The Determinants and Consequences of Chronic and Transient Poverty in Nepal

Abstract

Although there is now substantial international literature on poverty dynamics, both academic and policy discussions on poverty in Nepal continue to focus on static notions of poverty. This paper, for the first time, studies poverty dynamics in Nepal by analysing the determinants of chronic and transient poverty using data from a nationally representative panel of 962 households surveyed in 1995/96 and 2003/04. Suggesting that one of the consequences of poverty is its negative impact on asset accumulation, it also looks at how human capital accumulation differs between transient and chronically poor individuals. The findings indicate that while the average per-capita consumption of households increased between 1995/96 and 2003/04, over 47% of the households were poor in at least one of those two years. Among them, around 43% were chronically poor and the remaining 57% were transient poor. In studying the determinants of poverty, we focus on three factors, namely ethnicity, human capital and wealth. Our multinomial logit regression results indicate that while household wealth and human capital have a significant association with both chronic and transient poverty, they are more strongly related to chronic poverty. Another important factor related to poverty is the intensity of violent conflict in the household's district. Ethnicity, on the other hand, does not have a significant relationship with either type of poverty. Our investigation of the effects of transient and chronic poverty on human capital accumulation reveals that, on average, the chronically poor have a lower level of human capital. This gap can be largely explained by the differences in the characteristics of the chronic and transient poverty groups. Our findings suggest that since both the transient and chronic poor occur in large numbers, the government should have concrete policies to address both types of poverty. In particular, emphasis on human capital development and rural asset enhancement could have a beneficial impact on both transient and chronic poverty.