the poverty line or other absolute lines such as 2 times the poverty line. Households are considered vulnerable if they are non-poor but have more than 10 percent likelihood of falling into poverty. We also define middle class households as those with a relatively low likelihood of falling into poverty (less than 10%). Using these definitions, we find the size of the vulnerable and middle class population to be 45 percent and 22 percent respectively. An analysis of trends suggests that the growth in the size of the vulnerable as well as the middle class population has been increasing steadily over the years in Nepal.

Perceptions data as well as results from qualitative surveys generally suggest that Nepali households have experienced robust upward economic mobility along the economic ladder in recent years, but this mobility stands on fragile grounds. Based on data from Gallup and definitions of welfare that take into account realized mobility together with expected mobility, a significantly larger fraction of Nepalis is found to be either suffering or struggling as opposed to thriving. This implies that while Nepal has had a tremendous success in lifting people out of poverty, a majority of Nepalis is either directly at risk of falling back into poverty (more than 10% probability) or even if not directly vulnerable in this sense, they constitute what some have called the “struggling middle class”.

From the point of view of policy, the conclusions in this paper point to three key areas of priority. First, the unevenness in the mobility experience across people of different caste/ethnic groups and urban/rural location together with the high incidence of chronic poverty reinforces the call for policies that help equalize opportunities across space and across social groups. The point that not all Nepalis have benefitted in the same manner comes out quite strong. Second, the high degree of vulnerability and transitions around the poverty line with roughly one Nepali falling back into poverty for every two that escape suggests the need to strengthen social protection systems, particularly those that insure households against a variety of income shocks. A particular area of emphasis here should be on designing systems that are able to target and deliver assistance based on broader, income based notions of vulnerability through vehicles such as means tested conditional cash transfers. The recent earthquake that Nepal suffered was a violent and high profile example of a natural disaster wiping out the livelihoods of a large number of Nepalis. As important as it is for the government to respond to this specific emergency, this should also serve as a galvanizing opportunity to design systems that can respond in a more systematic and agile manner to smaller but more frequent and numerous shocks many Nepalis routinely grapple with.

Finally, while policies to directly address chronic poverty, lack of opportunities and vulnerability remain important priorities in Nepal, there is also a critical need to consider policies that facilitate transition into the middle class. The growth of the middle class is widely regarded as the bedrock for the development of stable and prosperous societies. The middle class group is typically associated with high entrepreneurial activity, high investment in human capital, and progressive political and economic value systems. (See Ferreira et al., 2011; Easterly, 2001.) The middle class group often also acts as a neutralizing force between the extractive tendencies of the elites and the revolutionary tendencies of the poor. As such, societies with a large and diverse middle class are often stable societies. The middle class is a source of demand for consumer goods and services and can provide much needed succor for the development of domestic industries not just in manufacturing but also in high value services such as tourism and banking. It can also be a robust voice in the demand for good governance and the provision of quality services which will indirectly also benefit the poorest. Unlike the strugglers, a secure middle class can afford a longer planning horizon and is thus more willing to trade off private costs in the short run for reforms that will yield better public and collective goods such as quality schools, health care, roads and the environment.

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