Income diversification and household welfare in Sri Lanka

Abstract

Income diversification is globally considered as an effective way to reduce income risk and also to enhance household welfare especially in developing countries. However, much attention has not been paid to study the welfare implications of income diversification in Sri Lanka. By taking data of a nationally representative sample of 21,756 households of Household Income and Expenditure Survey 2016, this study attempted to examine the welfare implications of income diversification of households in Sri Lanka while identifying the determinants of income diversification. Data were analyzed using descriptive statistics, probit regression, and ordinary least square regression. Results suggest that income diversification significantly increased the welfare of Sri Lankan households. More than half of the households from the total population have diversified their income portfolio. Further, we explored that rural and estate households appeared to have a more diversified income portfolio relative to their urban counterparts, and households that depend on permanent employment income were less likely to diversify their income. Results depicted that the major determinants of household welfare and income diversification decision in Sri Lanka are human capital-related factors and regional differences. The study strongly recommends implementing programmes for entrepreneurial development, human capital development, and female empowerment which deserves special attention in the design of national poverty reduction strategies and enhancing the household welfare.