and may limit farmers’ ability to take advantage of opportunities for selling to agribusiness. Access to credit will not guarantee expansion of non-farm activities, but credit limitations can hinder development of such activities, because credit is often necessary for entry into and expansion of non-farm activities. Credit may also be necessary for new crops or new technologies that must be adopted to produce quality output for processing. If non-farm activities are to develop, states need to assist with credit access when markets do not function well.

Infrastructure and location have a substantial influence on the creation of linkages; they can also be a barrier to entry, because poor infrastructure limits opportunities. Governments need to invest in infrastructure such as roads, electricity and telecommunications and other public goods, primarily human capital such as education and health, that foster the development of non-farm activities and increase their productivity. Rural areas close to urban centers tend to have greater farm/non-farm linkages. Rural towns play a significant role in agricultural development through linkages between the non-farm and farm sectors; investment in infrastructures to promote non-farm activities should concentrate on these locations.


Backward production linkages in Africa are generally limited because of the low inputs in agriculture. Forward production linkages depend largely on the commodity being produced and the type of processing. Expenditure linkages are critical for African rural development: they are the primary mechanism by which agricultural growth affects the non-farm sector. To foster the development and expansion of farm/non-farm linkages in Africa, there must be an emphasis on improving agricultural technology. Backward and forward production linkages require modern agricultural-production systems. Governments must consider actions that simultaneously promote complementary non-farm activities such as input supply and output processing as well as promoting agricultural technologies.

In Latin America, there are more backward and forward production linkages; expenditure linkages within local economies are minimal, because farmers tend to purchase items produced in distant urban centres. As agriculture develops, the backward and forward production linkages tend to become less local in that there is a tendency for many non-farm activities to move to regional centres. This is often a result of modernization of the agricultural sector, because transaction costs are inevitably reduced, allowing such activities to shift from small local producers to larger regional producers. This is not necessarily a problem, but regions should be assisted in developing regional centres that can foster farm/non-farm linkages.


In general, agribusiness plays an important and proactive role in creating linkages to agriculture. Farmers often play a less important role in forging linkages although without their active participation the linkages will not work. Given that agribusiness has taken a lead in developing linkages between the farm and non-farm sectors, it is important that the state create an environment that is conducive to investment in agribusiness activities. One reason for the lack of farmer initiation in developing farm/non-farm linkages is that farmers tend not to be organized sufficiently to initiate new activities. The lack of significant producer organizations limits the ability of farmers to be proactive in forming linkages. Taking actions to promote these organizations is likely to lead to a more dynamic agricultural system.


The numerous structural-adjustment and stabilization programmes that have been implemented in developing countries have resulted in states withdrawing to some extent from agriculture and rural areas. This has created an institutional vacuum that has not been adequately filled. States cannot and should not play the role they once did in agriculture, but they still need to be engaged. States must reconsider their role in rural development and ways in which they can foster and expand linkages. The case studies indicate that the public sector and NGOs as well as private entrepreneurs play an important facilitating role in developing linkages between agro-industry and farmers. This role may include organizing farmers or assisting NGOs or private enterprises to take on responsibilities previously discharged by states, providing credit, assisting with inputs, providing information on technology and ensuring that contract requirements are met. In this way, the public sector, NGOs, and private entrepreneurs are helping directly to create beneficial linkages between agro-industry and farmers, and indirectly creating other linkages between the farm and non-farm sectors.


Estudillo, J.P. & Otsuka, K. 1999. Green revolution, human capital and off-farm employment: changing sources of income among farm households in central Luzon, 1966-1994. Economic Development and Cultural Change, 47(3): 497-523.

Lanjouw, P. & Stern, N. 1993. Markets, opportunities and changes in inequality in Palanpur, 1957-1984. In A. Braverman, K. Hoff & J. Stigliz, eds., The economics of rural organization: theory, practice and policy. New York, USA, OUP.

Reardon, T., Stamoulis, K., Cruz, M.E., Balisacan, A., Berdegue, J. & Banks, B. 1998. Rural non-farm income in developing countries. In FAO: the state of food and agriculture, 1998. Rome. (FAO Agriculture Series, No. 31.)

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