Income Consumption

Document Sample
Income Consumption Powered By Docstoc
					CHAPTER 7

Income, Consumption and Poverty

                 “ … the deeper tragedy is that the glass is almost totally empty for too many. Indeed, for too many, it is the
                 worst of time, as huge disparities persist across and within countries.”
                                          James D. Wolfensohn at the IMF-WB Group Meeting, Hong Kong, September 1997

                 Poor countries need not wait to get rich before they can improve the lives of their citizens.
                                                                                                                 A. K. Sen, 1993


           uman deprivations like malnutrition,                   real per capita income declined by 0.5
           illiteracy and ill-health are closely                  percentage point. As the agricultural sector grew
           related to the level and structure of                  by just as 0.5 percent, per capita agricultural
 income and consumption. Absolute poverty                         income declined by 2 percentage points. During
 severely limits household capability to even                     the ’80s, growth rates in both the agricultural
 meet the basic human needs such as food,                         and non-agricultural sectors remained higher
 shelter, clothing, primary education, basic health               than the rate of population growth. As a result,
 facilities and safe drinking water. This chapter                 per capita income in the agricultural and non-
 analyses the incidence of poverty and its                        agricultural sectors grew by 2.3 and 2.9 percent
 correlates with various economic, geographic,                    respectively. During the ’90s so far, although the
 ethnic, social and demographic attributes which                  growth in per capita income has remained 2.9
 have implications for policy-making and for                      percent on average, per capita agricultural
 restructuring the economy with a view to giving                  income has recorded a decline (table 7.1).
 development a human dimension.
      Nepal’s level of income (US$ 210 per                        7.2 LEVEL AND COMPOSITION
 capita) is one of the lowest in the world; more                      OF INCOME AT HOUSEHOLD
 than half of the population survives on less than                    LEVEL
 one dollar a day. The rate of income growth is
 lower than that of the Asian and South Asian                     The NLSS (CBS 1997) shows Nepal’s average
 countries (ADB 1997). Growth was most rapid                      per capita income as $142 (with a regional
 during the last decade when the economy grew                     variation as follows: $298 for urban areas, $131
 by about 5 percent compared with the average                     for rural areas, $446 in Kathmandu, $ 146 in
 growth rates of 8 and 6 percent for the Asian and                Eastern Tarai, $110 in the Mountains and $107
 South Asian economies respectively. Moreover,                    in Western Tarai)2. (The per capita income
 Nepal’s economic growth is narrow-based and
 has a low employment intensity, with the result                    Table 7.1               Per capita GDP growth rate
 that income distribution is uneven. Overall, low                                                                        (percent)
 rate of income growth, skewed income                               Indicator\Period             1971-80     1981-90   1991-96
 distribution, and particularly, deteriorating terms                Real GDP growth rate             2.1        4.9        5.2
 of trade of the agricultural sector vis-à-vis other                  Agricultural GDP               0.5        4.6        2.2
                                                                      Non-agricultural GDP           7.0        5.2        7.8
 sectors have intensified poverty1                                  Population                       2.6        2.3        2.3
      During the ’70s GDP growth averaged 2.1                       Per capita income growth        -0.5        2.6        2.9
 percent per annum. With the population growing                      Agriculture                   (-2.1)      (2.3)     (-0.1)
                                                                    Source: MOF 1997.
 by 2.6 percent per annum during the same time,

114                                                                       NEPAL HUMAN DEVELOPMENT REPORT 1998
   Table 7.2                                 Level and source of household income by place of residence
                                                                                               (in thousand rupees at 1996 prices)

                                                       Share distribution of total average income (in percent)
            Region                Total      Farm    Non farm      Other        Wage           Self-      Other income
                                  average   income    income      income       income      employment
                                  income                                                      income
   Development Region
   East                              40.9     66        22         12           33           58                       9
   Central                           52.4     56        26         18           30           50                      20
   West                              39.2     59        19         22           25           52                      23
   Mid-West                          36.4     71        20          9           20           65                      16
   Far West                          37.3     62        19         19           26           54                      19
   Mountain                          32.3     62        18         20           34           54                      12
   Hills                             45       58        24         18           22           59                      20
   Tarai                             44.5     64        22         14           33           50                      17
   Rural vs Urban
   Urban                            86.8       16       54         31           36           33                      31
   Rural                            40.4       65       20         15           27           56                      17
   Kathmandu                       118.9      3         63         34           42           24                      34
   Nepal                            40.7       61       22         16           28           58                      18
   Source: CBS 1997a.

shown is lower than in the national account                       of wage and non-wage income: for the lowest
figures because it takes into consideration only                  consumption quintile of households, share of
the household sector and does not incorporate                     wage income in total income was as high as 35
business, government and external sectors of the                  percent and only 23 percent for the highest
economy) Farm income is the major source of                       consumption quintile.
household income accounting for 61 percent of                          Classification of household income into
the total household income in 1996. Income                        cash and kind components is also significant in
from non-farm enterprises accounted for 22                        analysing the structure of production,
percent and income from other sources (mainly                     distribution and consumption. These reveal the
financial assets) accounted for 16 percent of the                 economy’s levels of subsistence, specialisation
total household income. Urban income is more                      and monetisation, and their implication for
than double the rural income levels, reflecting                   resource allocation efficiency, access to facilities
the wide intra-country disparities in per capita                  and intra-household distribution of income and
income. The same applies for household level                      consumption. In 1985, the average share of cash
incomes as well (table 7.2).                                      income in total income was 41.8 percent (NRB
     The spatial variation in the source and                      1988). In the rural areas, cash income comprised
composition of household income is similarly                      only 38.8 percent of total income. The situation
significant. In the Mid-Western Region, farm                      was quite the opposite in urban areas: the
income accounted for 71 percent of household                      average proportion of household cash income
income in 1996 compared with 56 percent in the                    was 67.8 percent. In 1996, wages in kind
central region. Farm income as a proportion of                    comprised 40 percent of total the household
household income was 65 percent in the rural                      wage income. This averaged to 41 percent in the
areas and 16 percent in urban areas. The share of                 rural areas compared to 29 percent in urban
wage income in household income has been                          areas (CBS 1997). The higher proportion of cash
relatively low (27 percent) in the rural areas                    income in urban areas has facilitated better
compared to that in urban areas (36 percent). By                  access to basic services such as education, health
consumption group, the share of farm income                       and personal care, but it has also deteriorated the
was highest for the lowest consumption quintile                   nutrient consumption of the households,
of households. The same applies for the shares                    particularly of women and girl-children. This is

Table 7.3                           Size distribution of income by rural and urban areas (Gini coefficient)
Survey                                                        Rural Areas            Urban Areas                     National
NPC 1977 (Household income)                                    0.60                   0.50                         -
NRB (MHBS 1985) (Household income)                             0.55                   0.85                       0.57
NRB (MHBS 1985) (Per capita income)                            0.23                   0.26                       0.24
CBS (NLSS 1996) (Per capita income)                            0.31                   0.43                       0.34
CBS (NLSS 1996) (Household income)                             0.51                   0.55                       0.57
  Source: NPC 1977; NRB 1988; CBS 1996a.

INCOME, CONSUMPTION AND POVERTY                                                                                                 115
 Table 7.4                                     Size distribution of income by region, 1996 (Gini coefficient)
                                                    Development Region
                                     Eastern       Central       Western             Mid-Western             Far Western
 Gini coefficient                     0.46          0.66          0.52                 0.25                      0.35
                                                    Geographical Region
                                                      Mountains              Hills                        Tarai
 Gini coefficient                                          0.21              0.53                         0.66
 Source: CBS 1996.

 because intra-household consumption pattern                            Regionwise, income distribution appears to
 tends to be more gender-biased if consumption                    be worst in the central region; with the least
 is financed through cash income. Nutrient intake                 disparity in the mid-west (table 7.4). The Gini
 by women and children is also likely to                          coefficient for the central region is 0.66 whereas
 deteriorate with a growing cash share of                         it is only 0.25 in the mid-west. By geographical
 household income3.                                               region, the coefficient for Tarai is highest,
                                                                  indicating the greatest income inequality (0.66).
 7.3 DISTRIBUTION OF INCOME                                       Its value was lowest (0.21) in the mountain
                                                                  region. Although there is little variation in
 Studies on income distribution reveal a large                    income distribution across the ecological
 inter-survey variation. This is also due to the                  regions, wide variations exist between the rural
 treatment of income in terms of household                        and urban areas (figure 1.3). The average
 income in one survey and per capita income in                    household income in Kathmandu is double that
 another. As households with higher levels of                     in other urban areas and nearly four times that in
 income also tend to have smaller families,                       the rural areas.
 distribution of income on a per capita basis tends                     The income distribution pattern as a share
 to be more even than that on a household basis.                  of total income gives a more revealing picture of
 This is substantiated by the fact that the Gini                  the concentration of income (NRB 1988 and
 coefficient for income distribution calculated on                CBS 1996). MPHBS shows that the bottom 40
 the basis of NLSS data for 1996 was 0.34 in                      percent of population share only 23 percent of
 terms of per capita income and in terms of                       total income while the top 10 percent claim 23
 household income (table 7.3).                                    percent (table 7.5). Regionwise, the share of the
      In recent years, income distribution appears                top 10 percent of population in rural income
 to have worsened: the Gini coefficient for 1996                  ranges from 13 percent in the Mountains to 23 in
 was 0.34 in comparison to 0.24 in 1985. Income                   Tarai, and the share of the bottom 40 percent
 disparity tends to be wide in the urban areas                    ranges from 23 percent in the Hills to 33 percent
 where the Gini coefficient went up from 0.26 in                  in the Mountains. The income share in urban
 1985 to 0.43 in 1996. Although the parameters                    areas ranges from 24 to 27 percent for the
 are not directly comparable because of                           bottom 40 percent of population and 20-21
 differences in sample areas and their size, they                 percent for the top 10 percent of population.
 nevertheless hint at the deterioration of income                       Income distribution is more uneven
 distribution over the decade.                                    according to the NLSS: the share of the bottom

  Table 7.5                 Distribution of per capita household income by income category and place of
                                                                                                    (percentage share of income)

                                                        Rural Areas                                Urban Areas
  Income Group                  All Nepal       Tarai           Hills        Mountains         Tarai       Hills
  MPHBS, 1985
  Bottom 40%                       23            24              23              33                27                24
  Middle 50%                       54            53              56              54                52                56
  Top 10%                          23            23              21              13                21                20
  NLSS, 1996                    All Nepal       Tarai           Hills        Mountains         Rural              Urban
  Bottom 40%                        11           15              7              -               18                  2
  Middle 50%                        37           48              37             -               53                 27
  Top 10%                           52           37              56             -               29                 71
  Source: NRB 1988; CBS 1996.

