Q. Explain the indicators of welfare in the Nepalese context.

Prepared By: Renisha Adhikari

Presented To: Prof. Dr. Krishna Raj Acharya and class of M.A.Economics II Semester

The objective of every individual and society is to maximize their welfare. Welfare economics
is the study of how the allocation of resources affects economic well-being. It falls under the
normative science (how it ought to be). It advocates equitable distribution of resources in the
society. Welfare is a subjective phenomenon which depends on the perceptions of the society. It
is an abstract concept which depends on value judgment.

There is no any concrete method or idea to measure the social welfare. Hence, the measurement
of welfare is a challenging issue. Over the time period, different economists have stated different
criteria to measure social welfare. The capitalists believed that land was the prime indicator
of welfare. Greater the land possession, higher the maximization of welfare and vice-versa.
Adam Smith had developed the GNP growth criteria for the measurement of social welfare.
According to Adam Smith, the growth of the wealth of the society or the growth of GNP means
an improvement in the social welfare of the people. He believed that increase in GDP indirectly
means increase in employment and increase in the production of goods and services available to
the society. Likewise, Jeremy Bentham stated that total welfare is the sum of the utility of the
individuals i.e. W = ∑ Ui

W = Ua+Ub+Uc +…+Un

Where,

W= Social Welfare

Un= Utility of nth individual

Alfred Marshall stated that economics is not only the study of wealth and thus, he gave more
importance to the means of material welfare. He defined economics as the study of man in the
ordinary business of life. Marshall argued that the subject was both the study of wealth and the
study of mankind. A.C. Pigou is the father of welfare economics. He regarded that welfare is a
measurable phenomenon and it is the utility obtained by individuals. According to Pigou, there
are two conditions for the improvement in social welfare. Firstly, increase in national income
increases the social welfare. Secondly, the redistribution of income also helps to increase the
level of social welfare. The redistribution of income from the rich to the poor reduces the
inequality and increases the social welfare. Thus, according to cardinal welfare economists,
social welfare will be increased when income is more evenly distributed among the individuals
in the society.

1|Page
The Pareto’s concept of maximum social welfare is based upon ordinal utility and is also free
from value judgments occupies a significant place in modern welfare economics. The concept of
Pareto optimum or economic efficiency is based on a welfare criterion put forward by Vilfredo
Pareto. Pareto criterion states that if any reorganisation of economic resources does not harm
anybody and makes someone better off, it indicates an increase in social welfare. Thus, in the
Pareto optimum position the welfare of any individual of the society cannot be increased without
decreasing the welfare of another member.

In the given figure, CV is a utility possibility curve which shows the various levels of utilities
obtained by two individuals A and B of the society resulting from the redistribution of a fixed
bundle of goods and its consumption by them.

According to Pareto criterion, a movement from Q to R, or Q to D, or Q to S represents the

increase in social welfare because in such movements the utility of either A or B or both
increases. A movement from Q to R implies that the utility or welfare of B increases, while that
of A remains the same.

By the time of Irvin Fisher, indicators of welfare were guided by consumption. It shows that
welfare was analyzed from demand side only. Later World Bank stressed on analysis of welfare
from the distributive or supply side of the economy.

Indicators of welfare in the context of Nepal

The Constitution of Nepal, 2072 has laid emphasis on developing a socialism-oriented

independent and prosperous economy as the economic objective of the State. Likewise, the
Fifteenth Plan has been prepared with the long-term vision of fulfilling the shared national
aspiration for "Prosperous Nepal, Happy Nepali".

2|Page
In the context of Nepal, there isn't one exact method to measure welfare. The above mentioned
approaches to welfare are also very technical. Nevertheless, the following indicators can be used
as a reflection of welfare in the Nepalese context:

1. Real GDP per capita: As per Economic Survey 2078/79, the real GDP per capita is Rs.
85,505.

2. Per Capita Income: As per Economic Survey 2078/79, the Per Capita Income is USD
1,381.

3(A) Multi-dimensional Poverty Index: In 2019, 17.4 percent of Nepalis are

multidimensionally poor. There are 10 MPI indicators.

3(B) Gini-coefficient: It is a measure of inequality. It can be shown with the help of Lorenz
curve. A Gini coefficient of 0 expresses perfect equality, where all values are the same (i.e.
where everyone has the same income) while a Gini coefficient of 1 (or 100%) expresses
maximal inequality among values.

4. Human Development Index (HDI): The Human Development Index, or HDI, is a metric
compiled by the United Nations and used to quantify a country's "average achievement in
three basic dimensions of human development: a long and healthy life, knowledge and a
decent standard of living." HDI is divided into four tiers: very high human development (0.8-
1.0), high human development (0.7-0.79), medium human development (0.55-.70), and low
human development (below 0.55). As per UNDP report of 2020, Nepal's HDI is 0.602.

5. Life Expectancy: 71 yrs

6. Literacy Rate: 58% (above 15 years)

7. Gross National Happiness Index (GNHI): The report is a publication of the United Nations
Sustainable Development Solutions Network. The recent World Happiness Report has
ranked Nepal at 84th out of 150 countries.

8. Carbon emission and Green House effect Rate: Target to reduce carbon emissions to 0 as
per the recent budget of 2079/80.

Thus, different indicators can be used to assess the welfare in the Nepalese context.

3|Page
4|Page