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Nepal: Poverty in Nepal: At the Turn of the Twenty-First Century

Nepal FY99 PA

Full Report (4.4Mb PDF)

Internal Discussion Paper 174
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Since the completion of the 1991 study on Poverty and Incomes, much work has been conducted to learn more about the extent and causes of poverty in Nepal. A number of new data sources have become available, major changes have taken place in the political situation and the country's economy, and important lessons have been learned in the implementation of development programs.

The poverty assessment makes use of information from a variety of sources, but is based primarily on the results of the 1995/96 Nepal Living Standards Survey (NLSS), the first nation-wide multipurpose household survey in more than a decade. The survey permits a quantitative analysis of poverty, and establishes a baseline against which the impact of policies and public expenditures on the poor can be assessed in the future. Information from other sources complement and enrich the picture that emerges from the NLSS.

Precise estimates of the incidence of poverty vary depending on the methodology used, but are close to fifty percent. Not only is poverty measured in economic terms widespread, but social indicators remain low for the vast majority of the people, and are especially low for the poor. Literacy, life expectancy, access to safe water and sanitation are all below the levels in neighboring countries; infant mortality is the highest in the region, and malnutrition and immunization rates are among the worst. The survey reveals that there are wide disparities across geographic areas and socioeconomic groups. Poverty is higher and deeper, and social indicators worse, in rural than in urban areas, in more remote than in more accessible rural areas, for women, and for people belonging to certain social groups, such as occupational castes.

Assessing what happened over the past two decades is not possible with certainty because of the lack of comparability between successive surveys, but a careful analysis of evidence from available surveys indicates that there is no evidence of substantial improvements over the last twenty years. There is, however, some evidence of improvement in rural consumption levels between 1991/92 and 1995/96.

Looking ahead, projections show that significant gains in poverty reduction — of the order of a 20 percent reduction in the number of poor people over the next ten years — are achievable, but require growth rates of output that are higher than those experienced over the last couple of years, and closer to those of the first part of the 1990s. Achieving such a reduction would also require no significant changes in the distribution of income/consumption or, stated differently, a pattern of growth that does not leave behind some parts of the country, or some sectors of the economy. In particular, growth that is not centered on agriculture and does not bring significant benefits to rural areas is bound to increase inequality.

The centrality of agriculture as a source of livelihood appears clearly in an analysis of employment and income sources. The data highlight how the poor have lower agricultural productivity because they farm marginal land, have limited access to modern inputs and technology, and are illiterate. Those households that cannot survive on the product of their land often send a family member away to work, if they can, or work as agricultural laborers on other people's land. Off-farm work is important both to provide needed cash for agricultural inputs and to provide security if crops fail, but employment opportunities off-farm are not easily available to the poor.

Access to infrastructure has increased substantially over the last decade, but remains limited for most Nepalis, and especially so for the poor. In particular, the lack of transport infrastructure, especially rural roads, greatly constrains the potential for agriculture, as it increases the cost of inputs and reduces the value of marketable output. Even the simple access provided by passable dirt roads has a positive impact on agricultural production and on incomes.

As one might expect, the poor have worse educational outcomes than the average and attend schools less. They also use health services less. The bright side of the picture is that primary education and basic health services are expanding, and public expenditures on primary education do reach the poor. On the other hand, more can be done to improve the targeting of public spending in education and health.

Among public safety nets, income transfers do not appear to play a significant role in providing income security; virtually no one receives pensions. Public works schemes could potentially have an impact, as they are larger in scope and more effective in targeting the poor, but international experience indicates that implementation problems, including corruption, need to be addressed. The main private safety net mechanism is remittances from family members who have migrated for work.

Women continue to live a hard life in Nepal. Education indicators are lower, and there is evidence of lower expenditures for health if women or girls are sick, partly a reflection of the fact that sons continue to be preferred to daughters. But women are active in many areas - they work the fields, raise livestock, take out credit, and sometimes run family enterprises. Thus, programs should be designed with female, as well as male, clients in mind.

The information collected in two participatory poverty assessments draws a fuller picture of coping mechanisms adopted by households, and of the reasons why services do not reach the poor. The role of institutional constraints — distance to services, inability to tackle the bureaucracy, lack of voice in local decisions — emerges clearly from interviews and focus groups.

In a country as poor as Nepal, the main focus of a poverty alleviation strategy has to be growth: broad-based, equitable, sustainable growth. With a low per capita income and almost no surplus to redistribute, there is little scope for targeted poverty alleviation efforts on any scale large enough to make a difference at the national level; therefore, poverty alleviation will require faster per capita income growth and, in turn, faster output growth and slower population growth.

Efforts to slow population growth through the provision of girls' education and of maternal and child health services should complement efforts to spur GDP growth, as population increases translate to lower per capita gains with a given overall growth rate.

To be equitable and include the poor, growth has to be centered in rural areas and based on agriculture. In the short-to-medium term, agriculture presents the highest potential for growth and poverty alleviation, as the vast majority of the people, and especially of the poor, live in rural areas, and agriculture accounts for 50 percent of income and 80 percent of employment. Any increase in production would have direct and indirect effects on a large segment of the Nepali population. Over the past decade, agricultural output has barely kept up with population growth; not surprisingly, living conditions have not improved much. Faster agricultural growth is a necessary condition to begin to attack the pervasive poverty problem of rural areas. Hydropower, tourism, specialized exports to the growing Indian market all have potential, but will take time to develop, and their role in alleviating poverty in the near future is likely to be limited.

Faster agricultural growth -- and future growth in the rural non-farm sector -- requires a strengthening of the infrastructure and human resource base of the country, which in turn requires that scarce public resources be used more effectively, especially in the provision of inputs to the agricultural process and of rural roads. The 1998 Country Economic Memorandum discusses the steps necessary to improve the efficiency with which public resources are used, so as to increase the growth impact of public investment, and to promote private initiative through policy and regulatory reforms. Better management of public expenditures in agriculture and better targeting of subsidies are the key elements of a poverty alleviation strategy. Similarly, much can be done to improve the targeting of spending in the social sectors, particularly education and health.

While a redistribution of expenditures would certainly be desirable, it would not be sufficient to ensure that expenditures reach the poor, if it is not accompanied by changes in the institutional mechanisms whereby programs are implemented. In recent years, community involvement, coupled with decentralization, has emerged as the most promising mechanism to implement projects and programs in ways that reach the poor, and with lower levels of corruption than experienced otherwise. A basic model has emerged. While questions remain on the effectiveness, replicability, and sustainability of this approach, it is certain that any successful poverty alleviation strategy for Nepal has to be based on decentralized, participatory project design and implementation.

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