Nepal - Poverty and incomes

9585 A WORLD BANK COUNTRY STU 1L5 Nepal Poverty and Incomes FILE COPY X',- w :4  A WORLD BANK COUNTRY STUDY Nepal Poverty and Incomes A Joint Study The United Nations The World Bank Development Programme The World Bank Washington, D.C  Copyright @ 1991 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the Uruted States of America First printing April 1991 World Bank Country Studies are among the many reports originally prepared for internal use as part of the continuing analysis by the Bank of the econom-c and related conditions of its developing member countries and of its dialogues with the governments. Some of the reports are published in this series with the least possible delay for the use of governments and the academic, business and financial, and development communities. 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ISSN: 0253-2123 Library of Congress Cataloging-in=Publication Data Nepal poverty and incomes. p. cm. -- (A World Bank country study) "A joint study by the World Bank ano The United Nations Development Programme." ISBN 0-8213-1808-X 1. Poor--Nepal. 2. Income dlstribution--Nepal. 3. Nepal- -Economic conditions. 4. Nepal--Soclal conditions. 5. Nepal- -Economic policy. 6. Nepal--Social policy. I. International Bank for Reconstruction and Development. II. United Nations Development Programme. III. Series. HC425.Z9P664 1991 362.5' 095496--dc2O 91-12947 CIP  ACUNOVLEDGDNTS This report was prepared on the basis of a mission to Nepal in November 1989 consisting of W. James Smith (Mission Leader), John H. Duloy (Consultant - Poverty and Incomes), Christopher Gibbs (Agricultural Economist), Lynn Bennett (Anthropologist), John Elder (Consultant - Agriculture, Food Security), Sanjay Sinha (Consultant - Informal Sector) and Neil Walton (Consultant - NGO and Income-Generating Programs). The analysis is based on a substantial amount of preparatory work that was done in Nepal; background studies were managed by Meena Acharya, Kul Shekhar Sharma, Madhup Dhungana and Harka Gurung. Thanks are due to the Nepal Rastra Bank for allowing us access to the Multi-Purpose Household Budget Survey Data, and particular recognition is due to Baskar Risal, who managed the reprocessing of the survey data. The report draws on numerous background papers and analyses, to which the following persons contributed: Messrs./Mss. Ram Nath Acharya, Hamid Ansari, Aswasthama, Kishor Kumar Guru Gharana, Ana Maria Jeria, Chaitanya Mishra, Yogendra Prasai, Khem Raj Sharma, Azealia Ranjitkar, Prayograj Sharma, Ramesh Sharma, Salikram Sharma, Gajendra Man Shrestha, Subrama Laxmi Singh, Ganesh Bahadur Thapa, Indra Jung Thapa, and William Thiesenhusen. Irajen Appasamy provided computational support, and Deborah Ricks processed the report. Financial support for the study was provided by the United Nations Development Program. The report also benefited from the findings of a parallel study of poverty undertaken by the Canadian International Development Agency. - iii -   CURRENCY EQUIVALENTS Year US$1.00 Equivalent (Average) 1984/85 Rs. 17.8 1988/89 Rs. 25.6 FISCAL YEAR July 16 - July 15 LIST OF ABBREVIATIONS AND ACRONYMS USED ADB Asian Development Bank ADB/N Agricultural Development Bank of Nepal AIC Agricultural Inputs Corporation BNP Basic Needs Program CSI Cottage and Small Industries EGS Employment Guarantee Scheme ERL Environmental Resources Ltd. ha. hectare 'dMG His Majesty's Government of Nepal IBP Intensive Banking Program IRDP Integrated Rural Development Project kg. kilogram LF Labour Force MPHBS Multi Purpose Household Budget Survey mt. metric tons NFC National Food Corporation NGO Non-Governmental Organization NPC National Planning Commission p.a. per annum PCRW Production Credit for Rural Women Rs. Rupees SFDP Small Farmers' Development Program SSSR Social Sector Strategy Review UNDP United Nations Development Program UNICEF United Nations Children's Fund WDR World Development Report WFP World Food Program -v-   Table of Contents Page No. Executive Summary ...................................... xi CHAPTER I: Introduction ........................................... 1 A. Objectives and Scope .. 1 B. The Nature of the Problem ......................... 3 CHAPTER II: The Structure of Incomes and Poverty. 5 A. Levels and Distribution of Income in Nepal. 5 B. Composition of Income. 9 C. Profile of the Poor .13 D. Conditions of the Poor .16 CHAPTER III: The Determinants of Poverty . . .23 A. The Dynamics of Poverty- Output and Growth Issues . .23 Population and the Resource Base . .23 Economic Performance . .26 Macroeconomic Conditions . .27 Structural Adjustment . .29 The Trade and Transit Dispute. 30 Emerging Trends. 30 B. The Mechanics of Poverty - Distributional and Equity Issues ... 33 The Social Context - Inequality at the Village Level e v el.......... 33 Land Tenure and Tenancy .... 34 Labour Force Issues ... 38 Migration ....45 Debt and Indebtedness ... 46 Gender and Poverty v e r ty......... . . 48 Social and Political Constraints ... 50 CHAPTER IV: Poverty and the Productive Sectors.. .. . 53 A. Agricultural Incomes and Poverty . . ...... 53 Poverty and the Environment.. ... 64 B. Off-Farm Employment and Incomes. ....... 65 The Formal Sector. .............................. 65 The Informal Sectore c t or........... .. ... 69 - vii -  - viii - CHAPTER V: The Social Dimensions of Poverty ....................... 73 A. Nutrition and Access to Food ...................... 73 B. Education and the Poor ............................ 78 C. Poverty, Population and Health .................... 85 CHAPTER VI: Poverty Related Programs and Policies . . 91 A. HMG's Policies and Programs .91 General Policies .91 The Composition of Public Expenditure .91 The Basic Needs Program and the Eighth Plan .93 B. Poverty Alleviation Programs .94 Subsidies and Transfers .94 Integrated Rural Development Projects .97 Food and Feeding Programs .99 Targetted Credit ................................ 101 Employment Creation Projects .................... 105 Income Generating Projects ...................... 106 C. Institutional Issues .............................. 