Unwilling entrepreneurs

A common sensical but useful new paper by Nagler and Naude, on how many if not most African households make their money. Descriptive analysis is underrated.

Although non-farm enterprises are ubiquitous in rural Sub-Saharan Africa, little is yet known about them. The motivation for households to operate enterprises, how productive they are, and why they exit the market are neglected questions. Drawing on the Living Standards Measurement Study — Integrated Surveys on Agriculture and using discrete choice, selection model and panel data estimators, this paper provide answers using data from Ethiopia, Niger, Nigeria, Malawi, Tanzania, and Uganda.

The necessity to cope following shocks, seasonality in agriculture, and household size can push rural households into operating a non-farm enterprise. Households are also pulled into entrepreneurship to exploit opportunities.

Access to credit and markets, household wealth, and the education and age of the household head are positively associated with the likelihood of operating an enterprise. The characteristics are also associated with the type of business activity a household operates. Rural and female-headed enterprises and enterprises with young enterprise owners are less productive than urban and male-owned enterprises and enterprises with older owners. Shocks have a negative association with enterprise operation and productivity and a large share of rural enterprises does not operate continuously over a year.

Enterprises cease operations because of low profits, a lack of finance, or the effects of idiosyncratic shocks. Overall the findings are indicative that rural enterprises are”small businesses in a big continent”where large distances, rural isolation, low population density, and farming risks limit productivity and growth.

Hat tip to Logan Cochrane.