Changing Income Portfolios and Household Welfare in Rural Uganda

Abstract

This paper provides evidence on the heterogeneous welfare implications of rural income portfolios in eastern Uganda. We use household survey data from two-panel rounds, and fixed and random effects estimation and quantile regressions to estimate average and heterogeneous effects. While the literature mostly focuses on either income diversification or participation in non-farm activities, we distinguish between income diversification, using the Simpson Index, and off-farm income generation. We use ex-post income and poverty measures as well as an ex-ante vulnerability measure to analyse welfare effects. We find that income diversification and non-farm income generation improve household income, and reduce poverty and vulnerability. We find that it is most beneficial for poorer households with less land assets to diversify their income portfolio, while moving out of agriculture is equally beneficial at all income levels and most beneficial for households with more human capital. We find that income diversification reduces vulnerability most strongly at high levels of diversification and low levels of income while non-farm income generation reduces vulnerability at lower levels of non-farm income and increases vulnerability at higher levels of non-farm income. Our results lead to nuanced findings that bring additional insights in the literature on structural transformation and rural development.