107 Civil Service and Service Delivery Issues ........................................ 107 Decentralization anu Popular Participation ......1 08 Non-Government Organizations .................... 109 CHAPTER VII: Country Strategy Implications .......................... 111 CHAPTER VIII: Policy Conclusions ..................................... 119 A. Overall Strategy .................................. 119 B. Sectoral Policies ................................. 120 C. Programming Implications .......................... 124 ANNEX I: Summary of Detailed Recommendations .................... 127 ANNEX II: Statistical Appendices ................................. 135 ANNEX III: Bibliography .................................... 215 Map No. IBRD 22886  - ix - List of Tables Table 1.1: Indicators of Relative Underdevelopment-Selected Countries ............................................ 3 Table 1.2: Structural Economic Indicators ......................... 4 Table 2.1: Average Per Capita Monthly Income by Income Deciles .... 5 Table 2.2: Distribution of Total Household Income in Nepal and Selected Countries ............................... 6 Table 2.3: Per Capita Household Income Distribution in Nepal ...... 7 Table 2.4: Incidence of Poverty Under Different Poverty Lines ..... 8 Table 2.5: Composition of Household Income-1984/85 ................ 10 Table 2.6: Some Survey Estimates of Income Composition ............ 11 Table 2.7: The Effect of Farm Size on Incomes ..................... 12 Table 2.8: Returns to Family Labor Per Day Worked By Farm Size.... 13 Table 2.9: Nepal - Poverty Profile ................................ 14 Table 2.10: Monthly Consumption Pattern of Poor Households .17 Table 2.11: Food Sources and Consumption Among the Poor-Rural Terai .18 Table 3.1: GDP Composition and Growth ............................. 26 Table 3.2: Nepal - Structural Economic Indicators ................. 28 Table 3.3: Size Distribution of Operational Holdings .............. 34 Table 3.4: Estimated Current Daily Wage Rates (1989) .............. 40 Table 4.1: Characteristics of Farm Household Groups in the Hills ................................. 57 Table 4.2: Potential Monthly Per Capita Income From Field Crops and Percentage of Poverty Line Income For Poor Households, 1988/89 .................................. 59 Table 4.3: Household Income and Landholdings in the Terai by Level of Poverty .................................. 60 Table 4.4: Potential Income Per Hectare from Field Crops in the Terai and Area Needed for Poverty Line Income, 1988/89 ............................... ....... .... .... 61 Table 4.5: Current and Projected Formal Sector Employment ......... 68  Table 4.6: Estimated Informal Sector Employment - 1990 ............ 69 Table 5.1: Regional Per Capita Production of Grains and Potatoes ............................................. 75 Table 5.2: Population Growth Rates (1971-1981) and Growth Rates of Agricultural Production (1967/68-1987/88) ..................................... 76 Table 5.3: Projected Daily Per Capita Availability of Calories from Grains and Potatoes ............................. 77 Table 6.1: Composition of Public Expenditure - 1988/89 ............ 92 Table 6.2: Nepal - Poverty Alleviation Programs at a Glance ....... 94 Table 6.3: Targetted Credit Programs .............................. 102 Table 7.1: Possible Labour Absorption - 2010 ...................... 113 Table 7.2: Potential Impact of Various Developments on the Incidence of Poverty ................................. 114 List of Figures Figure 1: Composition of Income Among the Rural Poor ............. 9 Figure 2: Effect of Population Growth on Income and Food Availability ......................................... 24 Figure 3: Actual and Projected Population Growth 1910-2030 ....... 30 Figure 4: The Changing Spatial Distribution of Population ........ 31 Figure 5: Annual and Trend Variation in Food Production .......... 76 Figure 6: Income, Gender, and Education Participation ............ 79  Executive Summary 1. This study seeks to build a better understanding of the nature of incomes and poverty in Nepal, and to propose an affordable set of measures to reduce the incidence of poverty. It consists of three main elements: - a quantitative analysis of the conditions of the poor and the non-poor, their sources and levels of income; - an analysis of the micro-economic factors influencing incomes, the constraints facing the poor, and the potential contribution of various sectors to raising personal incomes; and, - an appraisal of the effectiveness of existing poverty alleviation programs and projects. It concludes by outlining the elements of a medium- to long-term poverty alleviation strategy for Nepal. 2. By the most conservative definition, between 7 and 8 million of Nepal's population of 19 million live in absolute poverty, defined as having incomes below the level required to support a minimum daily calorie intake (about US$100 p.a. per capita). The poor are overwhelmingly rural subsistence farmers. They earn about half their incomes from their own agricultural production (almost none of which is marketed), they earn less than 30Z from employment - mostly on-farm, and the remainder of their incomes is made up from miscellaneous subsistence activities. Although there has been some shift towards off-farm activities, the limited resource base, and lack of alternative opportunities resulting from Nepal's landlocked position beside an economically dominant neighbor, have limited non-agricultural employment growth. 3. Population growth of 2.7Z p.a. has eroded the limited gains that have been made in GDP and agricultural output. The population has doubled since 1960, and is projected to double again over the next 25 years. Furthermore, the demographic profile is such that within ten years the labour force will be growing at about 0.4 million persons per year - twice the average rate experienced during the 1980's. The major challenge in avoiding a deterioration in the poverty situation will be managing the absorption of this massive labour force growth. However, in the absence of an effective program to slow population growth, all other poverty- alleviation measures will be meaningless. 