The formal-informal institutional and policy nexus in livelihood diversification among smallholder farmers in developing countries: a systematic review

Livelihood diversification is widely recognized as a strategy for improving income stability, resilience, and food security among smallholder farmers in developing countries. However, evidence on how institutional environments shape diversification outcomes remains fragmented, particularly regarding interactions between formal and informal institutions. This study applies the Sustainable Livelihood Framework to examine how these institutional spheres influence livelihood diversification across developing-country contexts. A systematic review of peer-reviewed journal articles, book chapters, and institutional reports from Africa, Asia, and Latin America was conducted. The review synthesized evidence on the roles of formal institutions, including extension services, financial systems, policies, cooperatives, and market infrastructure, alongside informal institutions such as kinship networks, reciprocity systems, Indigenous Knowledge Systems, community savings groups, and Self-Help Groups. Findings show that both institutional spheres significantly influence diversification decisions, with stronger outcomes where complementarities exist. Formal institutions shape access to markets, finance, technology, and information, while informal institutions provide social capital, flexibility, and risk-sharing mechanisms. However, weak coordination, policy misalignment, and exclusionary implementation processes often constrain diversification and produce uneven outcomes. The study concludes that sustainable livelihood diversification depends on cohesive institutional environments that recognize and integrate both systems. Key outcomes include improved income, food security, resilience, and capital accumulation. Recommendations include strengthening institutional coordination, improving extension and financial access, investing in rural infrastructure, aligning policies with local norms, and reinforcing governance within informal institutions to support inclusive livelihood diversification.