116                                                                     NEPAL HUMAN DEVELOPMENT REPORT 1998
                                                                                 highest quintile of households.
 Table 7.6               Distribution of household                                    Fifty percent of the family members in the
                     income by farm size and region                              lowest consumption quintile group of
                                                                                 households never consulted a doctor, whereas
 Farm Size* R.Tarai R.Hills R. Mount.                            R. Nepal
 Large        3,380  1,882      1,735                               2,024
                                                                                 this proportion in the highest quintile group of
 Medium       1,822  1,218      1,167                               1,316        households was only 26. Only 22 percent of the
 Small        1,210    923        875                               1,028        children in the lowest quintile were immunised,
 Marginal       787    674        631                                 736        compared to 60 percent in the highest one. The
 Landless       633    764        871                                 683
 * The definition of farm size is: large farm size = holding of more than 5.4
                                                                                 mean number of children in the lowest quintile
 ha in Tarai and 1.04 ha in the Hills and Mountains; medium farm size =          was 3.1 compared with 2.1 in the highest
 2.73 to 5.4 ha in Tarai and 0.52 to 1.04 ha in the Hills and Mountains; small
 farm size = 1.03 to 2.73 ha in Tarai and 0.21 to 0.52 ha in the Hills and       quintile. This was mainly due to better
 Mountains; and marginal farm size = up to 1.02 ha in Tarai and up to 0.21       awareness in the high income/ consumption
 ha in the Hills and Mountains.
 Source: NRB 1988.                                                               group of households regarding family planning
                                                                                 methods. In fact, 24 percent of the couples in the
                                                                                 highest quintile group were adopting some
40 percent people in total income is just 11                                     method of family planning, against 8 percent of
percent and that of the top 10 percent is as high                                the couples in the lowest quintile.
as 52 percent (CBS 1976).
     There is a strong relationship between the                                  7.4 OWNERSHIP STRUCTURE
size of landholding and household income. In                                         AND USE OF PRODUCTIVE
1985, the household income of large farm
households was nearly 3 times higher than that
of the marginal farmers (NRB 1988). Similarly,
                                                                                 7.4.1 Structure of landownership
household income of the large farm households
was more than 50 percent higher than that of the                                 Only about 17 percent of the total land area of
medium size households, and nearly double the                                    the country is comprised of agricultural land.
income of small size households. The average                                     The per capita landholding is 0.14 ha. Land
income of the landless households in the rural                                   ownership is highly fragmented. About 69
areas was just one-third that of the large size                                  percent of landholding is less than 1 ha in size
households (table 7.6). This indicates the                                       and about 89 percent are less than 2 ha. The
positive association between household income                                    average size of landholding is only 0.24 ha,
distribution and size of landholding.                                            with, on average, more than four land parcels
     Household level income or consumption is a                                  per holding (CBS 1993).
major determinant of household capabilities to                                        Regional variation in the distribution of
improve the welfare of members. This capability                                  agricultural land is substantial. The Tarai
is manifested in a range of attributes such as                                   covering only 17 percent of the total land area
school enrolment and drop-out, medical                                           comprises 49 percent of the total agricultural
consultation, child immunisation, fertility,                                     land. The Hills and Mountains cover 63 and 20
adoption of family planning services and gender                                  percent of the total land area, and account for 40
discrimination in these services and elsewhere.                                  percent and 11 percent of agricultural land
NLSS shows that 71 percent of the family                                         respectively.
members in the lowest quintile group of                                               Most of the agricultural land in Nepal is
households never attended school, compared                                       apparently cultivated by the owners themselves
with 39 percent in the highest quintile. The ratio
                                                                                 − it accounts for 97 percent of the total
of female to male school attendance is 41
                                                                                 landholding. The proportion of rented out land is
percent for the lowest consumption quintile,
                                                                                 thus only 3 percent. The larger the size of
compared with 74 percent for the highest one.
                                                                                 landholding, the higher the proportion of land
The NLSS reports income as one reason for
                                                                                 rented out: the proportion of land rented out is
school non-attendance; nearly 20 percent of the
                                                                                 less than 5 percent for landholding of less than 1
households felt that schooling was too expensive
                                                                                 ha, 11 percent for holdings of more than 3 ha
while another 21 percent engaged their children
                                                                                 and more than 19 percent for landholding size of
in farm and household activities. Only 4 percent
                                                                                 more than 5 ha (annex 7.1).
of the children in the lowest quintile of
households were enrolled in private schools                                      7.4.2 Distribution of land
(which are widely perceived as providers of
better education) compared to 17 percent in the                                  The bottom 40 percent of the agricultural

INCOME, CONSUMPTION AND POVERTY                                                                                               117
Table 7.7   Size distribution of agricultural                        multifarious problems despite many attempts for
    landownership by household and region                            reform. First, there is the problem of land tenure,
                                                  (in percent)       which embodies dual ownership between the
 Region/holding          0.5 ha     0.5–2.0 ha    < 2.0 ha           owner and the tenant, with neither party
 Mountains                 41.6        44.3           14.1           motivated to invest on land and benefit from the
 Hills                     45.8        47.6            6.6           resulting gains. The rural credit survey (NRB
 Tarai                     33.2        47.1           19.7
 Nepal                     40.1        47.0           12.8           1994) reports that investment in land
 Source: CBS 1997.                                                   improvement is less than 3 percent of household
                                                                     income. The unequal distribution of land
                                                                     together with the very low size of holdings of
   households operate only 9 percent of the total                    the majority of the households is another
   agricultural land area, while the top 6 percent                   problem. In addition, studies indicate a
   occupy more than 33 percent. The concentration                    deterioration in land fragmentation accompanied
   index for agricultural land is 0.54 reflecting a                  by a further fall in the average size of holdings4.
   highly uneven distribution of the most dominant                   As a part of this vicious cycle, the incidence of
   productive resource of the country (CBS                           landlessness has been increasing rapidly and the
   1997A).                                                           small holders are being marginalised and
        NLSS (CBS 1997A) indicates 40 percent of                     transformed into landless workers relying on
   the agricultural households own less than 0.5 ha                  scarce wage employment. This tendency is
   of land and 13 percent more than 2 ha. The                        adding to the number of the rural poor, as real
   proportion of households with less than 0.5 ha is                 wages and the number of working days are not
   as high as 46 percent in the Hills and 42 percent                 rising. In addition, technical changes are also
   in the Mountains. Furthermore, about 20 percent                   limited by the size of the holdings, in addition to
   of the households in Tarai have a holding of                      other institutional obstacles, viz., inadequate
   more than 2 ha, compared with only 6.6 percent                    credit facility, illiteracy, low expenditure on
   in the Hills. This points to the relatively small                 education and unfocused government policies.
   size of landholding in the Hills, compared to the
   average size of landholding in the Mountains                      7.4.4 Credit
   and Tarai (table 7.7). The smaller size of
   landholding in the Hills is also manifest in the                  Access to credit is extremely important for those
   higher incidence of poverty in this region.                       households with inadequate savings of their
                                                                     own. The informal financial market is the sole
   7.4.3 Land tenure and tenancy                                     source of credit for 80 percent of the borrowing
                                                                     households in rural areas. The remaining 20
    The dominant type of land entitlement in Nepal                   percent borrow from formal financial institutions
   is owner-tiller. About 85 percent of the operated                 (NRB 1992). All borrowers of formal credit also
   land is owner-operated and the remaining 15                       access informal sources of financing.
   percent is rented in (table 7.8).                                 Distribution of formal sector credit remains
        Amongst the agricultural households, 95                      highly unequal: in 1990 only 9 percent of the
   percent operate their own land whereas 6.4                        landless households had access to such credit
   percent also rent out part of their land. About 29                compared to 38 percent of the large farm
   percent of the households work on rented land                     households.
   along with their own land. About 5 percent of                          A more recent survey shows that 59 percent
   the households work on rented land only (table                    of the households are borrowers of one kind or
   7.9).                                                             the other; 35 percent in the urban areas and 66
        Land system in Nepal is besieged by                          percent in rural areas are borrowers (CBS 1997).

     Table 7.8                    Size distribution of agricultural land operatorship by household and region
                                                                                                                (in percent)

     Region/Operation                   Percent of total operated land             Percent of total owned land
                                        Owner operated        Rented in    Owner operated              Rented out
     Mountains                               89.4                10.6          97.0                        3.0
     Hills                                   89.1                10.9          95.9                        4.1
     Tarai                                   80.1                19.9          90.0                       10.0
     Nepal                                   84.7                15.3          93.2                        6.8
     Source: CBS 1997.

118                                                                        NEPAL HUMAN DEVELOPMENT REPORT 1998
 Table 7.9                        Distribution of households by land entitlement status and region
                                                                                                 (in percent)

 Region                          Self-owned land     Rented out land     Rented in land    Rented in only
 Mountains                            97.4               6.2               26.5               2.6
 Hills                                97.5               6.2               22.6               2.5
 Tarai                                92.2               6.6               36.3               7.9
 Nepal                                95.2               6.4               28.7               4.8
 Source: CBS 1997.

