Income Shock Threat

After the political change and the adoption of liberal economic policies, many Nepali people have come out of the clutch of poverty and graduated to the middle class status, but they still lie in an economically precarious situation filled with insecurity. They are vulnerable to unexpected vicissitudes and may fall back to poverty trap again. A threat resulting from volatility is a matter of concern for the nouveau riche of Nepali characteristic. A Systematic Country Diagnostic (SCD) report of the World Bank says that many Nepali families that recently graduated from a state of poverty and joined the club of middle class might backslide into their former poor status with the jolt of income shocks. This shows that an upgradation of an economic class is not enough; the state needs to have suitable and secure environment for them to maintain the newly achieved position. The WB report warns that the fresh graduates of the Nepali middle class who left poverty behind still remain vulnerable to falling back into poverty should an income shock occur. International migration and job situation, altered opportunities within the country, impacts of natural disasters and climate change added with the over dependence on monsoon agriculture might lead to the situation of income shocks. Health reasons also play important role for such shocks. Those households that have exited the trap of poverty and are struggling to gain the middle class position are especially vulnerable due to inadequate amount of welfare gains they are supposed to receive.

Nepal’s economic growth has both risks and potentials and, according to the WB assessment, economic policy readjustments could bring positive results and reduce the vulnerabilities. Inequality of opportunities, exacerbated by low public investment, has been blamed. According to WB projections, Nepal’s per capita income is likely to reach only US$ 958 in 2030. Power imbalance is also seen as a culprit for a fragile economic situation. The country’s economic growth is largely driven by remittance but this is hardly being invested in productive sectors. The report says that Nepal’s economic growth is driven by the remittance-dependent private consumption rather than investment, and the country needs higher rates of productivity growth and structural transformation fuelled by investment in physical capital rather than consumption. On the brighter side, migrant returnees have come back with cash in pocket, entrepreneurial skills and love of the home country. These young entrepreneurs can make a huge difference in raising productivity. The report points out that opportunities for faster growth and, in return, poverty reduction, are being missed with the rate of foreign direct investment being one of the lowest in the world. The report recommends encouraging investment in infrastructure, strengthening regulations and increasing openness. It also suggests the reduction of tariffs to increase FDI and increasing credit for women entrepreneurs, rural entrepreneurs and small and medium enterprises. The WB report, which sees power imbalance as an obstacle for poverty reduction, sees federalism as a potential game changer.

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