Bank 2006) and as low as 12 percent by 2010 (World Bank 2013),<sup>6,7</sup> far exceeding the optimistic scenario envisaged in the early 1990s. This impressive stretch of poverty reduction record led the government to re-evaluate the poverty line established in 1995 in order to reflect the evolving living standard in today’s Nepal. Even with the revised poverty line that increased in its real value by 35 percent from the previous line,<sup>8</sup> the poverty rate in 2010 was estimated at 25 percent (World Bank 2013). The pace of recent poverty reduction in Nepal has been so spectacular that one global poverty reduction benchmarking exercise puts Nepal in the 96th percentile of all available country episodes.<sup>9</sup> Many non-income dimensions also exhibited significant improvements in terms of both levels and rankings, often at a pace faster than neighboring countries such as India and Bangladesh (Table 1 and Figure 1). Life expectancy at birth was 68 years as of 2011, an improvement by 18 years since 1985. Nepal’s infant mortality rate (per 1,000 live births) was much higher than India, Bangladesh or Sub-Saharan Africa until the early 1980s, but converged to the world average by the late 2000s. Access to improved sanitation facilities is still low at 40 percent and ranks 154<sup>th</sup> out of 195 countries in 2011, but a considerable improvement from 4.5 percent in 1990. Nepal’s primary completion rate was as low as Sub-Saharan Africa on average in the early 1990s, but it exceeds the world average in 2014. The adult literacy rate tripled from 21 percent in 1981 to 60 percent in 2011. The youth literacy rate (15 to 24 years old) increased by 55 percentage points, from 30 percent in 1981 to 85 percent in 2011. National Account indicators, in contrast, show much slower progress. The share of agricultural output in GDP declined to 38 percent but remains the 9<sup>th</sup> highest in the world and the highest outside of Sub-Saharan Africa. GNI per capita is still one of the lowest in the world and the second lowest in South Asia after Afghanistan.

The rest of this paper sheds light on the way this unlikely but remarkable success story unfolded in Nepal. Section 2 offers a historical perspective of poverty reduction in Nepal, followed by a detailed account of changes in living standards since 1995 (Section 3). Drivers of poverty reduction and the roles of remittances are discussed in Section 4. Section 5 poses some key challenges on the country’s future path to improving living standards and building prosperity. The final section concludes.

> 6 In all three rounds of the Nepal Living Standard Surveys, data collection was carried out for 12 months in order to capture a complete cycle of agricultural activities and seasonal variations. Since the data collection period always encompassed two calendar years, the NLSS are often referred to with respective calendar years such as 1995/96, 2003/04 and 2010/11 to be precise. For brevity, however, we refer to the NLSS and all statistics estimated from the NLSS as of the year in which data collection started such as 1995, 2003 and 2010.

> 7 The official poverty estimate was 25 percent in 2010, reflecting an upward revision to the previous poverty line set in 19995. Appendix I offers an overview of changes in poverty measurement methodology in Nepal and its implications on poverty monitoring efforts.

> 8 The revised poverty line is Rs.19,261 per person per year in 2010 prices (World Bank 2013).

> 9 Based on benchmarking methodology described in Newman, John L., João Pedro Azevedo (2013) "Setting reasonable performance targets for public service delivery," Policy Research Working Paper Series 6385, The World Bank (http://ideas.repec.org/p/wbk/wbrwps/6385.html).

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