Moneylenders and relatives account for more           the grounds of efficiency of the banking sector.
than 80 percent of total credit whereas the share     Nonetheless, the question arises: what about the
of the banks is just 16 percent. Most of the loans    economic future of the rural people tied to the
(71 percent) is used for household consumption        exploitative informal financial market?
and personal expenditure only; 29 percent goes             Besides, it is not necessarily the loss-
to business and production purposes. The lower        making branches of the commercial banks in the
income households tend to have a higher               rural areas that are entirely responsible for the
borrowing rate, and, correspondingly, incur           general inefficiency of the banking sector. Even
larger volumes of debt finance consumption.           in the urban areas, banks have been generally an
The lowest consumption quintile of households         impediment to productive investment because of
utilise as much as 62 percent of the loans for        punitive interests charged on loans. Almost all
consumption compared with 42 percent in the           financial institutions show a very high spread
case of the highest quintile (CBS 1997A).             between deposit and lending rates, ranging
          Since the mid-’80s, there has been a        between 6-10 percentage points. The reasons are
landmark expansion in the financial institutions      high service delivery cost, heavy loan loss and
and financial products. The number of                 imperfect competition. This has benefited
commercial banks has now increased from 2 to          neither the depositors nor the lenders; it has
11. Of them, 9 are in collaboration with foreign      restrained financial intermediation instead.
banks. More than 40 finance companies and five        Performance of the financial sector should be a
rural development banks have come into                good lesson to the policy-makers in Nepal that
operation within a period of five years. Besides,     deregulation, by itself, may not be able to
more than 30 NGOs and 20 cooperative societies        contribute to the change expected in important
are also conducting limited banking activities.       areas in economy.
The share of total deposits in the financial               Joint-venture banks opened with foreign
system increased from 18 percent of the GDP in        participation have been especially hesitant to
1985 to 28 in 1996, indicating a good deal of         extend services by opening bank branches in
financial deepening in one decade. However, all       rural areas. The directive of the central bank
these expansions have failed to cater higher level    requiring two branch offices (later reduced to
of formal credit in the rural areas. The              one) in the rural area for every one in the urban
lopsidedness of the financial system in favour of     area is systematically breached by them. But the
the urban sector has brought about many               older and bigger of these banks have collected
distortions in the system. First, the introduction    dividends for their shareholders many times over
of new financial services and products                the initial equity investment in a relatively short
notwithstanding, lending practice is still            period.
traditional. More than 80 percent of the formal            One consequence of this situation is that
sector financing is collateral-based. Those who       there has been a reverse flow of financial
do not possess land and other bankable property       resources from the rural to urban areas. This
have no access to such credit in areas where          tendency also indicates that opening banking
targeted and micro-credit programmes do not           services in the rural areas is not a sufficient
exist. Secondly, with the structural adjustment       means of bringing about a reversal in favour of
and financial liberalisation programme, the           the rural households. The flow of resources from
government-owned or-controlled banks with an          the rural to the urban areas is mainly the
extensive network in the rural areas have almost      contribution of deposits collected by the state-
stopped opening new branches. Instead, they           controlled commercial banks in rural areas used
have been closing, amalgamating or transferring       for financing business and industrial activities in
the existing branches to ensure their                 urban areas. Even the Agricultural Development
profitability. The policy cannot be contested on      Bank which was expected to check this tendency

INCOME, CONSUMPTION AND POVERTY                                                                       119
 has failed in its mission because of its own          on women (IIDS 1997). Evaluation of such
 inclination towards commercial banking as             programmes has shown noteworthy results.
 opposed to development financing.                     Besides, the Intensive Banking Programme
      Collateral-based lending practices have          (IBP) also takes into consideration the small and
 deprived the small, marginal and landless             marginal income households for its credit
 households      of      institutional    borrowing    operation. The common characteristics of most
 opportunities. NLSS shows that 86 percent of          of these credit programmes are: (a) they are
 the formal credit is issued against collateral in     targeted to specific sectors and people with low
 the form of land or other property and only 12        income; (b) they extend credit on group
 percent of borrowing is collateral-free. As 49        guarantee and with no physical collateral
 percent of the households possess less than 0.5       required; (c) they include in their programme
 ha of land, and women are as yet denied legal         other services along with credit; (d) their
 rights to parental property, pledging collateral      principal aim is poverty alleviation; and (e) they
 for large loans is virtually impossible. Access to    are external donor-dependent for resources.
 institutional credit similarly depends upon           There are some exciting success stories related
 location, the purpose underlying the request for      to some of these activities. In general, and from
 loan and social status of the borrower. These         the standpoint of sustainability, however, these
 practices clearly discriminate against borrowers      programmes suffer from a variety of problems
 in the rural areas. The consequence is that           including high cost of service delivery, low rate
 households are compelled to resort to informal        of loan recovery and inadequate commitment of
 borrowing at exorbitantly high interest rates and     the concerned institutions. Erosion of
 to      mounting       indebtedness.       Growing    cohesiveness among the group members
 landlessness, migration, deprivation and poverty      constituted for credit and community building
 have in turn intensified their indebtedness.          purposes and intrusion of partisan politics and
 Besides, lack of credit has hindered utilisation of   donor agenda have also contributed to low
 labour, the only productive resource of the poor,     performance − even in cases where the
 in productive activities.                             programme was extremely successful at the
      Realising that general expansion of the          initial stages.
 financial system does not necessarily ensure               The      sustainability   of     micro-credit
 formal credit to the rural economy in general         programmes has been questionable from the
 and the poor households in particular, a number       viewpoint of high service delivery cost. The
 of targeted credit programmes have been               service delivery cost is 12 percent of the loan for
 initiated during the last two decades or so. The      SFDP, 42 percent for PCRW and 10-20 percent
 programmes which are targeted to the poor in          for rural development banks. The cost of fund is
 Nepal are Small Farmers Development                   between 8 to 10 percent of the loan (except for
 Programme (SFDP), Production Credit for Rural         PCRW whose cost of fund is only 4 percent) and
 Women (PCRW), Micro-Credit Project for                notional provision for non-repayment loan loss
 Women (MCPW), Credit to the Deprived                  may be between 10-20 percent. This means that
 Sector, Rural Development Banks and credit            the operating cost of these programmes is as
 operations of the NGOs engaged in banking             high as 35 percent for SFDP and more than 20
 services. Presently, more than 30 NGOs are also       percent for most others. The operating income,
 working as micro-credit institutions with             however, ranges between 16-20 percent of the
 permission to operate from the Nepal Rastra           loan. Besides, the outreach of micro-credit to the
 Bank. Together, they constitute an important          hard-core poor is low because of their location
 channel of credit delivery to the grass-roots level   in remote areas, relative lack of initiative on
 along with other support services. In addition,       their part to form groups, low skill for off-farm
 there are other NGO programmes like                   enterprise and the hostile social environment
 Swabalamban            (Rural         Self-Reliance   they face. Since these are factors that make them
 Development Programme) which was initiated            poor in the first place, successful programmes
 in the mid-eighties under the umbrella of an          need to demonstrate how they can transcend
 NGO (IDS) and has expanded since then with            these barriers.
 other NGOs also embracing its concept and
 philosophy. There are now similar activities like     7.5 WOMEN AND INCOME EAR-
 self-reliant development programme for
                                                           NING OPPORTUNITIES
 marginal women, Nirdhan, self-help banking
 programme and others which are more focused
                                                       Women contribute a substantial portion of the

120                                                          NEPAL HUMAN DEVELOPMENT REPORT 1998
 Table 7.10                            Distribution of participation of women in economic activities by region
                                                                                    (as percent of total economically active population)

                                                                1981                                       1991
 Participation in                                 Urban       Rural     Total          Urban              Rural              Total
 Economic activity                                31.5        47.2      46.2           20.3               48.1               45.8
 Labor force                                      26.4        35.1      34.6           23.8               41.6               40.4
 Agricultural work                                34.4        36.4      36.4           37.8               45.2               45.0
 Non-agricultural work                            12.2        17.9      16.6           19.5               20.7               20.2
 Manufacturing                                    12.5        16.5      14.9           27.3               20.9               22.9
 Source: Acharya 1997.

country's labour force. The share of women in                     lower rate of participation of women in
the total labour force was 45.5 percent in 1991, a                economic activities compared to that of men.
slight decline from 46.2 percent in 1981 (a                       There has been no improvement in the rate of
detailed analysis of surplus labour force has                     female participation in economic activities
been done in chapter 6). Women work longer                        through the last decade. In 1981, 46.2 percent of
hours than men. Women spend much more time                        the total female population were participating in
than men on subsistence activities and domestic                   economic activities. This figure declined to 45.5
work. In these activities, the workload of women                  percent in 1991 (table 7.10). Despite the fact that
exceeds that of men by more than 25 percent                       the bulk of the household work such as crop
(NPC/UNICEF 1992). Subsistence activities                         farming, kitchen gardening, livestock raising and
also confine women to conventional activities                     forestry development is done by women, their
including domestic work and agricultural labour.                  recorded low participation is indicative of the
A pioneering study on the status of women in                      dearth of gender-sensitive data in Nepal5.
Nepal (CEDA 1979) revealed that 86 percent of                          There has been a drastic reduction in
all domestic work and 57 percent of subsistence                   participation of urban women population in
agricultural-activities were undertaken by                        economic activities, falling from 31.5 percent in
women. Women’s contribution to household                          1981 to 20.3 percent in 1991. Similarly, their
income is estimated at 50 percent compared to                     share in labour force fell from 26.4 percent in
44 percent for men and 6 percent for children                     1981 to 23.8 percent in 1991. This shows the
(Acharya 1979).                                                   negative effect of urbanisation on women's
     Various census and survey reports show a                     participation in labour force. Participation of
                                                                  women in agricultural and manufacturing
                                                                  activities has gone up, which remains at around
 Table 7.11              Distribution of employment by            20 percent of the total population (Acharya
                                type, region and gender           1997).
   Employment               Paid job    Income       Unpaid            The pattern of work participation indicates a
       status                           earning       work
                                                                  large proportion of women working as unpaid
  All Nepal                  19.6         36.8        43.7
  Male                       32.1         44.0        23.9        family workers. The proportion is 63 percent for
  Female                      7.3         29.8        63.0        women and 24 percent for men. Region-wise,
  Mountain                   15.1         52.0        32.9        the proportion of women engaged in unpaid
  Male                       23.9         52.9        23.1        family works is 75 percent in Tarai and 55
  Female                      6.6         51.1        42.3        percent in the Hills. The proportion of unpaid
  Hills                      17.6         43.3        42.3        men workers in these regions is respectively 25
  Male                       29.6         47.4        23.0        and 23 percent (table 7.11). This shows that
  Female                      5.9         39.3        54.7
                                                                  women's share in income is severely limited by
  Tarai                      22.3         27.8        49.9        their status of being unpaid workers.
  Male                       35.9         39.2        24.8
  Female                      8.8         16.6        74.6
                                                                  Interestingly, the proportion of unpaid female
                                                                  workers is higher in the urban areas than in rural
  Rural                      18.7         38.0        43.3
                                                                  areas. Which means urbanisation has adversely
                                                                  impacted on women's income earning
  Male                       30.6         44.9        24.4        opportunities.
  Female                      6.9         31.2        61.9             Trade and industrial reforms have had some
  Urban                      28.2         24.2        47.5        favourable impact on women's participation in
  Male                       46.4         34.3        19.2        wage-earning jobs in the manufacturing sector;
  Female                     11.1         14.7        74.2
   Source: CDPS 1997.
                                                                  particularly, carpet and garment industries. The
                                                                  type of work in which women are mostly

