Inclusive Growth in Nepal

Nepal has had a good economic growth since the mid 80s and throughout the 90s. This has led to increased inequality, but in general the poor have also benefited economically. The exception is some ethnic groups of the central and eastern hills, where labor migration has been more limited. Poverty was still high in 2003 in particular within the Tamang and Rai communities. Poverty has declined among hill Dalits, and probably also among terai Dalits, which can be explained by labor migration to India. However, poverty rates are still high among the Dalits. The main pathways out of poverty from 1995 to 2003 have been landless farm workers who became subsistence farmers, construction or manufacturing workers, and subsistence farmers who added to their income by working in the same trades of construction and manufacturing industries, or as migrants to India. Can more households follow the same pathways out of poverty? This depends on the economic policy of the new government. As argued by some Nepali scholars the social democratic model is likely to be followed by the new government. 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 will 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. Nepal may also consider to copy the rural employment guarantee of India. With a sound social and economic policy Nepal may in general be able to copy the developments of the most successful states of India, with a combination of the policies of Kerala and Punjab, where Kerala focused early on the social sectors, while Punjab focused on agriculture. 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 brick and construction industries may become less important. There are indications that also Dalits take part in these positive developments in the semi-urban areas. However, in the remote parts of terai there are still landless people who work as permanent laborers for the landlords. These people …