Three dimensions Income distribution, poverty and inequality

Income is the major determinant of the living standard of the people, and it indicates how rich or poor a country is. Nepal ranks very low in the World Bank’s rating of nations according to the income level with per capita income of US $340. The Nepal Living Standard Survey (NLSS) of 1995/96 and 2003/04 has considered various sources of income of Nepalese households to identify the people’s living standard.

The total household income as identified by these two surveys consists of mainly agriculture, wage/salary, enterprises, transfer, housing and others. In Nepal, agriculture farm is one of the most important industries, being a major source of income in the form of agriculture wage. However, in recent years, remittance has been playing a vital role in supporting the livelihood of the poor, nearest poor and the middle poor. The diversification of income has improved the living condition considerably between 1995/96 and 2003/04. Herein, an attempt is made to compare the share, growth rate and inequality of income distribution for different groups of people between the periods of two NLSS.

The government claimed that poverty reduced from 42% in 1995/96 to 32% in 2003/04. It is no doubt a great achievement amidst the chaos and domestic conflict and war. However, the per capita income share of the poor has surprisingly declined from 10% in 1995/96 to 7% in 2003/04. Similar is the case for the nearest poor, middle group and nearest rich whose income share declined from 13%, 17% and 21% respectively in 1995/96 to 11%, 14% and 20% respectively in 2003/04. Contrary to that, the share of per capita income for the rich increased from 39% in 1995/96 to 48 % in 2003/04. It further proves that the inequality in the distribution of income has been widening manifold over the years.

The growth rate of income of the ultra poor was 5.1% per year during the period 1995/96-2003/04. It is the lowest compared to the rest. During the same period, the growth rate of per capita income of the nearest poor was 5.7 %, which is higher than that of the ultra poor but lower than the middle group. The middle group experienced a growth of 6.5 % per year, 1.2 and 1.8 times less than the growth of the nearest rich and ultra rich respectively. The growth rate of the per capita income of the nearest rich was 7.9 % per year being 1.5 times lesser than that of the ultra rich that experienced 11.8 % growth during the same period of time. From analysis, inequality in the growth rate of the share of per capita income between the poor and the rich is widening with highly skewed distribution of income making the rich more richer.

Economic inequality comprises of all disparities in the distribution of economic assets and income. The term typically refers to inequality among individuals and groups within a society, but can also refer to inequality among countries. Gini coefficient (GC) measures the inequality in the distribution of income with value ranging from 0 to 1 with 1 referring to the extreme situation of inequality. The GC for per capita income in Nepal increased from 0.44 in 1995/96 to 0.47 in 2003/04 implying that the inequality in the distribution of income increased with the annual growth rate of 0.8 %. The GC for both farm income and transfer decreased from 0.61 and 0.93 in 1995/96 to 0.55 and 0.90 in 2003/04 respectively with the annual growth rate of (-) 1.3 and (-) 0.4 respectively. Though there is a marginal improvement, the GC is already very high representing highly skewed distribution of income. Similarly, the GC for wage income and property both increased from 0.68 and 0.77 respectively in 1995/96 to 0.72 and 0.78 in 2003/04 with the annualized growth rate of 0.8 % and 0.4 % respectively. It implies that the distribution of wage income and property over the period further skewed. Analyzing the dispersion in the distribution, per capita income of the rich was four times greater than that of the poor in 1995/96 which increased 6.4 times more in 2003/04.

Amidst the rising inequality in distribution of income and income from different sources (farm, wage, property and transfer), the number of poor in the country decreased significantly

during the same period of time. Highly skewed distribution of income of such kind if left unchecked intensifies more inequality in the years to come.

Thus, to improve the living standard of people of lower quintile, inequality in the distribution of income should be reduced to its minimum. The increasing trend of income inequality, however, would increase the gap between the income of the rich and the poor making the progress achieved so far in the reduction of poverty unsustainable.

For reducing the income inequality, imposing higher tax on the income of the rich and investing it in the construction of infrastructures such as roads, bridges, power generation, etc. can increase employment opportunities to a larger number of the poor and to some extent, it helps minimize the income inequality between the rich and the poor.

Dr. Dhungel is Associate Professor, Department of Economics, TU