INCOME, CONSUMPTION AND POVERTY                                                                                                  121
      Table 7.12                        Distribution of work participation of women by economic activity
                                                                                                 (as percent of population 15-59 years of age)

                                                             Rural                            Urban                           Total

                                                         Male         Female            Male         Female             Male         Female
      Agriculture                                        58.4           60.9            13.7           14.7             54.1           56.4
      Industry and mining                                 5.7            2.3            10.2            4.6              6.2            2.6
      Electricity, gas and water                          1.0            0.2             2.9            0.7              1.2            0.3
      Commerce                                             7.5             3.0            29.0            11.1             9.6            3.8
      Construction and transport                           7.0             0.7            12.3             1.8             7.5            0.8
      Personal and community services                     16.5            17.8            27.2            52.1            17.5           21.1
      Others (including “missing”)                         4.8            15.1             4.5            14.9               -            3.8
      Source: CDPS 1997.

 involved also indicates the status of their income         education) amounts to about 38 percent of the
 earning opportunities in comparison to that for            total consumption expenditure in the rural and
 men. Majority of women are involved in                     45 to 51 percent in urban areas (table 7.13).
 agriculture and personal and community                          The MPHBS (NRB 1988) shows that grains
 services, where income generation is very low.             or cereal products constitute nearly 37 percent of
 On the other hand, their participation in income           the consumption expenditure followed by
 generating activities such as commerce,                    housing expenses (17.3 percent), clothing (11.7
 transportation and industry, and electricity, gas          percent), vegetables (5.3 percent) and medical
 and water, is very low. Women’s participation as           and personal care (3.7 percent). Nearly 3 percent
 a ratio of men’s participation amounts to 42               of the expenditure is spent on alcohol and
 percent in industry, 39 percent in commerce and            tobacco; the level spent on education. The
 only 11 percent in transport and construction              expenditure incurred on medical and personal
 (table 7.12).                                              care is only slightly higher than that on alcohol
                                                            and tobacco.
 7.6 LEVEL AND STRUCTURE OF                                      The composition of consumption is
     CONSUMPTION                                            different in the rural areas in comparison with
                                                            the urban areas. Households in the urban areas
 A low level of household income and high                   spend less than one-fourth of their total
 propensity to consume has resulted in a high               expenditure on the consumption of grains and
 ratio of consumption to the level of income. The           cereal products compared to 38 percent in rural
 proportion of consumption to income was 84                 areas. On the other hand, households in urban
 percent in the late ’70s which increased to 88             areas spend 28 percent of their income on
 percent in the ’80s and rose further to 90 percent         housing, as against 16 percent in rural areas.
 in the ’90s (annex 7.2). Although the proportion
 of consumption is high, it does not adequately                  Table 7.13                        Distribution of household
 meet all the basic needs of the households; for,                                                  consumption expenditure
 most of the consumption goes to food items                                                                                              (percent)

 leaving little income for education, health and                    Items/Expenditure        Rural                      Urban             Nepal
 other non-food expenses. The intra-household                    Food and beverage            62.3                       51.0             61.2
 distribution of consumption is more unequal:                      Grain/cereal products      38.3                       24.0             36.9
 boys are better fed than girls, husbands get a                    Pulses                      2.6                        2.5              2.6
                                                                   Vegetables                  5.3                        5.4              5.3
 bigger share of food than wives, and pregnant                     Milk and milk products      3.3                        3.1              3.3
 and lactating women are treated no better than                    Spices                      1.8                        1.5              1.7
 the average family member even if they are not                    Meat, fish and egg          2.5                        2.9              2.5
 maltreated.                                                       Oil and fats                2.7                        2.7              2.7
      The pattern of household expenditure shows                   Alcohol and tobacco         2.6                        2.5              2.6
                                                                   Others*                     3.2                        6.4              3.6
 that food is the major consumption item for most                Other goods and services     37.7                       49.0             38.8
 of the households. In the rural areas, food items                 Housing                    16.2                       27.6             17.3
 constitute nearly two-thirds of the consumption                   Clothing                   11.9                       10.1             11.7
 expenditure, whereas these items account for                      Medical and personal care   3.7                        3.9              3.7
                                                                   Education                   2.7                        4.1              2.9
 nearly half of the consumption expenditure in                     Others                      3.2                        3.3              3.2
 the urban areas. Expenditure on other goods and                 Note: *Others includes fruits and nuts, tea, coffee, sugar, sweets, restaurant
                                                                 meals and transport.
 services (such as clothes, housing, medicine and                Source: NRB 1988.

122                                                                      NEPAL HUMAN DEVELOPMENT REPORT 1998
Similarly, households in urban areas spend more       wells. The rest utilise open wells and open
on education, medical and personal care and           reservoirs and streams as sources of drinking
other consumption (such as tea, sugar, fruits and     water. Access to piped water is available to 58
sweets) compared to those in rural areas (table       percent of urban households while only 31
7.13). However, as they have to spend a higher        percent of the rural households enjoy this
proportion of their income on dwelling, income        facility. Access to electricity is even more
left for spending on education, health, recreation    limited: only 14 percent of all households and
and personal growth is very low causing an            just 9 percent of all rural households have access
impeding effect on human development.                 to electricity (CBS 1997a).
                                                           Sanitation and health. The kitchen, which is
7.6.1 Housing                                         heavily smoky during the cooking hours (and, in
                                                      the colder mountain regions, at almost all hours)
Housing is an important component of level of         and which otherwise needs to be kept clean, is
living     and     of     human      development.     not allocated a separate room in 42 percent of all
Approximately 94 percent of all families,             households. The proportion of such households
irrespective of income status, own their              is 67 percent and 51 percent in the mountain and
dwellings. Even in the urban Kathmandu Valley,        hill regions respectively. Almost 94 percent of
owner-occupancy rate is 66 percent. (Illegal          all households use wood, dung and leaves as
home construction in urban areas, however, is         cooking fuels. Only 22 percent of all households
high at 27 percent.) The average dwelling is          use sanitary toilets. Covered drainage facilities
approximately 876 sq ft. in size, with the urban      are available only in parts of the urban areas and
dwelling smaller by about 100 sq ft. Average per      cater to 34 percent of the households in such
capita dwelling space is about 155 sq ft. and a       areas (CBS 1997a).
room is shared by 2.2 persons. The average                 Housing has not been a salient space for
homestead area is about 1,340 sq ft. However,         government policy-making and action, except in
homesteads in Tarai are 3.7 times and 2.3 times       relation to extension and maintenance of
as large as those in the Mountain region and          drinking water facilities. Physical planning,
Hills respectively. Both the homesteads and           zoning, land development, etc. remain highly
dwellings of the poor are smaller in size, by         under-emphasised even at the level of policy.
about one-third, compared to those of the non-        There is little government involvement in
poor (CBS 1997a).                                     housing investments. The recent National
     While the ownership and distribution of          Housing Policy has proved a non-starter.
housing presents a fairly satisfactory picture, the
same cannot be said of the physical quality of        7.7 STRUCTURE OF
housing and, thus, of well-being. The walls of
slightly more than one-half of all housing
                                                          HOUSEHOLD SAVING
structures are built with bricks or stones − with         AND INVESTMENT
mud used as mortar in most of the cases.
Cement-bonded brick or stone houses form only         Low levels of income have constrained the
11 percent of all houses and most of these are        ability of the household to save. Further, as a
located in urban areas. Nearly 40 percent of the      significant proportion of the households lie
houses are constructed with bamboo strips and         below the poverty line, they have become
plastered with mud. Another 5 percent are made        dissavers and debtors. As debt is mostly owed to
of wooden planks. One-half of all houses are          the informal sector, the rate of interest is as high
roofed with straw or thatch or grass.                 as 100 percent, the average rate being 37 percent
Furthermore 90 percent of all dwellings have an       further eroding the rural households’ capacity
earthen floor. A much larger proportion of            for capital formation.
houses in urban areas, however, have more                  The Rural Credit Survey conducted in 1992
impervious roofs and floors. Overall, on the          by the Nepal Rastra Bank reports an average
basis of the materials used in walls, roofs and       saving of just 7 percent of household income
floors, 54 percent of all houses were assessed to     (NRB 1994). The saving propensity is directly
be substandard (CBS 1997a).                           related to level of income, which in turn is
     Drinking water and electricity. Only one-        determined by the size of landholding. That
third of all households have access to piped          survey reveals that households with large
water facility. Slightly more than one-third          landholdings save as much as 15 percent of their
obtain drinking water from tube wells or covered      income while the marginal farmers dissave at an
                                                      average rate of one percent of their income. The

INCOME, CONSUMPTION AND POVERTY                                                                      123
      Table 7.14                          Distribution of household saving and investment by size of farm
                                                                                                                    (in Rs.)

