Agricultural Productivity and Poverty Reduction in Nepal

• Date: 01 November 2013
• DOI: http://doi.org/10.1111/rode.12062
• Published date: 01 November 2013
• Author: Satis Devkota,Mukti Upadhyay

Agricultural Productivity and Poverty Reduction

in Nepal

Satis Devkota and Mukti Upadhyay*

Abstract

This paper provides for the first time a clear quantitative link between agricultural productivity and poverty

among rural households in Nepal. Using data from a nationwide Nepal Living Standard Survey 2004, we

first estimate household-specific productivity per worker under both Cobb–Douglas and translog produc-

tion functions. Second, the paper identifies the determinants of productivity. Third, we explore a theoreti-

cal link between productivity and poverty using Sen’s poverty index and find empirically that productivity

growth substantially helps poverty reduction. Finally, the integrated effects of changes in productivity

determinants are found to be stronger than the outcomes of sectoral policies taken in isolation.

1. Introduction

The share of agriculture in Nepal’s Gross Domestic Product has been falling over

time. Yet agriculture still accounts for 33% of national production, 70% of all

employment and a third of all exports (Ministry of Finance, 2011). Unfortunately, the

decline in agriculture has resulted from stagnant or falling productivity in the agricul-

ture itself, and not because manufacturing or industry has rapidly overtaken agricul-

ture in productivity changes. Thus, how to attain a continuous rise in agricultural

productivity remains a concern of policy.

Productivity in agriculture remains constrained by a host of factors. High popula-

tion density and limited cultivable area have led to severe land fragmentation. Almost

75% of households have holdings of less than one hectare, inadequate to meet their

subsistence needs (Central Bureau of Statistics, 2004). Year round irrigation is avail-

able to only a third of arable land. Even where irrigation is no barrier to production,

adoption of modern technology is constrained by limited access to extension services,

or low risk taking ability of farmers. Agriculture in Nepal has grown much slower

than elsewhere in South Asia.

A consequence of the poverty trap facing many rural farmers is that much of the

young generation either migrates to India or, if the direct cost of migration is afford-

able, to East Asian or Persian Gulf countries, to supplement family incomes. Foreign

employment cannot go far in tackling poverty when it can only absorb a tiny fraction

of rural population growth. In contrast, industrialization and service sector develop-

ment may have a large potential to make an impact on poverty. Yet that will require

the emergence of a stable path of constitutional and political development that the

current political stalemate in Nepal precludes. Agriculture still offers hope since even

* Upadhyay: Department of Economics, Eastern Illinois University, Charleston, IL 61920, USA. Tel:

+1-217-581-3812; E-mail: mpupadhyay@eiu.edu. Devkota: Department of Economics, Lawrence University

Appleton, WI 54911, USA. For insightful comments we thank an anonymous referee, and seminar partici-

pants at Jinan University, Tribhuvan University, and the National Planning Commission, Kathmandu. The

usual disclaimer applies.

Review of Development Economics, 17(4), 732–746, 2013

DOI:10.1111/rode.12062

© 2013 John Wiley & Sons Ltd