4. At the very low level of average GDP, raising personal incomes for most Nepalese depends on overall economic growth. Given the limited cultivable land base, agriculture alone cannot ultimately be counted on to provide the solution to poverty in Nepal. The basis for long-term growth, if it is to come at all, must thus eventually be sought in the expansion of services, energy, and industry. For these it seems inevitable that Nepal - xi -  - xii - will have to look to a large extent to greater participation in a growing Indian economy. However even with the best policies and most robust external environment, industrial sector growth will be a very long term proposition. Therefore, in the medium-term raising incomes will have to rely in large part on agricultural intensification, and agriculturally-led growth in the informal sector. 5. The agricultural land base is rapidly approaching saturation. There is, however, scope for increases in both labour absorption and agricultural productivity - largely through improved irrigation. About half of the agricultural poor could rise out of poverty on the basis of increased productivity, however to reach them will require a more subtle blend of agricultural interventions than has been tried to date. For the balance, their holdings are too small to ever be viable economic units - they need off-farm income-earning opportunities - either where they currently are, or elsewhere. 6. Even under the most optimistic assumptions, the formal sector will not absorb more than about 15-20Z of the labor force by 2010. The informal sector holds more promise, since there is room for a "catch-up" effect to compensate for the low levels of physical access and monetization in the past; although ultimately it can only follow growth led by the other sectors - especially agriculture. However, wages are close to a subsistence minimum, and at existing wage levels the poor will not rise out of poverty on the basis of employment alone - that will require a tightening of the labour market. While a successful population program can contribute, in the long ru. the scope for effect'irg labou. maket factors may be limited by the free flow of labour to and from India, which will tend to lead to wages equalizing at Indian levels. Given the constraints on effective labour market interventions, Government can best contribute to off-farm employment growth through enabling mechanisms: providing transport and communications infrastructure, education, and to a lesser extent skills training and credit. 7. In the absence of any obvious source of rapid economic expansion, curbing population growth is central to relieving poverty. However, at any expected levels of population and GDP growth, average incomes will not rise enough to have a major impact on poverty levels unless such growth is focussed to benefit the poor. Furthermore, forces are in place - through growing landlessness, monetization, and urbanization - for a deterioration in the distribution of income, unless policies are followed which consciously guard against it. The type of growth pursued must be balanced in such a way as to generate incomes for the poor (in the medium term this means largely increased agricultural productivity and labor absorption). 8. Poverty in Nepal is chronic, basically rooted in the insufficiency of the resource base vis. a vis. excessive population. Its solution will lie in productivity growth coupled with population control, but this will take a long time. In the meantime, there will remain a large number of absolute poor. It is therefore legitimate to consider a sustained program of support to the poor - some of it production-oriented and some of it welfare-oriented.  - xiii - 9. There are too many poor (and too few resources) to realistically consider large-scale transfer or subsidy programs. Therefore it is important to design cost-effective transfers. Both Government and the donors, under a wide-range of projects, are already putting substantial resources into poverty-type programs - to relatively little effect. Better targetting and institutional strengthening are needed to improve the efficiency with which those resources are used. In addition, some significant welfare improvements for the poor can be achieved without major resource transfers or income increases (through, for example, improved hygiene and nutrient retention). 10. The report concludes that there is no easy poverty alleviation strategy for Nepal, but that significant gains can be made through a combination of measures - mostly involving increased labour absorption in agriculture (which could increase by about 50X), coupled with productivity gains in low-input farming systems; informal sector growth; and some redistributive measures, if tightly focussed. 11. There are also some areas (eg., tenancy, labor contracting) where policy reforms are required. In addition, limited gains can be made at the micro level, by strengthening the capacity of the poor to undertake self- reliant income generation - although these efforts require labor-intensive inputs and their replicability is thus questionable. Given the weakness of service delivery mechanisms these are probably best delivered through non- governmental organizations. While the report concludes that credit and income-generating projects are unlikely to have a large-scale impact on incomes of the poor, the distributional benefits of some aid can be improved without much efficiency loss, by channelling it down to lower levels, for example through NGO's and targetted credit programs. 