Rural areas in Ethiopia, particularly the arid and semi-arid lowlands (ASAL), face significant environmental and socio-economic challenges threatening the livelihoods of smallholders and pastoralists. Despite Ethiopia’s rapid economic growth, poverty and malnutrition remain widespread, especially in rural regions home to 80% of the population. The ASAL regions, bordering Kenya, Somalia, Djibouti, and Eritrea, are vulnerable to increasing droughts, floods, violent conflicts, and competing land uses between mobile pastoralists, sedentary agro-pastoralists, and commercial investors. Pastoralists have become increasingly dependent on food aid due to loss of resilience, resource degradation, and restricted livestock mobility caused by government-driven resettlement and irrigation projects. These changes have led to environmental degradation, reduced livestock productivity, and social stratification. This study analyzes rural transformation trends and future scenarios to 2030, based on participatory scenario building and qualitative interviews in Afar and Somali regions. Findings reveal that current transformation processes are neither environmentally sustainable nor socially inclusive. Land privatization, declining customary governance, and growing conflict over resources exacerbate vulnerabilities. The government’s focus on commercialization risks excluding poorer pastoralists. Strategic recommendations emphasize a hybrid approach prioritizing diversified, trans-local livelihoods with livestock production central. Key interventions include strengthening governance and customary institutions, securing land tenure, sustainable pastoral intensification, livelihood diversification, and improving education and employment opportunities. An integrated, trans-sectoral effort is essential to foster a socially inclusive and environmentally sustainable rural transformation in Ethiopia’s ASAL regions.