       Description                     All Farms      Large          Medium                       Farm size
                                                                                      Small       Marginal     Landless
      Gross income                    26,066          71,165        43,044         26,286        16,928       17,044
      Gross savings                   1,949           10,330        5,520          2,030             -226     1,201
      Savings as percent of income6             7.5         14.5          12.8            7.7          -1.3          7.0
      Investment                      4,452           14,624        5,094          5,008         3,047        1,076
       Purchase of physical assets    3,716           9,651         3,872          4,429         2,595            904
       Land dev. & construction               736     4,973         1,222               579           452         172
      Investment as % of income                17.1         20.5          11.8           19.1          18.0          6.3
      Purchase of financial assets    1,260           6,055         1,901          1,266              603         656
      Source: NRB 1994.

 rate of saving is found to be negative in 25                       7.8 INDEBTEDNESS: SCALE,
 percent of the districts surveyed. Even large                          TRENDS AND CORRELATES
 landholders are found dissaving in 28 percent of
 the surveyed districts. The marginal farmers are
                                                                    The latest source of information on indebtedness
 dissaving in 69 percent of the districts.
                                                                    at the household level is Rural Credit Survey
 Interestingly, the landless households are found
                                                                    (NRB 1994). According to this survey, 58
 to have a high propensity to save, and in 60
                                                                    percent of the rural households were indebted in
 percent of the districts surveyed, such
                                                                    1992. The proportion of indebtedness was higher
 households are found as savers (table 7.14). As
                                                                    for the medium and small landholding
 the landless households include the rural
                                                                    households compared with the large and landless
 business class, semi-skilled labour and non-
                                                                    households. Among the indebted households,
 agricultural wage earners, their income levels
                                                                    average debt per household stood at Rs 9987 in
 and hence saving rates are higher than those of
                                                                    mid-July 1992. Of this, institutional debt stood
 the marginal landowners.
                                                                    at 30 percent, the rest was non-institutional or
      The structure of investment shows that 17
                                                                    informal market debt (table 7.15).
 percent of household income is spent as gross
                                                                         More than two-thirds of the borrowing
 capital expenditure on physical assets, of which
                                                                    households borrowed for consumption purposes.
 average investment on financial assets is just 5
                                                                    Eighty-seven percent of the consumption credit
 percent of the income. Investment on physical
                                                                    was financed from the informal sector
 assets is as high as 20.5 percent of the income
                                                                    borrowing compared to just 13 percent of
 for large landholders, compared with 11.8
                                                                    institutional borrowing for consumption
 percent for medium landholders. Larger the
                                                                    purposes6. The average interest rate on
 landholding size, higher the proportion of
                                                                    borrowing was as high as 31 percent (table
 income invested on financial assets as bank
                                                                    7.15). It is obvious that borrowing for
 deposits, securities and shares. Large
                                                                    consumption and high interest cost has
 landholders invest as much as 8.5 percent of
                                                                    contributed to growing indebtedness of the
 their income on financial assets, compared with
                                                                    borrowing households. As a consequence, the
 just 3.5 percent for small landholders. Large
                                                                    amount of debt for the indebted households grew
 landholding households also invest a higher
                                                                    by 4.3 percent from 1970 through 1992. The
 proportion of their income on land improvement
                                                                    share of institutional debt in total household debt
 and construction. The proportion of income
                                                                    increased from 17 percent in 1970 to 30.4
 spent for this purpose is 7 percent for large
                                                                    percent in 1992 (table 7.16).
 holders and 2.7 percent for marginal holders.

 Table 7.15                           Household indebtedness by source and purpose of borrowing, 1992
                                                                       Institutional    Non-Institutional      Total
 Proportion of indebted households (in %)                                    17                49                58
 Average outstanding debt per borrowing household (in Rs)                3,040              6,947             9,987
 Average borrowing per household (in Rs.)                                  983              2,326             3,309
 Average interest rate (in percent)                                          17                37                31
 Purpose of borrowing Production (as percent of total borrowing)             77                13                32
 Purpose of borrowing Consumption (as percent of total borrowing)            23                87                68
 Source: NRB 1994.

124                                                                       NEPAL HUMAN DEVELOPMENT REPORT 1998
 Table 7.16                                   Trend of household indebtedness by source of credit
 Source                          1970      1977      Percent annual change   1992    Percent annual change
 Institutional                     668     2,437           20.3              3,040            1.5
 Non-Institutional               3,262     3,498             1.0             6,947            4.7
 Total                           3,930     5,935             6.1             9,987            3.5
 Source: NRB 1994.

     The expansion of banking services along           resource to maintain minimum standard of
with the extension of specialised credit               living” (World Bank 1980), implying that
programmes in the rural areas has expanded             poverty means more than low income. It is a
access for institutional borrowing. In particular,     state in which "opportunities and choices most
extension of the Priority Sector Credit Program        basic to human development are denied − to lead
and Small Farmers Development Programme                a long, healthy, creative life and to enjoy a
has contributed to an increased flow of                decent standard of living, freedom, dignity, self-
institutional credit in the rural areas. However,      respect, and respect for others" (UNDP 1997:
loan extension without proper project                  15). All these concepts suggest that an
assessment, use of credit for consumption              investigation of poverty focusing exclusively on
purposes, crop failure, market failure, diversion      the physiological needs alone is incomplete and,
of institutional borrowing for re-lending in the       thus, should be complemented with the use of
informal sector, high interest rate differentials      indicators of other concepts such as “basic
between the formal and informal sectors and            needs”, “capability” and “social exclusion”.
laxity of financial institutions in loan recovery           The mainstream approach to identifying
have led to high rates of institutional loan           poverty has been to specify a cut-off ‘poverty
delinquencies and indebtedness. On the other           line’, defined as the level of income below
hand, heavy dependence on a low productivity           which people are diagnosed as absolutely poor.
agriculture, frequent production and market            Initially, the poverty line was defined on
failures, demonstration effect on consumption          consumption space, based on normative
behaviour and borrowing for consumption                nutritional daily per capita requirements and
purposes, high cost of borrowing, chronic              other non-food basic consumption requirements.
illness, death of livestock and natural calamities     The conventional measure of poverty counts the
have resulted in higher indebtedness of the            number of people below the poverty line − the
households. Lack of insurance and social               so-called “head count index”, defined as the
security provisions has further aggravated the         proportion of total population that happens to be
problem.                                               below the poverty line. However, the issue of
                                                       how consumption information at the household
7.9 INCIDENCE OF POVERTY                               level could be translated into consumption of
                                                       individuals has not been resolved. Correcting for
The growing incidence of poverty in Nepal is           household composition takes us into the still
the outcome of an economic process that is             controversial areas of estimating adult
associated with a worsening income distribution        equivalent scales. But even if this problem is
among the households. Poverty has further been         solved, translation of household consumption
exacerbated by limited access to productive            into individual level consumption by simply
resources, high levels of underemployment              dividing total consumption by the number of
and/or     unemployment       augmented      and       equivalent adults assumes that consumption
perpetuated by the indebtedness of the poor.           within household is distributed according to
High incidence of poverty not only signifies           need, thus ignoring the problem of intra-
inhuman living conditions; it also blocks all          household distribution of poverty and its effects.
avenues of capability formation and functionings            The major drawback of the head count
of an individual.                                      method is that it measures neither intensity of
                                                       poverty nor distribution of income among the
7.9.1 Concepts and measurement                         poor. The so-called ‘income gap’, which
                                                       measures the additional income that would be
In general, poverty can be defined as “a state of      needed to bring all the poor up to the level of
economic, social and psychological deprivation         poverty line, i.e., the minimum extra income that
occurring among people or countries lacking            would be sufficient to wipe out poverty, is used
sufficient ownership, control or access to             to address this lacuna. But the income-gap ratio

INCOME, CONSUMPTION AND POVERTY                                                                       125
   Table 7.17                                                                                               Incidence of poverty, 1977
                                                                                              (percentage of households and population below poverty line)

                                                                Percentage of households below                Percentage of population
   Poverty Criteria
                                                                         poverty line                            below poverty line
                                                                 Rural        Urban       National            Rural             Urban National
   Minimum subsistence consumption                                     34.3    19.9         33.7                 32.1           20.0               31.5
   Minimum subsistence income                                          41.2    22.1         40.3                 37.2           17.0               36.2
   Source: NPC 1977: 1171-19.

 is completely insensitive to the number of heads                                  (1977), NRB (1988) and World Bank/UNDP
 counted and it takes note only of the average gap                                 (1990). It has been argued that consumption is a
 of income of the poor from the poverty line. The                                  more appropriate variable than the level of living
 major weakness of both of these indices is that                                   because utility depends directly on consumption
 they do not take into account income distribution                                 and not on income per se. Current consumption
 among the poor.                                                                   is a better indicator both of the current standard
                                                                                   of living and long-term average well-being.
 7.9.2 Poverty incidence trends                                                    Thus, we have chosen consumption expenditure
                                                                                   rather than income to assess the level of living.
 Literature available on income-poverty in Nepal                                   Our analysis of the trends in incidence of
 does not seem to have dealt adequately with the                                   poverty in Nepal is constrained by limitations set
 issue of poverty, its causes and consequences.                                    by various surveys and is restricted to the
 Most of it has tried to quantify incidence of                                     normative criteria of the minimum consumption
 poverty focusing on characteristics of the poor                                   bundle of food items related to the bare
 rather than on 'poverty' or “institution” which                                   physiological needs of survival.
 links up the poor and the non-poor and on                                              As indicated by the NLSS (CBS 1996),
 generational reproduction of poverty including                                    around 9 million Nepalis – 45 percent of the
 capability poverty. In 1997, the National                                         population – are defined as poor, an increase of
 Planning Commission (NPC 1977) defined the                                        nearly 9 percentage points from the level of
 poor as individuals with income/consumption                                       1977. In 1977, the proportion of households
 levels below the physiologically required level.                                  falling below the poverty line was estimated at
 NPC has also defined poverty in terms of basic                                    33.7 percent (34.3 percent rural and 19.9 percent
 needs (NPC 1985). However, no attempt has                                         urban)7. However, the incidence of poverty
 been made to measure poverty in terms of                                          based on income levels indicates that 40.3
 “deprivation of material requirements for                                         percent of the households (42.2 percent of rural
 minimally acceptable fulfillment of human                                         and 22.1 percent of urban households) fall below
 needs” (UNDP 1997:6).                                                             the poverty line. In terms of the total population,
      We choose here, however, not to fall into                                    the absolute incidence of poverty (based on
 the conceptual debate of poverty measurement.                                     subsistence consumption) is estimated as 31.5
 We, instead, accept a definition of poverty line                                  percent (32.1 percent of rural and 20.0 percent
 which is expressed in terms of consumption                                        of urban population). Alternatively, in terms of
 required to maintain a family in “good                                            subsistence income, 36.2 percent of the total
 nutritional health” as well as to satisfy                                         population (37.2 percent rural and 17.0 percent
 “minimum conventional needs” adopted by NPC                                       urban) is estimated to be poor8 (table 7.17).
                                                                                        In 1985, the national incidence of poverty