12. While there is no easy solution to poverty in Nepal, the potential contribution of public policy is large. As an illustration - if the Government is able to achieve the best reasonable expected results from an effective family planning program and in sustaining economic growth, then per capita GDP could rise to about $270 equivalent per capita by 2010 - probably holding the number of poor to below 5 million. On the other hand, if population growth continues unabated, and GDP growth is no better than the average achieved over the last twenty years, then per capita incomes would stagnate at around $180 per annum - probably increasing the number of poor to over 20 million by 2010. In short, the cost of not getting public policy right - especially with respect to curbing population growth - is probably in the order of 15 million additional absolute poor. 13. The priority elements of a poverty alleviation strategy in Nepal need to consist of: (i) an effective program to curb population growth - through the promotion and support of temporary methods of contraception; (ii) an agricultural program that includes: small farmer irrigation (and measures to get all irrigation working in the terai), input supply deregulation, development of a technical package free of purchased inputs for inaccessible hill farmers;  - xiv - horticultural support for accessible small farms in the hills; and design of an outreach cum extension program that takes account of the constraints facing poor farmers; (iii) a program of increased rural access in the terai and selected areas of the hills; (iv) intensification of basic education, including: (a) a national literacy campaign; (b) revamping of curriculum and examination systems to improve relevance and quality; (c) measures to lift constraints on attendance by girls and by the poor; and (d) agreement on commitment of adequate financing for expansion of the primary school system to provide almost universal coverage; and, (v) in addition, there is scope for a package of low-cost measures to help the large numbers of those who will remain absolutely poor for the foreseeable future - through selected off-farm income generating activities and improvements in health, nutrition, and access to food (A program of such poverty alleviation measures is described in paragraph 16, below). 14. Conversely, there are a number of areas in which the Government should probably exercise caution, and a further sub-set of areas in which action is justified, but where further analysis is needed first. The following are areas in which, on the basis of the analysis, it appears that public C. Lerve= onts* would not' be a cost-effectI e mear.s of nelpin.g the poor: - large-scale infusions of targetted credit; - price controls or commodity subsidies; and - excessive intervention in the industrial sector. Those areas in which further analysis is needed to formulate effective programs include: - partitioning the hills for poverty alleviation purposes into areas for varying degrees of support, depending on the efficiency of providing access at reasonable cost; - cost-effective measures to improve access to food in remote areas; - analytical work to develop a strategy for managing the transition of population from the hills to the terai and to urban areas; - an assessment of the scope for effective measures to promote income-earning opportunities in the informal sector; - investigation of the scope for, and implications of, reforms to the land tenure system, to improve both efficiency and equity.  - xv - - improvements in the design and implementation of income- generation and skills training projects. 15. Pervasive poverty in Nepal stems from four factors: (i) a limited resource base; (ii) a physical location between two large countries - both of which are also poor; (iii) rapid population growth, and (iv) poor economic performance - with GDP growth averaging under 3Z p.a. over the last 25 years. Little can be done about the first two factors, however effective policies can reduce population growth and accelerate economic expansion. Unfortunately Government initiatives in these areas to date have been partial and ineffective. The Government now has an opportunity to play a more aggressive role - by pursuing a very active population program, and laying the basis for more rapid growth, through, inter alias widespread public service reforms, accelerating education and skills training, further liberalization of trade and industrial restrictions, a more aggressive agricultural growth strategy, and reform of the financial sector. Additional measures are required to ensure that the poor specifically benefit, and these are discussed in the following sections. 16. The report concludes that even with the best expected performance in economic growth and family planning, there are likely to remain some 5-10 million absolute poor over the next twenty years. It therefore proposes, in addition to the broad priorities for creating equitable growth outlined above, a set of measures for Government and donor support specifically to assist those who will inevitably remain poor, consisting of the six elements outlined below: (1) Expansion of Selected Transfer Programs. These are large-scale rural employment programs which, in the absence of sufficient growth in the medium-term, can provide cost-effective transfers while at the same time creating productive rural assets. Two such programs exist in Nepal - Food for Work, and the Special Public Works Program - with some strengthening they could be amenable to substantial expansion. The next step would be to determine how much they could expand, their financial requirements, to identify measures to improve targetting and efficiency, and agree on a financing package for them. (2) Incremental Improvements to Existing Income-Generating Programs. There are a number of smaller programs which have had some success in raising incomes of the poor (including the Small Farmers Development Program, Production Credit for Rural Women, and localized NGO income- generating projects). While these can never have sufficiently wide coverage to make a major reduction in the incidence of poverty, they should be expanded as staffing constraints allow. There is also room for incremental improvements to their operations, including more intensive training of staff and better sub-project evaluation. (3) Food and Food Aid Programs. Enough areas have sufficiently large food deficits, which cannot be solved by out-migration or agricultural productivity increases in the near term, that food aid and food distribution programs will be an important continuing part of any poverty alleviation strategy. The