Assessing the impact of grid electrification on rural nonfarm enterprises in Ethiopia

In low-income nations, the growth of rural non-farm enterprise activities is as important as agriculture for rural development. These non-farm enterprises can be an important channel for diversifying income, generating employment, and reducing poverty. One of the key constraints to the development and productivity of rural non-farm enterprises is limited access to reliable and modern infrastructure, particularly electricity. This study investigated how access to grid electricity affects rural non-farm enterprise participation in Ethiopia, using correlated random effect probit model. For this study, the data is compiled from the Ethiopian Socioeconomic Survey, run by the Central Statistics Agency of Ethiopia and the World Bank Living Standards Measurement Study-Integrated Surveys on Agriculture team. The descriptive statistics show that around 22.6% of households are engaged in nonfarm enterprises (NFEs), which is a relatively low participation rate that reflects the dominance of agriculture in rural livelihoods, though a substantial minority is diversifying. As compared to households without access to grid electricity, households with access are 7.3% more likely to engage in non-farm enterprise activities in rural Ethiopia. The between-household effect shows that households in more electrified areas are 13% more likely to participate in NFEs indicating a strong contextual effect of electricity beyond individual access. Access to rural infrastructure like roads and financial services is inconsistent, pointing to challenges in rural development and inclusion. Policymakers should complement electrification programs with targeted infrastructure development, such as roads and electricity, and financial services, like credit access and MFIs, to unlock the potential of rural non-farm enterprises.