 Table 7.18                                                                               Incidence of poverty by region, 1984/85
                                                                                              (percentage of households and population below poverty line)

                                     Percentage of households below poverty line                    Percentage of population below poverty
 Ecological Region                                                                                                   line
                                     Rural                  Urban              National            Rural           Urban          National
 Tarai                                 34.1                  20.2                33.0                35.4             24.1         34.5
 Hills                                 49.8                  12.6                47.1                52.7             14.5         50.0
 Mountains                             36.0                   -                  36.0                44.01              -          44.1
 Nepal                                 40.7                   6.1                  -                 43.1             19.2         42.6*
* National incidence of poverty computed for the 7th Five Year Plan.
Source: NRB 1989: 136.

126                                                                                       NEPAL HUMAN DEVELOPMENT REPORT 1998
 Table 7.19               Incidence of poverty under different poverty lines by rural-urban residence, 1989
                                                                                                                                     (in percent)

 Poverty criteria                                        Tarai                                   Hills                      Nepal
                                         Rural           Urban           Total         Rural     Urban     Total   Rural   Urban      Total
 NPC*                                     29              17              28            55        13        52      42      15         40
 US dollar 150                            69              51              68            78        32        75      74      42         71
 Lipton**                                 70               5              58            65        52        64      68      51         66
* Per person per month poverty cut-off points of Rs. 210 in Hills and Rs. 197 in Tarai.
** Percentage of population which spends 70 percent or more of the total expenditure on food.
  Source: World Bank/UNDP 1990: 8.

 was 42.6 percent (NRB 1988)9. However, there                                              150 per capita per annum. The proportion of
 was significant variation across the ecological                                           population with an income level below this
 regions. Incidence of poverty was highest in the                                          poverty line was estimated at 71 percent
 Hills (47 percent of households and 50 percent                                            nationwide and at 75 percent in the Hills. The
 of the population), followed by the Mountains                                             third approach defined the poor as suggested by
 (36 percent of households and 44 percent of the                                           Michael Lipton, i.e., as those whose expenditure
 population), and Tarai (33 percent of households                                          on food consumption absorbs 70 percent or more
 and 35 percent of the population).                                                        of total expenditure (Lipton 1983). This
      The survey also revealed that incidence of                                           suggested that two-thirds of the population were
 poverty was more pronounced in the rural than                                             below the poverty line, comprising 68 percent in
 in urban areas. In the rural areas it was 40.7                                            the rural areas and 51 percent in urban areas, and
 percent of the households which is 41.3 percent                                           58 percent in Tarai and 64 percent in Hills (table
 in terms of the total population. Within rural                                            7.19).
 areas, geographical variations in the extent of                                                Another study (Chhetri 1996), based on
 poverty were found to be wide and distinct. Both                                          1992 data,10 evaluated household levels of
 in terms of households (49.8 percent) and                                                 income and expenditure based on the prevailing
 population, (52.9 percent), Hills showed a                                                prices without adjusting for the inter-district
 higher incidence of poverty than Tarai. In Tarai,                                         variations. This estimates the incidence of
 34.1 percent of households (comprising 35.4                                               poverty at 34 percent in Tarai and 64 percent in
 percent total population) were found to be under                                          the Hills and Mountains. The study indicated no
 the poverty line. In urban areas of the Hills, 12.6                                       significant difference in the incidence of poverty
 percent of households (14.5 percent of the total                                          measured either in terms of per capita income, or
 population) were found poor. Moreover, the                                                consumption expenditure, or in terms of food
 incidence of poverty was higher in urban Tarai                                            expenditure (table 7.20).
 than in urban Hills (table 7.18).                                                              It has to be noted that the level of 'absolute
      A 1989 reprocessing of the 1985 MPHBS                                                poverty' computed at the household level might
 data (NRB 1988) has calculated the proportion                                             vary significantly from the incidence of poverty
 of population below the poverty line under three                                          calculated for the entire population. But as we
 sets of assumptions (World Bank/UNDP 1989).                                               have calculated the nutritional requirements at
 The first was the poverty line defined by the                                             per capita level to compute the poverty cut-off
 National Planning Commission (NPC) on the                                                 point, household level nutritional requirements
 basis of level of income required to supply the                                           could be obtained by multiplying per capita
 minimum caloric requirements (2250 kcals), at                                             requirement by household size. Thus the head-
 1988/89 prices. This amounted to Rs. 210 per                                              count ratios computed for the total population as
 person per month in the Hills and Rs. 197 in                                              household level incidence of poverty, in our
 Tarai. It suggested that about 40 percent of                                              case, would not provide any additional 'relevant'
 population were absolutely poor. The second                                               information. The head count index, based on per
 poverty line was defined in terms of the                                                  capita consumption using NLSS data,11 is
 internationally accepted threshold of US dollar                                           presented in table 7.21.

    Table 7.20                                     Incidence of rural poverty by region under different criteria, 1992
    Region\criteria                      Per capita income              Per capita consumption expenditure Per capita food expenditure
    Tarai                                      34.3                                    34.0                            34.0
    Hills                                      64.0                                    64.0                            64.0
    Mountains                                  64.2                                    64.1                            63.9
    Source: Chhetri 1996.

 INCOME, CONSUMPTION AND POVERTY                                                                                                            127
 Table 7.21                Incidence of poverty by region,                            number of absolute poor has almost doubled in
                                                                                      the past 20 years.
                                                 (Head Count Index in percent)             The variation in incidence of poverty across
  Development                    Ecological Region                                    regions is worsening over time. In 1997, the
     Region              Mountains    Hills   Tarai                    Total          incidence of poverty in the rural areas was 2.2
 Eastern                   57           68       27                      43           times higher compared to urban areas. This ratio
 Central                   48           31       34                      34           has gone up to 2.6 in 1996, implying that the
 Western                   52           46       44                      45
 Mid-West                  72           66       47                      59           relative incidence of poverty in the rural areas
 Far West                  80           73       49                      65           has increased relative to the national average
 Rural                      -             -        -                     47           over time. With the majority of population
 Urban                      -             -        -                     18           residing in rural areas, national incidence of
 Total                      63            50       37                    45
Note: The NLSS was designed to capture aggregative information, particularly at       poverty has moved in tandem with rural
     the development region and ecological zone levels; sizable sampling errors       incidence. Similarly, the ratios of regional
     are likely at the sub-regional level.
Source: CBS 1996.                                                                     incidence of poverty to the national average
                                                                                      indicate that poverty is consistently more severe
                                                                                      in the Hills and Mountains compared to Tarai. In
      On the basis of the above-defined poverty                                       1996, the incidence of poverty in the Mountains
 lines, the incidence of poverty in rural areas is                                    had gone up significantly in relation to that in
 2.6 times higher than in urban areas. Since about                                    Tarai, whereas it had declined in Hills (table
 88 percent of population live in rural areas, the                                    7.23).
 incidence of poverty is overwhelmingly a rural
 phenomenon. The incidence of poverty                                                 7.9.3 Correlates of poverty
 disaggregated at the ecological and develop-
 mental region levels shows that it is highest in                                     Poverty is not merely an economic issue, it is
 the Mountains, followed by Hills and Tarai                                           also an issue related to human dignity.
 among the ecological zones. Among the                                                Accordingly, the economic definition of poverty
 development regions, the worst poverty is found                                      has to be linked with the broader spectrum of
 in the far west followed by the mid-west,                                            socio-economic parameters. This sub-section
 western region and the central development                                           attempts to identify the poor in terms of various
 region. At the sub-regional level, the far western                                   socio-economic variables such as caste, location,
 Mountains recorded the highest incidence of                                          occupation, sector of employment, education
 poverty, followed by the far western Hills and                                       level, composition of income and family size. It
 mid-western Mountains. The incidence of                                              is expected that this will help trace the correlates
 poverty only in the eastern, central and western                                     of poverty as well as indicate areas of
 Tarai and central Hills is found to be less than                                     government intervention for redressing it.
 the national average (table 7.21).                                                        Table 7.24 depicts the dimensions of
      Poverty estimates based on an identical                                         poverty according to household characteristics
 level of daily per capita minimum caloric                                            and location. The first column lists the various
 requirement of 2,250 kcals are presented in table                                    caste/ethnic characteristics, and locational
 7.22. These figures show that there is no                                            attributes. The distribution of the sample
 evidence to substantiate that the incidence of                                       population by defined attribute is presented in
 poverty has declined over time. Conversely,                                          the second column. The third column indicates
 there are indications that the absolute number of                                    percentage distribution of the poor by variable.
 the poor has increased over the two decades                                          The fourth column indicates the high-risk
 since 1977. Poverty thus has increased at an                                         poverty groups. The last column presents the
 annual rate of more than three percent and the                                       relative incidence of poverty.

 Table 7.22                                                            Trends in incidence of poverty by rural-urban residence
                                                                                                            (percentage of population below poverty line)

 Source                                            Year         Rural             Urban    Nepal        Poor population            Annual change
                                                                                                           (in '000)                (percentage)
 NPC                                               1977*          37.2             17.0     36.2             4,897                        -
 MPHBS                                             1985           43.2             19.2     42.5             6,852                      5.00
 World Bank/ UNDP                                  1989           42.0             15.0     40.0             7,694                      3.07
 CBS                                               1996           47.0             18.0     45.0             9,507                      3.36
* Minimum caloric requirement per person per day is 2256 kcals.
  Source: NPC 1977, NRB 1989, World Bank/UNDP 1990, CBS 1996..