objective now should be to identify the most cost-effective combination of interventions (eg. relying on increased local  - xvi - production, improved feeding practices, etc. whenever possible), and to rationalize existing programs, which often do not reach the intended beneficiaries. This would include: - agreement on the appropriate level and form of food aid, its financing, and how best to distribute it; - reform of the National Food Corporation's program - eliminating mis-targetted subsidies, identifying which distribution measures reach those suffering food deficits, and how they should be expanded and financed; and, - identification of a program of effective interventions - including evaluating the relative roles of food distribution, agricultural productivity measures, food storage, vulnerable group feeding, and promotion of effective practices (e.g., weaning foods, feeding during pregnancy, etc.); followed by preparation of specific projects and agreement on financing for them. (4) Strengthening Non-Income Welfare Measures. These are interventions which could substantially improve the welfare of the poor even in the absence of increased incomes. They include: - a national hygiene campaign - which would combine intensive hygiene-awareness education with the provision of rural water suplies; - a range of particularly cost-effective health measures - (immunization, iodine supplementation, and oral rehydration salts) - these are existing programs which could be expanded at modest cost without awaiting major improvements in the (institutionally weak) health service; and, - (possibly) targetted nutrition and/or feeding programs - these can have a dramatic effect on reducing the long-term effects of malnutrition at affordable cost. Such programs usually rely on an administrative capacity which may not be present in Nepal; however, it is worth exploring the possibilities. (5) A Package of Policy Reforms. Tenancy Reform - a redistributive land reform would have some impact in the terai, but may not be feasible. However, the existing tenancy system provides many disincentives to maximizing output. It is possible to design a reform which at a minimum would regularize land tenure and remove barriers to efficient use of land. This, in the terai, could have a large impact on agricultural productivity. However not enough is known about the distribution and types of tenancy to design a workable reform immediately - some analytical work is required first. Labor Contracting Arrangements - current arrangements are exploitative beyond what would be expected on the basis of low average wage  - xvii - rates alone; some improvements would be possible by introducing revised procedures for public works (eg. the use of small local contractors) and increased monitoring and supervision. Decentralization and Civil Service Reform - effective implementation of the decentralization process can potentially help the poor by improving the delivery of social and development services to peripheral areas (by devolving staff and resources to them). Wider civil service reform is also needed, but it will probably be a slow process. At a minimum administrative improvements can be made which will increase the effectiveness of public services (by for example strengthening supervision and incentives for actively providing outreach services). NGO Regulation - the current system has constrained NGO activity and probably added to their costs. Government should explore the scope for relaxing the regulatory framework to facilitate NGO operations - along with measures to improve the technical support provided to them (for instance, to improve project selection and design). (6) Analytical Work On Priority Areas. This includes assembling data on incomes, wages and employment, and further analysis needed to design policy and program reforms.  1. INTRODUCTION A. Obiectives and Scope 1.1 This study is intended to deepen our understanding of the nature of poverty in Nepal; of its causes, and of the constraints which prevent the poor from improving their conditions. It investigates the effect of development policies and strategies on personal incomes, and seeks to identify the most promising areas for raising incomes of the poor. The objectives are to propose the outlines of a long-term country strategy to reduce poverty, as well as to recommend specific measures for Government and donor support. 1.2 The study came about as the result of a number of perceptions: Firstly, that extreme poverty is a widespread problem in Nepal, but that little analytical work had been done on income levels and trends, or the dynamics at work among the poor. Secondly, that there exists a desire within the donor community, and within the World Bank, to do more to support poverty alleviation efforts in Nepal, but that it has been difficult to identify which measures might be amenable to large-scale financial support. Thirdly, Nepal is a very poor country in which the Bank and the donor community have made substantial investments (presumably with the objective of raising living standards), but with little understanding of how our programs affect the incomes of the poor. The study seeks to better inform overall country assistance by investigating the links between incomes of the poor and various agricultural, industrial, and employment activities. Fourthly, the Government is already putting substantial resources into programs notionally justified on poverty-alleviation grounds - the analysis looks at ways these resources could be used most cost-effectively. Finally, in Nepal there have been many good village-level and sectoral studies, each of which tells an important part of the poverty story, but the isolated findings have never been pulled together. 1.3 The study has sought to assimilate the findings in various sectors, and build them into a wider analytical framework. The objectives are: (i) to outline the bounds of what might be possible (and expected) in the evolution of incomes over the next 20 years, and to evaluate the relative contributions of agriculture, industry and commercial development, and social services to reducing poverty; 1  - 2 - (ii) to suggest sectoral interventions, or changes in approach, which may have a greater impact on incomes, especially among the poor; and, (iii) to propose a menu of cost-effective poverty alleviation projects for possible support. 