The rural non-farm (RNF) sector in Bangladesh provides employment to a large and growing proportion of the country’s labour force. The evidence presented in this paper suggests that the process of labour shift from agriculture to the RNF sector represents a precarious balance of the "push-versus-pull" factors that might have kept rural poverty situation from deteriorating, without making much improvement in the situation either. The expansion of low-productivity self-employment has been the major contributing factor in the sectoral transformation of the rural labour force. While the provision of such non-farm employment has been crucial for absorbing the growing numbers of landless rural workers, the labour shift may have created some degree of overcrowding in the low-productivity non-farm activities, thus undermining the growth of overall productivity and income levels in the RNF sector. In future, if the RNF sector is to play a more dynamic role, there will have to be probably some shift of emphasis towards relatively larger-scale and higher-productivity RNF activities which are better able to respond to income-elastic market demand.

Recent macro evidence reconfirm the earlier finding that Rural Non-farm Activity (RNA) is a dominant and growing component of the rural economy in Bangladesh. Rural manufacturing is the most important RNA both in terms of current size and growth performance. While the overall cottage industry sector experienced negative growth in value added during the ‘80s, there has been differential performance within the sector. Most of the dominant cottage industries stagnated; but growth has been quite pronounced in non-traditional industries involving larger employment size and higher capital intensity. These industries cater towards urban markets and higher income groups in rural areas, and are located mostly in semi-urban and urban areas. The structure of small industries has also changed in favour of non-traditional industries that are located more in the semi-urban and urban areas, and have larger employment size and higher capital intensity. Average labour productivity in a large part of RNA is still lower than the going agricultural wage rate. However, the productivity level has shown a rising trend over the past decade for a significant proportion of the activities. One also observes a strong positive link between productivity and growth of individual industries. This implies that the subsistence nature of the sector is on decline – a process that can be accelerated through right kind of policy support.

This paper examines the structure of employment in Bangladesh’s rural non-farm (RNF) sector and its potential to generate sustainable employment, especially when compared with employment opportunities in agriculture. It also considers the role of labour policies, if any, in facilitating sustainable growth of productive employment in the rural areas. The paper concludes that the RNF sector in Bangladesh has grown in importance during the late 1980s. It has been contributing a rising share of employment and value added. While the rural non-farm sector is less productive than its urban counterpart, it generates full-time, sustainable employment in small-scale industry. Productivity of a number of activities is higher than the going agricultural wage rate. The household component of the RNF sector still largely consists of low-productive activities, and continues to employ a third of the rural labour force engaged in the sector. The RNF sector has barely begun the process of generating wage employment; future potential for wage employment will depend largely on the expansion of rural industries. Labour market policies have had very little impact on the RNF sector so far, since a large part of the sector consists of household activities, which remain a part of the informal economy. The introduction of a national minimum wage may, however, adversely affect the sector by increasing the size of its informal component. With increased casualisation of the labour force, Government attempts to improve the rural roads network would improve the efficiency of sub-contracting, which would benefit the sector.

The new piece of evidence culled from household expenditure surveys of BBS as well as 62-village panel surveys of BIDS indicates that the expansion of the rural non-farm sector (RNF) during the period since early eighties through mid-nineties can no longer be viewed as the persistence of a "residual" sector phenomenon. Such characterization, if true would have predicted declining output and higher incidence of poverty in this sector. The evidence presented in the paper suggests that the shift to non-farm occupations has been, on balance, pro-poor in nature. This is seen both in terms of greater potentials for poverty alleviation in these activities, and in respect of their potentials for moderating overall rural income inequality. The other view, favouring a "dynamic" characterization, is also found to be wanting in that it falls to recognize the lack of improvement in labour productivity in many RNF activities – and the consequent overcrowding at the lower end of the productivity scale – affecting the long-term sustainability of the sector.

In a labour surplus country like Bangladesh, rural non-farm (RNF) sector is important not only for poverty alleviation but also for promoting overall economic growth. Lack of credit has proved to be a binding constraint to the growth of RNF activities. Microcredit from Grameen Bank, BRAC, and RD-12 programme of the BRDB has played a significant role in relaxing this constraint and promoting RNF activities in Bangladesh. Data from household level survey show that both household characteristics and community factors are important determinants of RNF participation. Better infrastructure promotes RNF participation while better income earning opportunities in agriculture reduce it. Trade and manufacturing are the dominant forms of RNF activities in Bangladesh. Household attributes, village characteristics, and prices and wages have been found to explain a significant part of various of the choice structure of the RNF activities. Analysis of borrower-level data clearly indicates that because of skill training and other organizational help, BRAC borrowers have managed to sustain increased productivity with improved access to credit. Therefore, the supply of affordable credit for the expansion of RNF production must be supported by appropriate skill development, market promotion, and other organizational supports.

The prevent poverty and unemployment from becoming socially insupportable and politically explosive, Bangladesh must aim for a growth rate of 7-8 per cent using the most labour intensive techniques while still being efficient. The paper explores the role that non-farm sector can play in supporting this push for higher growth, and the lessons regarding non-farm development that can be derived from examining the experiences of growing countries in Asia. The thesis of this paper is that rapid growth in Bangladesh is likely to be a function initially of agricultural productivity and prosperity. It will be difficult to expand non-farm income if agriculture is stagnant. Comparative experience from some of the successful East and Southeast Asian countries and empirical evidence from Bangladesh suggest that investment in transport infrastructure and the mechanization of farming would give the strongest push to agriculture and generate the most potent spread effects. Agricultural growth stimulate growth of RNF activities through demand and input-output linkages. But in order to turn rural manufacturing into a leading sector with the potential to employ a large number of people and good export prospects, impetus must come from other directions as well.