Story of poverty

Does the rising tide lift all boats?” This is a succinct description of a topic of perennial debate in economics: does economic growth and a rise in GDP increase the living standard of everyone? Nepal’s experience in the last two decades gives rise to another interesting question: “Can boats be lifted without a rising tide?” Between 1995 and 2011, Nepal’s real per capita GDP grew at an average of 2.1 percent per year, hardly a breakneck pace of growth. Over the same period, the poverty rate, measured by household expenditure on food items, non-food items and housing, plummeted from 42 to 25 percent. People were better off even by their own assessment: where 73 percent of households thought their total income was less than adequate in 1995-96, only 49 percent thought the same in 2010-11.  If an increase in GDP was not responsible for the reduction in poverty, what was?

Remittance: In the story of poverty reduction in Nepal, remittance is the unequivocal protagonist.  In 1993, total remittance received into the country was $54 million. By 2010, the number had reached $4 billion, a 73-fold increase! In another measure of scale, total remittance to Nepal in 2011 equaled at least 22 percent of its GDP, one of the highest rates in the world.  

What’s more, the increase in remittance was broad-based.  Where 23 percent of all households received remittances in 1995-96, the number had climbed to 56 percent in 2010-11 and both rich and poor households experienced this increase equally. Per capita remittance received was Rs. 625 in 1995-96 and Rs. 9245 in 2010-11, an increase that was again distributed evenly across households in all poverty strata. Throughout the period, remittance continued to play an outsized role in households’ budget: share of remittances in total household income was 27 percent and 31 percent in 1995-96 and 2010-11 respectively. And here is the most telling fact of all: an astonishing 82 percent of remittance was used for daily consumption or education in 2010-11. The astronomical increase in the volume of remittance, coupled with the broad distribution of remittance receipts and the almost exclusive use of remittance in consumption, goes a long way in explaining the drop in Nepal’s poverty rate.

A shift away from agriculture: In the last two decades, there has been a shift away from low productivity subsistence agriculture to non-agricultural sectors like manufacturing, construction, trade and services like hotels, restaurants and transportation. The share of the labour force working in the agricultural sector declined from 83 percent in 1995-96 to 64 percent in 2010-2011. The drop was especially pronounced in wage labour in agriculture, the lowest paying sector, where 12 percent of the employed population worked for wages in agriculture in 1995-96, the fraction had dropped to less than three percent in 2010-11. This is important, because in 2010-11, the average daily wage in the non-agricultural sector was Rs 263, 55 percent higher than Rs 170 in the agricultural sector. The diminishing reliance on agricultural income is reflected in the sharp decline in the share of farm income in total household income, down from 61 percent in 1995-96 to 28 percent in 2011. This structural shift of labour was driven in no small part by urbanisation as agriculture constitutes an even smaller slice of the urban economy.

Out-migration of people from rural areas possibly had an effect on poverty indirectly as well.  With a lower number of people in rural areas tending to farms, there was perhaps an increase in per capita farm income even if there was no increase in agricultural productivity.

Social safety nets: The social safety net programme refers to programmes that provide cash and in-kind support to the most vulnerable populations. In the past few years, there has been a significant expansion of social safety nets in Nepal. Not only have new programmes like the Karnali Employment Programme, the Child Nutrition Grant, Endangered Ethnicities Grant and scholarship programmes for Dalits, girls and disabled children been initiated, the coverage of existing programmes like old age allowance, single women allowance and disability allowance have been expanded and benefit levels increased.  In 2011, 36 percent of households benefited from at least one social safety net programme and the total government expenditure on social safety nets is now more than two percent of the GDP, one of the highest rates in South Asia. Although the size of the transfers is often small, they have nevertheless augmented the income of some of the neediest households.

This looks good. But is it? Poverty reduction is welcome news but the way it has been achieved does not provide room for optimism. The almost exclusive reliance on remittances cannot be a viable long-term strategy for poverty reduction. In the absence of ‘real’ improvements in the economy, like an increase in land and labour productivity, industrial production and exports, the gains made in the last two decades will wash away like sand castles by the smallest waves of global economic disruption.

Nyaupane holds a PhD in Agricultural Economics from the Ohio State University

Posted on: 2013-03-04 08:25

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