Nonfarm Income Diversification and Inequality in Eastern Ethiopia: Evidence from Gini Decomposition Analysis

Abstract

This study attempts to analyze the equity effect of the income earned from non-farm income diversification in rural Ethiopia. The data for this study was obtained from household survey conducted in the rural areas of Harari regional state in June 2011.  Gini decomposition technique was used to analyze income inequality effect of RNF activities. Results show that only 21% of the total household income was derived from different nonfarm activities with activity rate of 46%. In disaggregated functional categories, 21% and 24.6% of the total sampled households participated in wage employment and self-employment nonagricultural economic activities respectively. While wage employment contributed 10.3%, self-employment activity accounted for only 11% of total income. The Gini decomposition analysis revealed the income inequality index of the study region is 0.31. Farm income as a whole accounted for 82%, while nonfarm income accounted for 19% of total inequality in the region. The research also showed that while non-farm income was inequality-decreasing, farm income was inequality-increasing in the study area It is also learned that, despite the fact non-farm income and livestock earnings are distributed more unequally than the other sources of income (as reflected in its higher Gini coefficient), its contribution to overall income inequality is the smallest (17% and and 8% respectively). This is probably because non-farm income comprises the smallest share in total rural income among the respondents, and the Gini correlation of non-farm income with total income rankings is lower than that for the other income sources

Keywords: Income diversification; income inequality; Gini coefficient