concretizing the definition of chronic poverty and to use the synthetic panel methodology to present some numbers to stimulate discussion and debate around it. Chronic poverty in Nepal is currently understood in terms of associational characteristics of the underlying population. For example, blanket statements characterizing the entire population of people living in Karnali or belonging to particular social groups such as Terai Dalits as being in chronic poverty may either go entirely uncontested or even if there is any contestation, there may be very little by way of analytics to qualify that statement. The objective is to pique the interest of policy makers not just on the issue of chronic poverty, but also on the kind of data required to measure it in a more holistic manner.

# **_3.2.The Vulnerable and Middle Class_**

This concept of poverty transitions, in particular the notion of the risk of falling into poverty, can be taken a little bit further to define a more general definition of vulnerability. Like chronic poverty, vulnerability is also widely acknowledged as a critical dimension of welfare in Nepal. But defining a broader class of vulnerabilities or the size of the Nepali population facing these vulnerabilities has been difficult. Heuristic constructs such as the size of the “population clustered just above the poverty” line have been used to define and gain analytical traction on the vulnerable group. For policy formulation and targeting purposes, social and demographic characteristics of the population (e.g., children, elderly, widowed) have been the preferred markers of vulnerability.

As the recent earthquake has amply shown, there is a high degree of vulnerability to natural disasters in Nepal. These vulnerabilities are heightened if one considers the increased frequency with which these disasters are likely to occur due to climate change. Beyond catastrophic shocks such as floods, droughts, landslides, forest fire etc. that can lead to direct loss of lives and severely affect livelihoods, a large proportion of Nepalis also face sharp variation in income simply as a result of variation in monsoon rainfall. Now if credit markets were to work well and if households were able to insure against these shocks, one would expect consumption and living standards to not be affected by much. But as shown recently by Tiwari et al. (2017), households in rural Nepal in particular, are far from being shielded from such risks. In fact, by their estimates, the level of exposure is such that a monsoon rainfall that is 10 percent below the historical norm can lead to a 0.12 standard deviation decline in the height-for-age for children.

Using the three rounds of the living standards data and applying the vulnerability of falling into poverty method developed by Lopez-Calva and Juarez-Ortiz (2011), we define a “vulnerability line” as the level of consumption below which a particular household has larger than 10 percent probability of falling back into poverty. In other words, all households that are above the poverty line but below this vulnerability line are categorized as vulnerable. Why do we do this instead of anchoring the definition of vulnerability along a more absolute concept, such as say, a multiple of the poverty line as it is sometimes done? We do it in order to align ourselves to Sen’s (1983) statement that “poverty is absolute in the realm of capabilities but relative in the realm of _functionings_ ”. Extending that notion to vulnerability, this approach takes an absolute stance on what it means to be vulnerable (when a household’s probability of falling into poverty is larger than 10%) but a “relative” position on how much income or consumption is required to achieve that capability.

An additional benefit of the methodology we use is that it allows us to get at the notion of the middle class almost as an immediate byproduct. The vulnerability line thought of as described above by definition, forms the “lower threshold” for the middle class population. That is, if, as a household, your income or living 10