standards is such that you are not vulnerable to falling into poverty, then you probably belong to the middle class. The question that arises is on what is the “upper threshold” of this middle class. Or in other words, what is the level of consumption that distinguishes the middle class from the top strata, the upper class, or the elite?

Here the literature offers a number of suggestions. Based on their analysis of household consumption data from 13 developing countries including India and Pakistan, Banerjee and Duflo (2008) propose from $2 to $4 per person per day as lower and upper thresholds respectively for the middle class. A global study of the middle class conducted by the Asian Development Bank defined the middle class in Asia (including Nepal) as those with consumption between $2 and $20 per person per day.<sup>1</sup> In our case, the lower threshold is determined by the vulnerability line which translates to roughly $3 per person per day in 2014 in 2011 PPP terms. For the upper threshold, we inspect the consumption distribution and pick a value that comes to about $8 per person per day in 2014. Even though this choice is somewhat arbitrary, it is between the global upper thresholds of $4 and $20 per person per day. Besides, given how thin the consumption distribution is at that level, the effect of the choice has minimal impact on the size of the middle class. In other words, the size of the middle class is much more sensitive to the choice of the lower threshold than the upper threshold.

With the definition of the vulnerable and the middle class clarified, we can now examine the relative sizes, trends and the various characteristics of these groups in Nepal. The results presented in Figure 5 show that as the proportion of the poor has declined in Nepal, there has been a corresponding growth in the size of the vulnerable population from 28 percent in 1995/96 to 45 percent in 2010/11. During the same period, there has also been quite a remarkable growth in the size of the middle class population in Nepal with the proportion increasing from 7 percent in 1995/96 to 22 percent in 2010/12.

Some familiar patterns appear when we analyze the characteristics associated with being vulnerable or belonging to the middle class. Close to half of the urban population is in the middle class while half of the rural areas is in the vulnerable category. Middle class prevalence is the highest in the Central Development region while the Mid and Far Western Regions have the highest poverty and vulnerability. Vulnerability in the _terai_ is higher than in the hills and the mountains and since the _terai_ is also more populous, the number of vulnerable is also higher there. Chances of being in the middle class are highest in the hills and lowest in the mountains but the absolute size of the middle class is, again, larger in the _terai_ owing to its higher population. (See Figure 6.)

# **Figure 5: The Poor, Vulnerable and the Middle Class in Nepal**

> 1 A number of other efforts have been made to define the middle class globally. Birdsall (2010) and Birdsall et al. (2011) proposed a relative concept of the middle class defined as those between 75% and 125% of any society’s median income. The notion that the definition of the middle class should be differentiated between developing countries and other, wealthier nations has also been noted quite generally. Ravallion (2010) for example proposed consumption level between $2 and $13 as middle class for developing countries while the “Western middle class” line is anybody above the US poverty line. But a lot of these approaches end up lumping the poor and the vulnerable into the middle class category.

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