Nexus between rural nonfarm income and agricultural production in Bangladesh

Abstract

Evidence from the rural livelihood literature shows that farm households in developing countries engage in nonfarm employment to supplement their household income. This raises the question of whether nonfarm income complements or competes with agricultural production due to a possible shift in farm household labour to nonfarm employment. Using survey data, this study examines the impact of rural nonfarm income on farm households’ agricultural production in Bangladesh. Applying the instrumental variable Tobit model, we find a nonlinear relationship between nonfarm income and total production expenditure as well as expenditures on major purchased inputs (equipment, seed, fertilizer, purchased labour). This indicates that when nonfarm income rises, production expenditure increases but at a decreasing rate. Furthermore, the endogenous stochastic frontier production model indicates that technical inefficiency in agricultural production decreases at an increasing rate when nonfarm income rises. Overall, the findings of this study suggest that nonfarm income exerts an income effect on agricultural production by reducing the liquidity constraint and intensifying major purchased inputs. Thus, introducing policies that would increase rural nonfarm income opportunities to rural households complements agricultural production. This would also lead to raised food production, ultimately leading to an increase in food availability as well as food security.