128                                                                                         NEPAL HUMAN DEVELOPMENT REPORT 1998
Table 7.23                                                        Inter-regional variation in incidence of poverty
                                                                                                                  All Nepal = 100

 Year       Urban Rural            Rural/Urban Ratio Mountains Hills         Tarai   Mountains/Tarai Ratio Hills/ Tarai Ratio
 1977       46.96       102.76           2.19            -          -          -               -                      -
 1985       45.18       101.65           2.25         103.52      117.37     80.99            1.47                 1.28
 1989       33.33       105.00           3.15            -        130.00     70.00             -                   1.86
 1996       40.00       104.44           2.60         140.00      111.11     82.22            1.70                 1.35
Source: Same as for table 7.22.

    Major observations emerging from the                                not explicitly consider the causal relationships
analysis of the correlates of poverty are                               between poverty and socio-economic and
summarised below. The analysis, however, does                           demographic variables listed in table 7.24.

   Table 7.24                                                                              Correlates of poverty, 1996
                                                                                                                 (in percentage)

                             (1)                       (2)               (3)                  (4)                 (5)
                                                  Proportion in     Proportion of        Proportion       Relative incidence
   Selected characteristics                          sample            poor in          below poverty         of poverty
                                                                       sample                line          [column (3)/(2)]
   Chhetri                                            17.71                19.48              50               1.10
   Brahman                                            14.85                11.33              34               0.76
   Magar                                               6.48                 8.28              58               1.28
   Tharu                                               8.24                 8.74              48               1.06
   Newar                                               4.98                 2.74              25               0.55
   Tamang                                              4.10                 5.35              59               1.31
   Kami                                                4.76                 7.16              68               1.50
   Yadav                                               4.26                 3.79              40               0.89
   Muslim                                              5.50                 4.64              38               0.84
   Rai                                                 1.39                 1.74              56               1.25
   Gurung                                              2.70                 2.70              45               1.00
   Damai                                               1.50                 2.22              67               1.48
   Limbu                                               2.20                 3.44              71               1.56
   Sarki                                               1.48                 2.13              65               1.44
   Other *                                            19.82                16.27              37               0.82

   Place of Residence
   Urban                                               6.94                 2.82              18               0.40
   Rural                                              93.06                97.18              47               1.04

   Development Region
   Eastern                                            22.52                22.05              43               0.98
   Central                                            34.58                26.24              34               0.76
   Western                                            20.31                20.61              45               1.01
   Mid-Western                                        12.90                17.07              59               1.32
   Far Western                                         9.69                14.04              65               1.45

   Mountains                                           7.87                11.07              63               1.41
   Hills                                              42.97                48.56              50               1.13
   Tarai                                              49.16                40.36              37               0.82

   Eastern Mountain                                    2.02                 2.59              57               1.28
   Central Mountain                                    2.34                 2.53              48               1.08
   Western Mountain                                    0.15                 0.18              52               1.20
   Mid-Western Mountain                                1.39                 2.25              72               1.62
   Far Wwestern Mountain                               1.96                 3.52              80               1.80
   Eastern Hills                                       7.83                11.84              68               1.51
   Central Hills                                      13.30                 9.10              31               0.68
   Western Hills                                      11.77                12.14              46               1.03
   Mid-Western Hills                                   6.30                 9.31              66               1.48
   Far Western Hills                                   3.76                 6.16              73               1.64

INCOME, CONSUMPTION AND POVERTY                                                                                                    129
      Eastern Tarai                                                    12.67                    7.61                        27                       0.60
      Central Tarai                                                    18.94                   14.61                        34                       0.77
      Western Tarai                                                     8.38                    8.28                        44                       0.99
      Mid-Western Tarai                                                 5.21                    5.50                        47                       1.06
      Far Western Tarai                                                 3.97                    4.36                        49                       1.09
      Sex of Household Head
      Female                                                            8.59                    8.01                        42                       0.93
      Male                                                             91.41                   91.99                        45                       1.01

      Age of Household Head
      Less than 25 years                                                3.71                    4.08                        49                       1.10
      25 – 40 years                                                    38.49                   43.53                        51                       1.13
      41 – 50 years                                                    24.26                   22.29                        41                       0.92
      51 – 60 years                                                    18.10                   16.38                        40                       0.90
      61 years and above                                               15.43                   13.72                        40                       0.89

      Education of Household Head
      Illiterate                                                       63.34                   75.88                        51                       1.15
      No schooling but literate                                        20.33                   15.68                        34                       0.77
      Primary                                                           7.17                    6.87                        43                       0.95
      Secondary                                                         3.87                    2.50                        29                       0.64
      High school                                                       3.77                    1.68                        20                       0.44
      Above high School                                                 1.52                    0.40                        12                       0.26
      Occupation of Household Head **
      Professional and technician                                       5.02                    1.17                        12                       0.23
      Administrator                                                     0.35                    0.00                        0                        0.00
      Clerical worker                                                   6.14                    2.51                        20                       0.41
      Sales worker                                                      0.89                    0.36                        20                       0.40
      Managers                                                          2.20                    1.72                        39                       0.78
      Agricultural workers                                             55.29                   61.24                        55                       1.11
      Production workers                                               29.15                   32.01                        55                       1.10
      Other                                                             0.97                    1.00                        51                       1.03
      Employment of Household Head
      Wage work in agriculture                                         12.09                   13.13                        55                       1.10
      Wage work outside agriculture                                    14.47                   15.64                        35                       0.92
      Self-employed in agriculture                                     62.17                   60.13                        47                       1.03
      Self-employed outside agriculture                                11.28                   10.89                        34                       0.96

      Household Size
      Less than three                                                   2.79                    1.39                        22                       0.50
      3 - 5 persons                                                    31.77                   24.97                        35                       0.79
      6 - 8 persons                                                    41.63                   47.36                        51                       1.14
      8 + persons                                                      23.80                   26.28                        50                       1.10

      Number of Children
      0                                                                 7.65                    4.08                        23                       0.53
      1                                                                13.73                    8.18                        27                       0.59
      2                                                                19.24                   16.07                        37                       0.83
      3                                                                21.69                   22.75                        47                       1.05
      4 and more                                                       38.05                   49.02                        58                       1.29
      Land Ownership ***
      Without own land                                                 15.10                   13.47                        40                       0.89
      Less than 0.5 ha                                                 32.95                   39.90                        54                       1.21
      0.5 - 2.0 ha                                                     39.10                   39.05                        45                       1.00
       2.0 ha and above                                                12.85                    7.58                        26                       0.59
      Share of Farm Income
      No farm income                                                    6.55                    4.61                        31                       0.70
      Less than 25 percent                                             11.75                    8.05                        31                       0.68
      25 – 50 percent                                                  15.44                   14.94                        43                       0.97
      50 – 75 percent                                                  20.29                   22.24                        49                       1.09
      75 percent and above                                             45.97                   50.16                        49                       1.09
       Note: The distribution of sample may differ with census distribution in relation to all the major categories. This applies particularly to those with multiple
      * Over-represented caste/ethnic groups of Tarai in this group.
      ** Definition of occupation categories is provided in annex to chapter 3.
      *** The result may vary significantly among for the urban areas, given the small urban sample. However, it is unlikely that the results for the rural areas will be
      Source: CBS 1996.

130                                                                                                    NEPAL HUMAN DEVELOPMENT REPORT 1998
•     Among the various caste/ethnic groups,                                 prone to be poor. However, data show that
      incidence of poverty is highest among                                  the achieved level of education does not
      Limbus, followed by socially downgraded                                necessarily reduce the severity of poverty
      formerly untouchable castes (Kami, Damai                               proportionately, particularly at the low
      and Sarki). Chhetri, Magar, Tharu,                                     levels of education. Incidence of poverty is
      Tamang and Rai are similarly over-                                     higher among households whose heads
      represented among the poor. Incidence of                               have completed primary level education
      poverty is lowest among Newars followed                                than among those whose heads are simply
      by Brahmans.                                                           literate and had not attended school.
           Stark differences exist in the                            •       In terms of occupation, households made
      incidence of poverty by place of residence.                            up of agricultural and production workers
      Relative incidence of poverty in rural areas                           are found to be more prone to poverty. In
      is 2.6 times higher than in urban areas.                               particular, agricultural wage employees are
      Poverty is less severe in the eastern and                              likely to be poor. Administrative workers,
      central development regions compared to                                in contrast, are non-poor. Similarly,
      other development regions. Similarly,                                  salaried workers in the sample have a low
      poverty is less rampant in Tarai compared                              incidence of poverty.
      to other ecological regions. Incidence of                      •       There is a strong positive association
      poverty is most intense in the mid-western                             between the size of the household and the
      and far western Mountains, followed by                                 number of children per household on the
      the eastern and far western Hills. It is                               one hand, and the incidence of poverty on
      relatively less severe in eastern Tarai, and                           the other. As the size of the
      central Hills and central Tarai.                                       household/number of children increases,
•     Contrary to the general belief, the situation                          the incidence of poverty goes up.
      of deprivation is better among the female-                             However, for very large households, such
      headed households compared to male-                                    an “incremental association” disappears.
      headed households12. This is likely to be a                    •       Date linking the size of landownership and
      result of defective reporting and data                                 incidence of poverty indicate that
      collection procedure. It may be that                                   households with small farm holdings are
      women receiving remittances from                                       more likely to be poor than those that are
      migrant husbands were over-represented in                              landless. This is likely to be a result of the
      the sample. The age of the household head                              relative occupational instability of small
      seems to affect poverty significantly.                                 landowners in terms of household
      Incidence of poverty is higher among                                   dependence on agricultural income. This is
      households with the age of their heads                                 found to be positively related to incidence
      from 25 to 40 years. It is likely to be due                            of poverty. Similarly, families dependent
                                                                             on agricultural income to meet their
      to the high rate of dependents per
                                                                             livelihood are much more prone to
      household in this category.
•     Educational attainment is a valuable
      safety-valve to neutralise burden of                              Table 7.25 points to the impact of poverty on
      poverty. Thus the illiterate are much more                   levels of well-being. Calculating the mean

 Table 7.25                  Selected socio-economic and demographic indicators for the poor and non-poor
                                                                    Poor                               Non-Poor
                                                          Rural    Urban          Total     Rural      Urban        Total
 Reported Illness (percent)                                 6.64      4.95         6.59       6.54       5.46         6.35
 % of fully immunized children                             28.94     54.43        29.59      41.41      59.41        43.01
 Average number of children per household                   2.96      3.05         2.96       2.06       1.80         2.03
 Average household size                                     6.23      6.31         6.24       5.32       5.24         5.31
 % of children out of school                               49.49     42.53        49.27      32.81      13.54        31.02
 Adult literacy rate (percent)                             26.31     41.34        26.72      38.41      68.00        41.64
 Average area of owned land (ha)                            0.99      0.40         0.98       1.18       0.92         1.17
 Population without adequate sanitation (percent)          68.10     64.52        68.00      69.93      39.74        65.58
 *Access to safe drinking water used as proxy variable.
 Source: Computed from CBS 1996.