1.4 The report is organized as follows: Chapter II analyzes the levels, distribution and sources of income. It presents for the first time in quantitative terms a profile of poverty in Nepal, characteristics of the poor and non-poor, and the conditions under which they live. This analysis is based on special tabulations of the Nepal Rastra Bank's household survey data undertaken as part of this study. Chapter III explores the causes of poverty - both those related to aggregate output and growth, and the more subtle mechanics of land tenure, employment, and social structures. Chapter IV looks at linkages between the productive sectors (agriculture, industry, etc.) and incomes, and the role of non-formal employment. Chapter V examines the social dimensions of poverty: food security, education, and health and population issues. Chapter VI briefly reviews His Majesty's Government's (HMG's) general policies, and summarizes our assessment of poverty-related programs based on a more detailed earlier version of this report.l/ The final two chapters suggest implications for country strategy and donor support. 1.5 Of necessity the report takes a longer-term perspective (20-30 years] than is 911sl in World Bank docu-m.ents. It also covers a wide range of sectors. In not all of these were we equipped to bring our conclusions to closure; in some we could only highlight the issues involved and point to possible solutions, or areas for further work. 1.6 Other reports on poverty have tended to focus on social services and their delivery. These issues have been explored at length in an earlier Bank study.2/ We have concentrated instead on the objective of raising personal incomes and consumption.3/ While this may provide a somewhat one-dimensional picture, it was necessary to limit the scope of the work to something manageable, and furthermore raising personal incomes (broadly defined) is, after all, the single best measure of reducing poverty. 1/ The World Bank; Nepal - Relieving Poverty in a Resource-Scarce Economy, 1990. 2/ The World Bank; Nepal - Social Sector Strategy Review, 1989. 3/ Incomes are taken throughout to include production of food for own consumption - which constitutes by far the largest share of personal income in Nepal.  - 3 - B. The Nature of the Problem - Poverty in Nepal in a Comparative Context 1.7 Average personal incomes are about Rs. 3,340 per capita (1984/85, expressed in 1988/89 prices) - equivalent to US$130 annually. Approximately 40? of the population live in absolute poverty, defined as having less than the income required to consume a minimum bundle of calories on a daily basis. There are also chronic and seasonal food deficits, which probably affect half of the population. Large scale starvation is avoided because of the absence of catastrophic droughts, although slow physical deterioration through malnutrition is widespread. 1.8 In comparative terms, Nepal is one of the world's poorest countries. It ranks 115th in per capita GNP out of 120 countries listed in the 1989 World Development Report (WDR). With respect to life expectancy, Nepal ranks 103rd out of 118 reporting countries. Food availability, measured in calories per capita, is worse only in Bangladesh, Haiti, and a handful of African countries. Table 1.1 presents key development indicators for Nepal, relative to some of the world's poorest countries, and relative to neighboring states in Asia. Tablo 1.1: Indicators of Relative Underdevelopment - Selected Countrie 3s Calorie Lif- P-r Capita Infant Population Availability Expectancy CNP Mortality Growth (Calories per (Years) (USS) (per 000) Rate capita per day) Ethiopia 47 130 154 3.1% 1749 Mall 47 210 169 8.0X 2074 Nepel 61 160 128 2.5S 2062 Bangladesh S1 160 119 2.4X 1927 Zaire 62 1S0 98 8.1X 2163 India S8 800 99 1.8X 2238 ThelIand 64 8S0 39 1.65 2331 Sri Lanka 70 400 83 1.1X 2401 / According to the 1989 World Development Report (WDR). For consistency of lnter- eountry comparisons all data are drawn from the 1989 WDR; these may not be consistent with estimates for Nepal cited elsewhere In the text, which were drawn from more recont surveys and roports. 1.9 Nepal is one of a constellation of countries characterized by rapid population increases, low or negative per capita GDP growth, and a slow transition out of a subsistence agricultural economy. It exhibits many of the characteristics of similar sub-Saharan African economies, including a limited productive land base, a land-locked location, and a very low level of exports. Table 1.2 illustrates some of the structural features of Nepal, relative to other countries.  -4- Table 1.2: Structural Economic Indicators Per Capita Per Capita Commercial CNP Share of Per Capita Energy Consump- Per Capita Growth Rate Agriculture Merchandise tion (kg. oil CNP 1965-87 n GDP Exports equivalont) Very Poor Countries Ethiopia a130 0.1X 42X 39.00 21 kg. Mall 3210 0.1X 54X 827.70 24 kg. Zaire t150 -2.4X 82X 348.90 73 kg. Nepal 8160 0.5O 57X t8.60 23 kg. Neighboring Asian Countries Bangladesh 3160 0.38 46X 310.10 47 kg. India 3300 1.8X 30X 316.70 208 kg. Thailand t8S0 3.9X 16X t217.60 330 kg. Sri Lanka 3400 3.0X 27X 389.90 160 kg. All data aro for 1987 unless othorwise Indicated. 1.10 Nepal's share of agriculture in GDP, one of the best summary indicators of the level of development and structural c'nange, is, at 57Z, higher than all but three of the very poorest countries (Uganda, Somalia and Tanzania). Similarly, the share of the labor force dependent upon agriculture (93Z) is the highest of any country listed in the 1989 WDR. Nepal is also one of the two lowest consumers per capita of commercial energy - a sensitive indicator of industrial and urban development. Nepalese consume 23 kg. of oil equivalent annually compared with 297 kg. for low income countries as a whole. 