This study uses the sustainable livelihood approach to examine the extent to which the access to various capital influence a household's livelihood transition from farming to non-farm activities also called farm exit in a poor rural agricultural setting of Nepal. A number of studies explain farm exits in developed countries such as in the United States, Canada, Israel, Germany, Austria and Finland (Bragg and Dalton, 2004; Foltz, 2004; Glauben, Tietje, and Weiss, 2006; Goetz and Debertin, 2001; Kimhi and Bollman, 1999; Pietola, Vare, and Lansink, 2002; Stiglbauer and Weiss, 2000; Vare and Heshmati, 2004). Many of these studies focused on socioeconomic forces influencing farm exit such as government payments, off-farm employment, land size, types of farm enterprises, land and livestock ownership, and returns from off-farm employment opportunities. Some of them also examined the influence of demographic factors such as farm operators’ age, their marital status, gender, family size, and number of children (Glauben et al., 2006; Kimhi and Bollman, 1999; Pietola et al., 2002; Stiglbauer and Weiss, 2000; Vare and Heshmati, 2004). Because a very small proportion of the population of these countries is engaged in agriculture, these studies are motivated by policies designed to retain farms (Bragg and Dalton, 2004; Foltz, 2003; Goetz and Debertin, 2001).

Studies of farm exit or livelihood transition are almost entirely absent in poor rural agrarian contexts of developing countries including Nepal. This study contributes to the existing knowledge gap by empirically examining the influence of various livelihood assets on livelihood transition of farm households to non-farm activities in a poor rural agrarian context of Nepal. This investigation is important for several reasons. First, about three-quarters of poor people in developing countries directly or indirectly depend on subsistence agriculture for their livelihoods. The World Bank (2008) recognizes that promotion of agriculture is important in agriculture-based countries particularly those in Sub-Saharan Africa for achieving the Millennium Development Goal (MDG) through reducing poverty and hunger. However, in agricultural transforming countries such as those of South and East Asia, the Middle East and North Africa, the World Bank suggests assisting farmers to help move out of agriculture in addition to other alternatives such as shifting to high value agriculture and promoting non-farm activities as important pathways out of poverty.

Second, shift of farm occupation by individuals and households to non-farm activities referred to as farm exit or livelihood transition is increasing recently in Nepal. The Nepal Labor Force Survey reported a significant decline in the proportion of population currently employed in agriculture from 76 percent in 1998 to 67 percent in 2008 (Central Bureau of Statistics, 1999, 2009)1. Moreover, within households, it is often not only one or two individuals but all members who change from farming to non-farming occupations. For example, in the Western Chitwan Valley the setting for this study, the 1996 Chitwan Valley Family Study (CVFS) reported that about 7.5 percent of households left farming between 1996 and 2001 (Bhandari, 2006). While this rate of attrition might not seem rapid, that it occurred in only five years makes it significant. Moreover, much less is known about various factors that contribute to livelihood transition by farm households in developing countries including Nepal.

Third, understanding of this issue is also important in the Nepalese context because increasing pressure of population in agriculture has been considered one of the important problems facing the country (Nepal Agriculture Perspective Plan, 1995; Ashby and Pachico, 1987). It is believed that increased population pressure on agricultural land has contributed to low agricultural productivity due to increased marginal land under cultivation (Chitrakar, 1990; Karan and Ishii, 1996). Therefore, lessening the pressure of population in agriculture by diverting farm based individuals toward non-farm activities such as formal and informal sector jobs, tourism, and business has been the policy agenda of the Nepalese government (NPC, 1998; NPC, 2003). In addition, the World Bank (2008) also recognizes that assisting farmers to help move out of agriculture is one of the important pathways out of poverty. By analyzing the unique longitudinal panel data of households at two points in time, 1996 and 2001, this study affords to fulfill the existing knowledge gap by empirically examining the influence of various capital assets on livelihood transition of farm households to non-farm activities.