There is ample evidence that poverty, which declined rapidly in Pakistan in the 1980s, has returned in the 1990s [Amjad and Kemal (1997); Ali and Tahir (1999); Jafri (1999); Qureshi and Arif (2001)]. Consequently large number of Pakistanis, more than one-third of the total population, live currently far below what can reasonably be regarded as a decent standard of living. Poverty has generally been higher in rural areas than in urban areas. This gap could not be bridged overtime; still the greatest degree of poverty is found in the countryside. To address rural poverty, policy-makers have long been looking to the growth potential of the farm sector of the rural economy. Non-agricultural activities in rural areas have received little attention. This neglect, however, may be socially costly. It has been shown in several recent empirical studies that nonfarm activities occupy an important place in rural economies throughout the developing world [Hazell and Haggblade (1993); Adams and He (1995); Bakht (1996); Sen (1996); Lanjouw (1999)]. They expand quite rapidly in response to agriculture development, and therefore merit special attention in the design of strategies concerning poverty alleviation in rural areas.