1.11 There is a very high cost in human suffering and wasted potential associated with Nepal's degree of poverty. For example, about 6 1/2Z of the population is estimated to suffer some degree of mental retardation, due mainly to malnutrition and iodine deficiency. Again, by the Indian Academy of Pediatrics standard, about 29? of the population exhibit 2nd or 3rd degree malnutrition. Associated with nutritional deficiency and diseases, there are estimated to be about half a million cases of blindness in Nepal (out of a population of about 18 million in 1988), a rate far in excess of international standards.  II. THE STRUCTURE OF INCOMES AND POVERTY IN NEPAL A. Levels and Distribution of Income 2.1 Average per capita incomes are estimated at about Rs. 260 per month in 1988/89 prices (US$122 p.a.) in rural areas; and about Rs. 426 (US$200 p.a.) in urban areas. In rural areas, the mean income in the hills is about 20? lower than in the terai 1/ ; in urban areas, reflecting in particular the relative wealth of Kathmandu, the order is reversed, with average incomes in the hills about one quarter higher than in the terai. 2.2 Within Nepal, the best source of data relating to incomes is the Multi-Purpose Household Budget Survey (MPHBS) conducted in 1984-85 by the Nepal Rastra Bank.2/ The analysis in this chapter is based on a re- processing of the MPHBS data undertaken by the World Bank specifically for this study to identify the characteristics of poor and non-poor households. Average per capita monthly income levels by decile are presented in Table 2.1. These data are expressed in terai-equivalent prices, so that they can Table 2.1: Average Per Capita Monthly Income by Income Deciles (1984/85 expressed in 1988/89 Rs per month) RURAL URBAN Decile Terai Hills Terai Hills 1 123 85 162 171 2 164 116 203 229 3 188 140 235 281 4 207 163 262 334 5 232 188 294 395 6 262 217 343 453 7 295 253 396 543 8 348 299 493 644 9 435 368 675 830 10 719 564 1196 1394 All Families 292 231 378 475 Source: Mission estimates derived from MPHBS. 1! The terai is a narrow lowland belt along the Indian border containing about half of Nepal's population. Incomes here are adjusted for differences in purchasing power; consumer goods flow mainly from the terai to hills and transport costs are very high. Mission estimates of the price differentials, based upon a basket of eight staple foods, suggest that prices are about 32? higher in the hills than terai. 2/ The survey is described in Annex II.2. While the MPHBS is an exceptionally well-designed and well conducted survey, it suffers from the inability of all such surveys to capture fully the exceptionally rich and the exceptionally poor. For this reason, the actual income distribution is more skewed than that revealed in the tabulations. 5  - 6 - be compared across hills and terai. Incomes are uniformly low except in the top decile - and are even then only about two and a half times the average. 2.3 Like other very poor countries, Nepal's predominantly rural economy sustains a relatively even distribution of income, corresponding to a stage of development before the income and wealth-concentrating process of urban-based development has had much impact. From Table 2.2 it can be seen that Nepal has a degree of income concentration somewhat more favorable to the poor than Sri Lanka, somewhat less so than, but comparable with, Sweden, and markedly more egalitarian than the distribution of income in Brazil. Table 2.2: Distribution of Total Household Income in Nepal and Selected Countries (Percentage of Share of Income) Household Group Nepal Sri Lanka Brazil Sweden Bottom 40Z 18Z 16Z 7Z 21Z Middle 50X /a 54Z 49Z 42Z 51Z Top 1O 28Z 35Z 51Z 28Z a/ That is, lying between the 41st and 89th npr59nti4les Source: Nepal, MPHBS. Other countries, World Development Report, 1989. 2.4 These comparative data suggest that the scope for improving the income position of the poor in Nepal by redistribution from the upper income groups is limited. For example, in Brazil, transferring 5Z of the income of the upper decile to the lowest 40t would involve an income increase for the latter of about 36Z, an amount which would have a significant impact in reducing the level of poverty. In Nepal, by contrast, transferring 5Z of income from the richest 10? to the bottom 40? would increase the average incomes of the latter group by less than 8Z, a welcome improvement no doubt, but not one which would produce a major impact upon poverty levels. At the same time it should be noted that the position of the poor in Nepal could be worsened greatly by a deterioration of the distribution of income. As discussed later in this report, there are reasons to believe that the mechanisms exist for such a worsening, which can only be countered by sustained off-setting policy interventions. 2.5 The distribution of per capita household income is presented in Table 2.3. As expected, it is less skewed than that of total household income (Table 2.2). (This is because household size increases consistently with total income, from less than 4 persons per household in the lowest income class to over 13 in the highest). The scope for poverty alleviation by redistributive measures alone is, therefore, even less than that  suggested by the cross-country data contained in the previous table.3/ Table 2.3: Per Capita Household Income Distribution in Nepal (percentage share of income) Rural Urban Income Group All Nepal Terai Hills Mountains Terai Hills Bottom 40Z 23X 242 23? 33Z 27% 242 Middle 50 54? 531 56% 54Z 52? 56? Top 102 23Z 23% 21% 13Z 21% 20? Source: Multi-Purpose Household Budget Survey. 