Income shocks might throw middle class back into poverty: WB

Kathmandu, Mar. 11: The World Bank has warned that the families that recently graduated from poverty and entered the middle class might fall back into poverty in case of income shocks.

"Although many households have exited poverty in Nepal, welfare gains have not been large enough to move them into the middle class, and they remain vulnerable to falling back into poverty should an income shock occur," said the WB in its recent Systematic Country Diagnostic (SCD) report of Nepal.

According to it, the position of these households is particularly precarious, given Nepal's high level exposure to natural disasters, which will increase with climate change, and the continued dependence on rain-fed agriculture. Health shocks also push many into poverty.

The WB has suggested that a substantial change in the structure of the economy was needed to reduce the vulnerability.

Similarly, it also warned that the opportunities for faster growth and poverty reduction are being missed, and sources of fragility remain because of power imbalances and inequality of opportunity.

"Opportunities and financing for investment are present, but public investment has been low and unable to crowd in potential private investment. The rate of FDI is currently one of the lowest in the world," reads the report.

The WB said that at current rates of growth, per capita income would reach only US $958 in 2030, and the country needs faster rates of growth, on the order of 7 to 8.

As the growth rates were driven by remittance-dependent private consumption rather than investment, the country needs higher rates of productivity growth and structural transformation fueled by investment in physical capital rather than consumption, reads the report. 

"Productivity can also be helped by returnee migrants, who come back with experience in a new sector, cash in their pockets and strong desire to be entrepreneurs."

It recommends encouraging investment in infrastructure, strengthen regulations and reduce government involvement in markets, increasing openness by reducing tariffs and increasing Foreign Direct Investment (FDI), and increasing access to credit for women, rural entrepreneurs and small and medium enterprises.

The CSD suggests six areas of opportunities for Nepal – encouraging political inclusion and eliminating clientelism, promoting private sector investment to create more and better jobs, harnessing the potential of natural resources, ensuring all Nepalis are equally able to invest in and use human capital, increasing resilience to natural disasters and health shocks, and getting more from migration.

The report says that the current transition to federalism is a potential game changer if it is accompanied by a meaningful change in the balance of power.

Similarly, addressing constraints to private investment is essential for individuals to become more productive employees and entrepreneurs.

"While action in all identified areas is needed, the evidence suggests a prioritisation. Improving public institutions is considered first, because inefficient and exclusive institutions constrain progress on all fronts, and because the transition to federalism presents a unique opportunity that should not be missed," reads the report.

The SCD, which builds on consultations and surveys of 200,000 people in all seven provinces, examines the key constraints to and opportunities for accelerating poverty reduction and enhancing shared prosperity in Nepal, claimed the WB.

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