We present the development of poverty rates for different castes and ethnic groups of Nepal, and find a strong relation between social exclusion, as defined by the caste system, and economic poverty. We go on to present poverty rates for different employment categories and conclude that landless farm workers have left poverty by becoming subsistence farmers, and subsistence farmers have left poverty by way of non-farm wage employment and labor migration. We discuss policies for continued inclusive economic growth and likely developments for the poor within different economic sectors. In the present political climate of Nepal, where the Maoists insurgents are now the largest party, we agree with Nepali scholars who find the social democratic model to be the best way forward. A combination of a social security net with competitive markets and secure property rights may foster domestic and foreign investments in productive physical and human capital. The role of the government must be to broaden the tax base, and spend the tax incomes, as well as foreign aid, on public goods in support of the combined goal of social security and economic growth. This implies investments in roads, transmission lines for electricity, irrigation, as well as primary education and subsidized health services. These general policies for economic development may be combined with some targeted programs, such as land redistribution to landless Dalits in remote villages of terai, and experiments with a rural employment guarantee in the same areas. With a successful economic policy we expect the poor to be employed in a more productive agricultural sector, including livestock and high value products, as well as in a growing manufacturing sector, while the now dominating brick and construction industries may become less important in the future.

Magnus Hatlebakk

Senior Researcher; Coordinator: Poverty Dynamics