Linkages between Farm and Non-Farm Sectors at the Household Level in Rural Ghana - A Consistent Stochastic Distance Function Approach

Abstract

In the light of an expanding rural non-farm (RNF) sector in developing rural economies, this paper explores the effects of this expansion within the household. Using rural Ghana as a case study this paper explores if the RNF economy allows for economies of diversification within farms; how input demands, agricultural-specific and shared, are transformed by the expansion of this sector; and if this expansion has measurable effects in overall household production efficiency. We first explore the characteristic of the intra-household linkages (technological and welfare driven) between the agricultural and RNF sectors both assuming perfectly working input and output markets, and assuming market failures, in particular missing labor and credit markets. We then try to measure the identified linkages by estimating a household level input distance function. This function is estimated consistently without making log-transformations as has been previously done in the literature. Our empirical analysis suggests that there are high levels of inefficiency in Ghanaian farms. Also, there are cost-complementarities between the RNF sector and the agricultural sector, particularly with food crops in which the poorest tend to specialize. The expansion of the RNF sector increases demand for most inputs including agricultural land. Finally, we show that smaller farms tend to be more efficient, and that RNF output is helping the farm household to become more efficient, but the latter result is not robust.

Keywords: Rural non-farm sector, input distance function, cost complementarities, technical efficiency, Ghana

JEL Classification: D13, Q12