Are Household Nonfarm Enterprises Structural Transformation?

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1 Are Household Nonfarm Enterprises Structural Transformation? LOUISE FOX AND OBERT PIMHIDZAI SEPTEMBER, 2013

2 Overview Structural transformation the question and methodology Uganda s structural transformation Implications for inclusive growth

3 What is structural transformation? Output transformation share of output in higher productivity sectors grows Normally, nonagriculture Employment transformation usually follows with a lag depends on how fast the labor force is growing, labor intensity of higher productivity sectors Lewis, others transformation to modern wage sector Usually, structural transformation is assessed with macro data (focus is on sectoral productivity)

4 Our approach look at transformation in the household In most of low and lower-middle income SSA, only about 10-15% of the labor force reports working for a wage as primary employment (including day labor). The rest work in the non-wage sector, often with other household members Wage sector is expanding rapidly, but from a low base so this pattern is liley to continue Does this mean there will not be an employment transformation? Ans: labor force will access higher productivity activities outside of agriculture, in household NFE sector This will improve incomes, lead to inclusive growth

5 Uganda two decades of growth and output transformation High GDP growth Typical low and low medium non-rr output change: Agriculture declined as share of output to about 25%; Industry also 25% (including modest manufacturing sector, plus construction) and services 50% Aggregate productivity grew from $438 p/l to $667 p/l while LF grew about 3% p.a.

6 Trends in sectoral share of GDP in Uganda, ,000 Share of GDP , , , , , ,000 Real GDP per capita (UG Shillings) Agriculture (% of GDP) Industry (% of GDP) Services (% of GDP) GDP per capita (on right axis)

7 Employment Transformation happened Sectoral composition of primary employment 1992/ /01 Agriculture Industry 4 8 Services 13 22

8 What kind of jobs were created? Mostly non-wage ones Share of change in net new non-ag. jobs Wage Non-wage All Industry of which mfr Services All non-ag

9 Job growth, 1992/3 to 2009/10 1,800,000 1,600,000 1,400,000 1,200,000 1,000, ,000 Wage Non wage 600, , ,000 - Industry Services Non-Agriculture

10 Households diversified income sources livelihood analysis Uganda Rural areas Agriculture wage Agriculture wage Public non-agriculture wage Public non-agriculture wage Private non agriculture wage Private non agriculture wage Non farm enterprise Non farm enterprise Farm Farm / / / /93

11 Portfolio change in rural areas less pure agriculture Family Farm, HE & ag wage 2% HE & non ag wage HE 0% 2% Family Farm & HE 18% Family Farm & non ag wage 9% Non ag wage 2% Ag wage only 2% Ag wage & Other 5% Family Farm 53% Family farm 7% Non ag wage 3% HE & non ag wage 1% HE 3% Family farm, HE & ag wage 5% Other 14% Family farm & HE 21% Ag wage only 2% Ag wage and family farm 13% Family farm 30% Rural areas, 1992/93 Rural areas, 2005/06 Family farm & non ag wage 8%

12 Two jobs = less underemployment Average hours worked in past month Primary activity 2+ activities 1 activity Men SE ag SE non-ag Women SE ag SE non-ag

13 Impact on household welfare and poverty Not use income errors in measurement correlated with outcome variable Use household consumption, control for demographics, education levels in household.

14 Household sources of income Rural Urban Family farming (non wage) income *** Farm wage income *** *** Non-farm enterprise (non-wage) income 0.134*** 0.209*** Non-farm wage income 0.113*** 0.123*** Receives remittances 0.041** Livelihood category (Base category Family Farm only) Farm wage income only Non-farm enterprise income only 0.236*** 0.334*** Nonfarm wage income only 0.308*** 0.277*** Family farm & farm wage income only *** Family farm & non-farm enterprise income only 0.119*** 0.372*** Family farm & non-farm wage income only 0.054* 0.170** Family farm & non-farm wage income only 0.276*** 0.468*** Family farm, non-farm wage & non-farm

15 Implications for SSA transformation if expanding, higher productivity sectors do not absorb a lot of labor, employment transformation is slow or nonexistent Inequality increases in E. Asia, in initial period, aggregate labor productivity in industrial sector fell, allowing rapid employment transformation In SSA, this also might happen as households shift into NFE in nonfarm sectors shift effect will be domiant one But it might not show up in aggregate data based on primary employment

16 Inclusive growth If focus of structural transformation policy is only on wage sector, it will exclude majority of households, esp. in rural areas Rural NFEs long history of facilitating transformation, poverty reduction Households first diversify, then specialize Transformation strategy has to be balanced, including improvements in ag. productivity