# **5. Challenges for Future Poverty Reduction**

Poverty reduction in Nepal since 1995 has been impressive, especially given the dire living conditions in the early 1990s. Yet thinking about potential sources of _future_ poverty reduction in Nepal, significant challenges come to the fore. How does Nepal cement these recent gains, make them sustainable and shift the policy discourse gradually from one that is dominated by discussions of absolute poverty to one that speaks to prosperity in general? How sustainable is the de facto migration-remittance based development model in terms of generating growth for the economy as well as for those that constitute the bottom 40 percent? What implication does that have for future investments in human capital, development of skills and the overall development of Nepal’s domestic labor market? How long can the improvement in living standards be sustained without productivity improvements that lead to robust, job-creating growth at the macroeconomic level?

The first challenge is to ensure that all sections of the Nepali society have the opportunity to benefit from the growth processes driving improvements in living standards. For example, despite the improvements on average, a closer examination of poverty trends at the sub-national level reveals sizeable spatial heterogeneity in progress (Table 3). At the national level, the poverty headcount ratio declined from 42 percent in 1995 to 12.5 percent in 2010 under the old poverty line, equivalent to an 8.4 percent reduction every year. Urban areas exclusive of Kathmandu valley experienced a much faster poverty reduction at 12 percent a year, followed by Rural Western Terai region at 10 percent. Rural Eastern Hill region is the only region that significantly lagged behind in reducing poverty from the rest of the country. While its poverty rate was below the national average in 1995, the sluggish pace of poverty reduction at 4 percent a year made Rural Eastern Hill the poorest and the second poorest region under the old and new poverty lines, respectively.

**Table 3: Subnational poverty and pace of poverty reduction**

|PovertyRate|Old Pov|erty Line|Proportional Change<br>er ear|New Poverty<br>Line|
|---|---|---|---|---|
||||p y||
|SurveyYear|NLSS 1995|NLSS 2010||NLSS 2010|
|Kathmandu|4.3%|1.3%|8.5%|11%|
|Otherurban|31.6%|5.4%|12.4%|17%|
|R-WHill|55.0%|17.1%|8.1%|32%|
|R-E Hill|36.1%|18.9%|4.4%|30%|
|R-WTerai|46.1%|15.2%|7.7%|27%|
|R-E Terai|37.2%|8.7%|10.1%|22%|
|National|41.8%|12.5%|8.4%|25%|

Source: Nepal Living Standard Surveys 1995 and 2010 There is also a notable regional disparity in terms of the average depth of poverty. Figure 13 summarizes average per capita consumption of the poor in 1995 and 2010, expressed in 2010 prices. The poor in Kathmandu valley, the least-poor region in both years, on average had the highest per capita consumption in all regions. Other urban areas, where the pace of poverty reduction was the fastest, saw the largest increase in per capita consumption among the poor. The average consumption in Rural Eastern Hill region was approximately at the same level as the national average in 1995, but due to the slowest pace of poverty reduction, the poor in the region had the lowest average per capita consumption in 2010. Note that the poverty headcount rate was 21