This short paper considers the poverty impacts of livelihood diversification and the potential challenges of creating a pro-poor rural non-farm economy (RNFE). Rural diversification can be defined as economic development of non-agricultural activities or a livelihood which has multiple, part-time components. It can be associated with a booming or recessionary economy or with accumulating or immiserating livelihood strategies. There are clear conditions that lead to either positive or negative outcomes and the theory behind these is summarised. Sub-sectors and returns from the RNFE are highly diverse, access inequitable, and labour markets casualised and multi-spatial. In turn this leads to class and gender inequality, insecurity and reduced social cohesion. However, diversified economies may also provide positive effects such as a check on falling wages and increased social mobility.