Poverty reduction efforts in Malawi are currently based on the twin strategies of the Poverty Reduction Strategy Paper (PRSP) and decentralization of government. This paper seeks to provide a critical viewpoint on these macro-level processes based in micro-level investigations of rural livelihoods. The truly desperate livelihood circumstances of most rural Malawians are emphasized by qualitative and quantitative information on assets, activities and outcomes in eight villages in Dedza and Zomba districts. Poor rural Malawians confront multiple severe constraints that can only be addressed by some combination of raising agricultural productivity, diversifying farm output to reduce risk and shift toward higher value outputs, and diversifying livelihoods toward nonfarm enterprises. The paper pays particular attention to the public sector institutional environment required to facilitate and encourage the latter option, and finds that the PRSP offers little guidance in this regard. Given already existing tendencies for monetized farm and nonfarm activities to be seen more as sources of potential revenue than as engines of growth and poverty reduction, there is a real threat that fiscal decentralization to 27 new rural district assemblies will create new barriers to trade and enterprise by multiplying business licenses and commodity taxes. A hitherto little explored but potentially important contradiction between the objectives of the PRSP and the funding needs of local government is brought to the surface.