INCOME, CONSUMPTION AND POVERTY                                                                                       131
differences by the level of achievement of the         restored multi-party democracy, the Eighth Plan
poor and the non-poor, it shows that child             adopted a market-oriented economic policy
immunisation, sanitation facilities, school            aiming to reduce incidence of poverty from 49
enrolment of the children, adult literacy and          percent of the population in 1992 to 42 percent
ownership of productive assets are significantly       by the end of the plan (1997). But no specific
high among the non-poor households compared            measures were taken to this end. Instead,
to the poor. Poor households reported about 50         adoption of market-oriented liberal economic
percent more dependent children, mostly                policies has had an adverse effect on poverty.
malnourished, than non-poor households.                The withdrawal of subsidies, mass retrenchment
However, the rates of morbidity are found to be        of civil servants, wage freeze, deregulation of
higher among the non-poor households as are            administered prices and upward revision in the
household sizes. Disaggregation by rural/urban         prices of the goods and services delivered by
sector reveals a higher morbidity rate among the       public enterprises have had an adverse effect on
urban non-poor than the urban poor. This might         the situation of poverty. Although overall growth
be a result of low levels of health awareness          rate has remained in line with the objective
among the poor. The figures for child                  (annex 7.5), the distribution of income has been
immunization and adult literacy among the urban        more adverse. This is evident from the
poor are more than 50 percent that of the rural        deteriorating terms of trade of agriculture on
poor, and are even higher than those of the rural      which 80 percent of the population subsists,
non-poor.                                              deteriorating levels of real wages, and high rates
                                                       of inflation (Acharya 1996). The rate of inflation
7.10     GOVERNMENT       POLICIES,                    averaged 10.3 percent during the plan period due
         PRIORITIES, FINANCING AND                     mainly to faster price rises on non-agricultural
         PERFORMANCE                                   goods which left an adverse effect on agricultural
                                                       households and fixed income (wage) earners.
Ever since the government initiated development             Besides, the development plans aimed at
planning, efforts were made to enhance the living      generating more employment opportunities by
standard of the people by increasing per capita        improving cropping intensity in agriculture,
income. For this purpose, the agricultural and         promoting off-farm activities, developing an
infrastructure sectors were given top priority in      industrial base and providing institutional credit
almost all development plans. However, per             so as to improve the level of income and reduce
capita income did not increase because the rates       poverty. Yet employment growth has been slow
of economic growth remained below the rates of         during this period and employment elasticity of
population growth throughout the ’70s. The             the economy remained low (about 0.34),
situation improved marginally in the ’80s and          implying that each 3 percent growth could
’90s. The marginal growth in per capita income         generate only one percent employment growth.
was highly skewed in favour of the non-                Sectoral interventions including the programmes
agricultural sector and urban areas. Gaps between      for Food for Work, Targeted Credit, and
the objectives and their realisation, programme        Integrated Rural Development added few
formulation and their implementation, and              employment opportunities. While labour demand
programme        implementation        and     their   has been growing at around two percent per
effectiveness lie behind this policy failure. Since    annum during the last two decades, the labour
implementation of the various development plans        force has grown by three percent per annum on
could not ensure a minimum quality of life for         the average. This has intensified both
the people, the Basic Needs Approach to                unemployment and underemployment.
development planning was initiated in the ’80s.             The approach paper to the Ninth Five-Year
The Seventh Plan (1986-90) was formulated with         Plan (1997-2002) prioritises poverty alleviation
this approach. The basic needs identified by the       as its first objective. The Plan aims to lower the
plan were food, clothing, fuelwood, drinking           national incidence of poverty from 45 percent in
water, primary health service and sanitation,          1997 to 32.5 percent by 2002, and eventually to
basic education and skill and minimum rural            10 percent by 2017. Among the proposed sets of
transportation facility. To attain these objectives,   programmes to achieve this objective are:
the plan laid emphasis on development of               effective implementation of the land reform
agriculture, water resources, industries, trade and    program, provision of subsidised agricultural
tourism.                                               inputs, improvement in agricultural marketing
     After the people’s movement of 1990 which         system and employment promotion.

132                                                          NEPAL HUMAN DEVELOPMENT REPORT 1998
      In the process of economic liberalisation and   mid-’80s was expected to support poverty
restructuring, a number of reform measures have       alleviation and human development through
been introduced since the mid-’80s. Accordingly,      enlarging access to credit for the people who
there has been industrial de-licensing, trade         have no physical or financial assets. But, this has
liberalisation, incentives for foreign investment,    not happened. First, banks have widened the
some privatisation and general pursuit of             spread between lending and deposit rates and
economic and administrative environment that is       hence made credit more expensive in relation to
conducive to private sector participation in the      the return for deposit. Second, banks have closed
economy. These reforms have given mixed               or merged loss-making branch offices situated in
results to the economy in terms of growth and         the rural/remote areas and thus deprived people
equity. One of the positive aspects is that macro-    from banking services. Third, banks have started
stability has broadly been attained with a            resorting to wholesale banking, thus depriving
favourable balance of payments, single digit          the masses even in the urban areas from banking
inflation rate and fiscal restraint. However, many    services. Fourth, banks overlooked their
more issues have cropped up as a trade-off to this    commitment to channel at least 12 percent of the
stability. First, economic growth has remained        total credit to the priority sector and 3 percent to
narrow-based; it has failed to create adequate        the deprived sector. The squeeze on rural credit
employment opportunities and to alleviate             which has a direct bearing on poverty alleviation
poverty. Second, the terms of trade of agriculture    has aggravated the problem of joblessness and
have deteriorated because price deregulation          wastage of human labour. And, fifth, agriculture
affected much more the non-agricultural               and industry continue to remain deprived of
products. Third, the workers’ share in income has     institutional credit despite a large extent of
deteriorated, as real wages have not improved.        financial deepening.
Fourth, civil service reform and privatisation             Fiscal restructuring in the process of
have propelled mass retrenchment of public            liberalisation and adjustment has had a significant
sector employees without enough job creation in       implication for human development. Past
the private sector. Fifth, the withdrawal of          experience shows a severe budget squeeze in the
subsidies and deregulation of prices have             social sector with the adoption of adjustment
increased the prices of basic consumption items       programmes (NPC 1994). This has had an
of the poor, more than increase in their income,      adverse effect on human development. Besides,
resulting in a deteriorated level of real             most of the loan associated with structural
consumption. Sixth, opening of the economy            adjustment went to economic sectors and only
without enhancing the competitiveness of              about 10 percent of the loan has gone for the
domestic industries has shaken the industrial         social     sector.     Subsequently,    government
base, and industrial capital has eroded. Seventh,     investment on social development through
emergence of market forces has displaced people       external sources remained low.
lacking skill, enterpreneurship and landed                 The foregoing discussion shows that the
property, has added hardship to women and             country has exercised various development
children (box 6.1, chapter 6) and eroded the          policies on a trial and error basis with little
social fabric (as every activity turns out to be      success in each of them. Irrespective of all the
commercial). And, eighth, regional imbalances in      policy measures and institutional set-ups for
development have widened due to the skewed            economic growth, poverty alleviation and social
development of the market and the investment          development, the country is likely to remain in a
left to be driven by the market.                      low profile of human development unless the
      Although opening the industrial sector          structure of the economy, and for that matter, the
through delicensing and inviting foreign              economic policies, strategies and programmes are
investment has led to some industrial expansion,      reoriented and focused towards broader
a number of distortions have emerged. The post-       distribution of growth, creation of more jobs in
liberalisation    industrial    environment     has   the process of growth and allocation of public
discouraged indigenous industrial activities like     resources for human priority concerns.
cottage and small industries. It has exposed the           Beside government sponsored poverty
weak domestic industrial base of the state to         alleviation programmes, there are large numbers
market competition. The little foreign investment     of international non-governmental organisation
that has come in is mainly in the capital-intensive   (INGOs),           national       non-governmental
services sector.                                      organisations (NGOs) and traditional self-help
      Financial liberalisation initiated since the    groups and self-help organisations. The available

 INCOME, CONSUMPTION AND POVERTY                                                                     133
scattered information suggest that these            rate could be achieved with the limited level of
programmes might have had a better impact on        resources, then selective and effective state
poverty alleviation albeit in limited areas, than   intervention would be called for. As Nepal falls
government sponsored programmes.                    in the latter category owing to several structural
     Experience has shown that economic growth      barriers, enhancing the level of human
increases income and hence the capability for       development along with economic growth
access to education, health and nutrition, and a    demands a number of institutional and policy
decent standard of life of the people in general    reforms which the subsequent chapters discuss in
only if it is significant, broad-based and          detail.
employment-creating. If only a moderate growth

134                                                       NEPAL HUMAN DEVELOPMENT REPORT 1998

Description: Income Consumption document sample