This report was prepared by a consultant, Darryl Jones, with contributions from Catherine Moreddu (co-ordinator) and Toru Kumagai. It was declassified by the Working Party on Agricultural Policies and Markets at its meeting of 23-24 February 2009. The report was prepared for publication by Louise Schets. This study was conducted under Output area 3.2.1: Agricultural policy reform (Item 3.2) of the Programme of Work and Budget of the Committee for Agriculture for 2007-08, and forms part of the synthesis report on Agricultural Policies and Rural Development, which will be provided as background to the Policy Forum of the Committee for Agriculture in November 2009. This report has two parts. Part I reviews the role of agriculture in the rural economy as indicated by its share in GDP, in employment, in land use and in population. Part II analyses the integration of farm households in the rural economy through their diversification activities, on and off the farm. In the light of available evidence, some initial policy implications are drawn. Several sources of information were used including: OECD and EU regional databases; thirteen country reviews released together with the report; and responses to a questionnaire on diversification.