Policy Paper on Inequality: Nepal

Working Draft*

Shiva Sharmaf

1. Not withstanding a dip in the growth rate during the escalation of Nepal’s conflict in the first half of this decade, poverty in the country declined; however, income inequality remained high and also widened. The growth rate was uneven. The agricultural sector, providing livelihood for two thirds of the population, suffered from poor public and private investment, un-remunerative prices, and poor access to credit.

2. The decade-long conflict worsened the government's budgetary allocation and expenditure. Conflict caused the security expenditure to sharply rise. It pushed up the size of the recurrent expenditure. As government expenditure on social services was maintained during the conflict, fewer budgetary resources were left for economic services and infrastructure.

3. Acceleration of tax reform resulted in a tax structure where indirect taxes such as customs taxes and value added taxes increased faster than direct taxes. The falling share of direct taxes did not contribute to lowering inequality.

4. There was a little improvement in wage employment, as the income and consumption shares of the lowest quintile of the population, vis-à-vis upper most quintile, improved between 1996 and2004. During this period a marginal gain in non-agriculture wage employment was offset by a sharp drop in the share of wage employment in agriculture.

5. Remittance from Nepalese workers abroad has remained the second largest source of income after agriculture. These remittances helped maintain macroeconomic stability during the conflict and contributed a slow growth. However, even among remitters thepeople who were relatively better off in terms of resources, skill and information earned more than the poor. Remittances helped reduce poverty, but such differences in earning also contributed to widening inequality.

6. To meaningfully make a dent inpoverty and inequality, policy intervention should begin from agriculture. Intervention should aim at structural change through land reform; and it should involve heavy public investment in irrigation, rural roads and technology support to agriculture.

7. The paper cautions that the urgency of economic reform should not bypass the basic socioeconomic interest of the poor, deprived and disadvantaged. The state should pursue an inclusive growth strategy where a meaningful participation of the poor and disadvantaged isensured. Targeted interventions leading to an increase in the income and employment of the poor and vulnerable are important to reducing inequality. Encouraging the private sector to generate decent employment is a must.

8. Public policy should contribute to enhancing the skills of the poor who wish to emigrate abroad forwork; it should also increase their access to finance. The migration of the poor to low income destinations should be substituted by high income destinations.