Within the rural areas, those with a low productive potential, usually home to poor agricultural households with limited access to assets, are often the core of rural poverty and under constant threat of resource degradation. There is ample evidence that neither trickle-down effects in high-potential areas nor structural adjustment measures have generated much poverty reduction in these less-favored areas (LFAs), often due a lack of attention to the development of factor and commodity markets. Sustainable and pro-poor development of LFAs therefore poses formidable challenges and requires special measures to achieve an enabling institutional and policy environment. It needs to be based on viable sources of growth that imply considerable investments in physical and human capital and appropriate technology, recognize positive externalities, and add equity and natural resource management concerns in a context of heterogeneity. To establish policy conditions that favor such development, the role of and experience with major policy interventions, incentives and institutions relevant to LFAs is reviewed, and an attempt is made to generalize these findings. To this effect the different interventions are grouped into three broad categories, viz. Price and market policies, public services and investment, and institutions and governance. While countries should adopt the relevant market and trade policies, the case is made for greater awareness of the adverse impact these policies can have in LFAs and on their poor, and complementary policies and investments need to be put in place to buffer or offset adverse outcomes. Key complementary interventions include public investments in infrastructure, human capital and technology to enhance the competitiveness of LFAs, and policies to improve their market access. There is also need for appropriate phasing of policy and market reforms to give people time to adjust, and effective safety nets to cushion loss of livelihood options. (C) 2004 Elsevier Ltd. All rights reserved.