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Nepal: Poverty and Incomes

Nepal FY91 PA

Full Report (17.6Mb PDF)

This study seeks to build a better understanding of the nature of incomes and poverty in Nepal, and to propose an affordable set of measures to reduce the incidence of poverty. It consists of three main elements:
  • a quantitative analysis of the conditions of the poor and the non-poor, their sources and levels of income;
  • an analysis of the micro-economic factors influencing incomes, the constraints facing the poor, and the potential contribution of various sectors to raising personal incomes; and,
  • an appraisal of the effectiveness of existing poverty alleviation programs and projects.

It concludes by outlining the elements of a medium- to long-term poverty alleviation strategy for Nepal.

By the most conservative definition, between 7 and 8 million of Nepal's population of 19 million live in absolute poverty, defined as having incomes below the level required to support a minimum daily calorie intake (about US$100 p.a. per capita). The poor are overwhelmingly rural subsistence farmers. They earn about half their incomes from their own agricultural production (almost none of which is marketed), they earn less than 30Z from employment - mostly on-farm, and the remainder of their incomes is made up from miscellaneous subsistence activities. Although there has been some shift towards off-farm activities, the limited resource base, and lack of alternative opportunities resulting from Nepal's landlocked position beside an economically dominant neighbor, have limited non-agricultural employment growth.

Population growth of 2.7Z p.a. has eroded the limited gains that have been made in GDP and agricultural output. The population has doubled since 1960, and is projected to double again over the next 25 years. Furthermore, the demographic profile is such that within ten years the labour force will be growing at about 0.4 million persons per year - twice the average rate experienced during the 1980's. The major challenge in avoiding a deterioration in the poverty situation will be managing the absorption of this massive labour force growth. However, in the absence of an effective program to slow population growth, all other povertyalleviation measures will be meaningless.

At the very low level of average GDP, raising personal incomes for most Nepalese depends on overall economic growth. Given the limited cultivable land base, agriculture alone cannot ultimately be counted on to provide the solution to poverty in Nepal. The basis for long-term growth, if it is to come at all, must thus eventually be sought in the expansion of services, energy, and industry. For these it seems inevitable that Nepal will have to look to a large extent to greater participation in a growing Indian economy. However even with the best policies and most robust external environment, industrial sector growth will be a very long term proposition. Therefore, in the medium-term raising incomes will have to rely in large part on agricultural intensification, and agriculturally-led growth in the informal sector.

The agricultural land base is rapidly approaching saturation. There is, however, scope for increases in both labour absorption and agricultural productivity - largely through improved irrigation. About half of the agricultural poor could rise out of poverty on the basis of increased productivity, however to reach them will require a more subtle blend of agricultural interventions than has been tried to date. For the balance, their holdings are too small to ever be viable economic units - they need off-farm income-earning opportunities - either where they currently are, or elsewhere.

Even under the most optimistic assumptions, the formal sector will not absorb more than about 15-20Z of the labor force by 2010. The informal sector holds more promise, since there is room for a "catch-up" effect to compensate for the low levels of physical access and monetization in the past; although ultimately it can only follow growth led by the other sectors - especially agriculture. However, wages are close to a subsistence minimum, and at existing wage levels the poor will not rise out of poverty on the basis of employment alone - that will require a tightening of the labour market. While a successful population program can contribute, in the long ru. the scope for effect'irg labou. maket factors may be limited by the free flow of labour to and from India, which will tend to lead to wages equalizing at Indian levels. Given the constraints on effective labour market interventions, Government can best contribute to off-farm employment growth through enabling mechanisms: providing transport and communications infrastructure, education, and to a lesser extent skills training and credit.

In the absence of any obvious source of rapid economic expansion, curbing population growth is central to relieving poverty. However, at any expected levels of population and GDP growth, average incomes will not rise enough to have a major impact on poverty levels unless such growth is focussed to benefit the poor. Furthermore, forces are in place - through growing landlessness, monetization, and urbanization - for a deterioration in the distribution of income, unless policies are followed which consciously guard against it. The type of growth pursued must be balanced in such a way as to generate incomes for the poor (in the medium term this means largely increased agricultural productivity and labor absorption).

Poverty in Nepal is chronic, basically rooted in the insufficiency of the resource base vis. a vis. excessive population. Its solution will lie in productivity growth coupled with population control, but this will take a long time. In the meantime, there will remain a large number of absolute poor. It is therefore legitimate to consider a sustained program of support to the poor - some of it production-oriented and some of it welfare-oriented.

There are too many poor (and too few resources) to realistically consider large-scale transfer or subsidy programs. Therefore it is important to design cost-effective transfers. Both Government and the donors, under a wide-range of projects, are already putting substantial resources into poverty-type programs - to relatively little effect. Better targetting and institutional strengthening are needed to improve the efficiency with which those resources are used. In addition, some significant welfare improvements for the poor can be achieved without major resource transfers or income increases (through, for example, improved hygiene and nutrient retention).

The report concludes that there is no easy poverty alleviation strategy for Nepal, but that significant gains can be made through a combination of measures - mostly involving increased labour absorption in agriculture (which could increase by about 50X), coupled with productivity gains in low-input farming systems; informal sector growth; and some redistributive measures, if tightly focussed.

There are also some areas (eg., tenancy, labor contracting) where policy reforms are required. In addition, limited gains can be made at the micro level, by strengthening the capacity of the poor to undertake selfreliant income generation - although these efforts require labor-intensive inputs and their replicability is thus questionable. Given the weakness of service delivery mechanisms these are probably best delivered through nongovernmental organizations. While the report concludes that credit and income-generating projects are unlikely to have a large-scale impact on incomes of the poor, the distributional benefits of some aid can be improved without much efficiency loss, by channelling it down to lower levels, for example through NGO's and targetted credit programs.

While there is no easy solution to poverty in Nepal, the potential contribution of public policy is large. As an illustration - if the Government is able to achieve the best reasonable expected results from an effective family planning program and in sustaining economic growth, then per capita GDP could rise to about $270 equivalent per capita by 2010 - probably holding the number of poor to below 5 million. On the other hand, if population growth continues unabated, and GDP growth is no better than the average achieved over the last twenty years, then per capita incomes would stagnate at around $180 per annum - probably increasing the number of poor to over 20 million by 2010. In short, the cost of not getting public policy right - especially with respect to curbing population growth - is probably in the order of 15 million additional absolute poor.

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