2.6 The distribution of income is essentially the same in all regions except the mountains where it is remarkably flat, with poverty being shared by almost the entire population. However, the proportion of Nepal's population which lives in the mountains is very small, and mountain people are included within the hills for much of the subsequent discussion. The Incidence of Poverty 2.7 Table 2.4 shows the proportion of the population below the poverty line under three different sets of assumptions. The first is the poverty line defined by the National Planning Commission (NPC) on the basis of an income needed to supply minimum caloric requirements. In 1988/89 Rupees, this translates into Rs. 210 per person per month in the hills and Rs. 197 in the terai, or the equivalent of US$8.24 and $7.73 respectively per person per month. With this poverty line, the data suggest that about 40% of the population is in absolute poverty.4/ That this is a very conservative definition of poverty can be seen by considering the implications of a poverty line equivalent to US$150 per capita per annum.5/ The proportion of the population with incomes below even this modest level is about 70% nation-wide, and almost 80% in the hills. This calculation suggests that calorie-based poverty lines may not be appropriate for Nepal, a matter which is given additional support by the fact that the usual relationship between food intake and measured under-nutrition in Nepal is weakened by the widespread prevalence of intestinal disorders (see Chapter 5). 3/ Note, however, the reservation contained in the earlier footnote: the data, like those from other such surveys, under-represent households at the highest income levels. 4/ The incidence data are approximations only. Note that the imputed rental value of owned housing was not included in total expenditures in these calculations. 5/ An accepted international definition of absolute poverty. (1988-89 rupee equivalent used; average exchange rate Rs. 25.5/US$1.00).  - 8 - 2.8 A third possible definition is one suggested by Lipton.6/ He has defined the poor as those whose food expenditures absorb 701 or more of total expenditures. This criterion underlies the third poverty line in Table 2.4, in which the Nepal-wide incidence of poverty is about 66%, similar to the incidence implied by a poverty line of US$150 a year. Table 2.4: Incidence of Poverty Under Different Poverty Lines (Percentage of Population Below Poverty Line) Terai Hills All Nepal Poverty Line Rural Urban Total Rural Urban Total Rural Urban Total NPC 29% 17% 28% 55Z 13% 52% 42Z 15% 40% US$150 69Z 51% 68Z 78% 32% 75% 74% 42Z 71% Lipton 70Z 50% 68% 65X 52Z 64Z 68% 51Z 66Z 2.9 The sensitivity of the number of poor to the choice of poverty line results from the flat distribution of income around a very low average. Thus moving the line up or down only slightly results in large changes in the share of the population above or below it. Within the limitations of the data it is thus not very meaningful to talk of the precise number of poor. The best one can conclude is that the incidence of absolute poverty is very high - in the neighborhood of 50-60%. In subsequent discussion we will use the (conservative) NPC poverty line.7/ By this measure about 8 million Nepalese live in absolute poverty - out of an estimated total population of 19.2 million. 2.10 While in the following sections reference is made to the "poor" and the "non-poorw, it is important to recognize that by any reasonable international standard everyone in Nepal is poor, except for a few professionals and businessmen, and perhaps some large farmers. The average income in the second decile (i.e. the second richest 10% of households) for instance is only about Rs. 500 per capita per month (US$20 per month) - in most countries these families would be among the very poorest. 2.11 It is often useful to distinguish between the poor and a subgroup of wultra-poor" - at whom one may want to target assistance or development. In Nepal such a distinction is not particularly useful - both because there are so many very poor (eg. about half the population), and because most of the poor exhibit characteristics usually associated with the ultra poor (eg. high proportions of income spent on basic cereals). However, while they are frequently hungry, they are not ultra-poor in the longer-term sense that 6/ M. Lipton% Poverty, Undernutrition, and Hunger; World Bank Staff Working Paper No. 597, 1983. 7/ In purchasing power parity terms this is estimated to be equivalent to about US$328 per capita p.a. - in the middle of the range of poverty lines cited in the 1990 World Development Report ($270-$375).  they are an under-class caught in a chronic trap, out of which they could not raise themselves with access to technology and sufficient improvements in productivity. There is, however, a growing group of such ultra-poor emerging among the urban population, and among the landless in the terai. B. Composition of Income 2.12 Figure 1 illustrates the overall composition of income emerging from the MPHBS. Of note are the overwhelming importance of subsistence activities and of agriculture, and the relative unimportance of wage incomes. Figure 1. Composllon ot Income Among the Rural Poor TERAI HILLS F Wages IV%m Wages (24%) - Cteh ISu% I7% helK I1% % d tcseja -2-3 ~~~~~~~~~~Cw in-m 6 AgrIculture (50%) - h40knd 43% Agrkculture (54%) - 1n46% CV MosiW rent,es, pere etc. b/ Mosity re t4,e dwelngs cnd cottage producr tr an caJmplrL * Ccuh 9nome 1%1 2.13 Table 2.5 shows the composition of income for different groups . The following particular characteristics emerge: - among the rural poor, only 35Z of incomes are in cash (32Z in the terai) - coming mostlya from wages; - the poor get a larger share of their incomes from wages and salaries than do the non-poor (who make much more from agriculture, especially in the terai); - even then wages and salaries account for only a quarter of income among the rural poor in the hills (a bit less than a third in the terai);  Table 2.6: Composition of Household Income - 1984-8S (1984/8S Ru. per household per month) R U R A L U R BA N Tera; Hills Terai Hills Poor Non-Poor Poor Non-Poor Poor Non-Poor Poor Non-Poor Agriculture Cash 64 (8%) 398 (27%) 58 ( 8%) 282 (18) 28 (4X) 90 (6%) S2 (8%) 83 (4%) Kind 285 (41%) 684 (46X) 306 (46X) 628 (43%) 160 (23%) 271 (24%) 197 (24X) 220 (12X) Subtotal 349 (5OX) 1082 (73X) 303 (54) 890 (68%) 186 (28%) 361 (28%) 248 (31%) 303 (18X) Non-Agricultural /a Enterprises 29 (4%0) 80 (%) 28 (4%) 121 (8%) 106 (1S%) 377 (27%) 77 (10X) 472 (25X) WagS and Salari"e Cash 108 (15%) 107 (7X) 121 (18) 209 (14X) 300 (43%) 417 (30%) 380 (43%) 721 (38%) Kind 120 (17X) 52 (14X) 39 (6X) 19 (1X) 34 (5X) 21 (2X) 12 (1X) 19 (1X) Subtotal MV (32X) Il- (11%)