35

Impact of Implementation of Current Land Reform Policy in Nepal

Damaru Ballabha Paudel1* and Katsuhiro Saito1

The objective of this study is to evaluate the potential impact of implementation of current land reform policy in

Nepal. Using SAM framework. we study the impact of alternative policies of land reform on GDP, households'

income, production of different sectors, government revenues, savings, foreign exchange and employment. We

found that redistributive reform increases income of poor households and reduces inequality. Productivity

augmenting reform has more impact on economy as it increases productivity of all sectors including income of all

households keeping inequality unchanged. Furthermore, implementing both reforms simultaneously produce

more impact by gaining both equity and efficiency.

Key words : land reform, poverty, social accounting matrix (SAM)

1. Introduction Low economic growth and high prevalence of poverty

are the inherent features of Nepalese economy. The

economic growth was about 4% for last decade (Ministzy of

Finance [7]) and the absohrte poverty in 2011 was 25.2%

(Central Bureau of Statistic [4]). As average productivity of

cereals crops is 2.85 metric tons per hectors (The World

Bank [13]), it is the lowest in South Asian Region.

Aditionally, only 17% of the countzy's total land is arable

and ownership distribution of land is skewed The landless

do not have land for cultivation whereas some of the land

with large landlords is left fallow. The visible inequality in

land distribution is one of the C8l1Ses of low productivity in

Nepal because those who have fanning skills do not have

enough land and those who have land do not have fanning

skill or no necessity offarming (Adhilcari and Bjondal [1]).

This kind of adverse situation in land is C8l1Sing a vocal

demand for land reform. However, land reform was started

in Nepal in 1951 and comprehensive land reform law was

COlllDlellCed in 1964, the progress of land reform is very

slow. Many studies (R.egmi [12]; Community Self-Reliance

Centre, [ 5]; Adhikari [2]; Adhikari and Bjomdal [1] etc.)

evaluated the land reform process of Nepal as UllSUCCeSsful

so far and indicated the need for successful land reform.

Moreover, land refunn issues are live issues in many

1 Minis1ry ofFinaooe, Govemmellt ofNepal 1 The University of Tokyo Corresponding author* : dbpaudel@ho1mail.com

developing IXllll'llries including Nepal (Lipton [ 6]) and they are

more serious now than decades ago because land refunn has not

oome to a logical md and the stmy of poverty and inequality is

much more complex today. Therefore, we, in this paper,

evaluate the impact of land reform in Nepal using social

accounting matrix (SAM) framewmk. If the current land

ceiling provisions were implemented s1rictly wbat would be

the impact of land reform on income distribution of

households; and in the whole economy; is the main research

puipoSe in this study. Instead of estimating the actual impact

of land reform, this paper shows the potential impacts.

Thus, to fu1fi11 this research purpose, we make different

three scenarios for land reform and see the effect of reform

in production, households income and the whole economy.

Here, we intend to see the micro-sinmlation effect of land

reform on macro-economy of Nepal, wbich is also the

distinct feature of this study. To the best of our knowledge,

this type of simulation study is new in literature.

2. Nepal SAM 2010111 and Its Features In this paper, we use Nepal SAM 2010/11 (Paudel and

Saito [11]) as main source of data. In this SAM, activities

and commodities are divided into 36 sectors which include

12 sectors for agriculture, 11 sectors for manufacturing and

rest 13 sectors for construction, trading, services and others.

Similarly, three primary factor accounts (land, labor, capital)

and 24 household accounts, four government accounts -

income tax, value added tax, import tariff, other government

36

Tlble 1. S.me-Ue Houelold lnco111: (il. %)

HLueldls Lila CapDl l.aDd Firm Gommleli Forejo.Excqe Tcial Ru!a!Hoosellolili 21.37 5.20 13.37 25.05 3.24 29.77 100 umm~Icu~e~m~s 37.1!3 9.ffl 12.80 ll95 216 14.1& 100 Srun:e: PaJJiel 111111 Sai!o [II]

activities; ooe enterprise account, ooe capital account, and

ooe rest of the world account

Table 1 shows the source-wise household income

taken from Nepal SAM 2010/11. Average share of labor

income is higher in urban households (37.83%) than rurnl

(23.37%). This is because people work in fonna1 sector in

urban region and their salary is higher. Similarly, urban

households have average share of capital rental income

(9.07%) higher than rurnl households do (5.20"/o). However,

share of other soun:es of income (land rental income,

business enterprise income, government ttan.sfer income and

Tillie 2. Bo111ebold Expeaditun: Category (ill o/o) Hwseholds Comrmditi.ls Gowmn:lmt Capilal accomt Total Rural H0118Cimls 90.54 0.45 9.02 100 Urban Houseldls 74.79 4.42 20.79 100 Source: Paudel and SUD [11]

foreign exchange income or remittance income) is higher in

rural households.

Similarly, table 2 shows household expenditure

category of rural and urban households. Average share of

consumption expenditure on commodities is higher in rurnl

households (90.54%) than urban (74.79%). However, share

of taxes to government is higher in urban households

(4.42%) than rural (0.45%). Similarly, share of saving is

higher in urban households (20.79%) than rural (9.02%).

3. Impacts of Land Reform In case of Nepal, the Land Related Act 1964 (NqJal

Law Commissim [8]) is the main law for 1aod refonn. It is

amended many times and the mentionable ammdment is 1he

Fiflh A!llflldment The Fiflh ADlflldmmt to the Land Related

Act 1964 was done in 2002 (hfreafter, FALRA 2002) that

drastically reduced the land ceiling in the countty aiming to use

land in 1he most productive way. Aa:ording to FALRA 2002,

land ceiling was reduced by 60% in Terai (from 18.40 lrectares

to 7.45 hectares), 51% in Kalbmandu Valley (from 3.10 lrectares

to 1.52 hectm:s) and 22% in all other regions (from 4.90

lrectares to 3.81 lrectares) including both agrirultural ami

homestead land. The law made provision of redistributive land

reform in Javor of poor farmers but the law could not come into

action due to many barriers from opposing forces including

deficiency of proper impl.eanemalion of policy. land reform in

Nepal has always been criticiziCd for lack of will (lOMX' tD

implement it (.Rcgmi. [12]). FALRA 2002 also was notprqx:rly

implemcnt.c:d indicating failed reform on land The scenario of

land distribution would be diffircnt if the land ceiling policy of

FALRA 2002 were properly implemcnt.c:d (Paudel and Saito

[9]).

Moreover, having more housdlold land shows a higher

sQllus in society, more influence in politics and it also helps as

collateral for borrowing credit As immoveable assets, it has

additional intrinsic va1ue and more security. In order' to see the

relationship between household own land si2Je and social

1'IMo1 ............. c.....,~~~oa..

Lm!Citp>ly .... _Lml,..(•!!l .... c.,,. (io!!!1!!!)

--MI<W... ""- --MI<W... ""-Tni 16.02 7.45 ·SlAI 1~1!11.67 77,711.00 -li5

Lillo ~v~ 1li 1.52 ·3116 55,1169.71 ll,!'/1.70 -4.54 Ollilr~ 6.41 1.11 ·l7!11 29,142.11 21,Dil.6S -!.19

Tni ~15 Oll 5l.6l 20,m.91 22,651.56 lil'l Mlqjol ~~ o.o5 0.116 l3.2l 26,!119.2! 34,4111.56 27J

Ollilr ..... lUll O.ll ~7A9 19,496.42 20,711.10 Ul

Tni ~02 O.ll 379.19 14,27l.tl2 20,1!2.00 4lll !.m11oo ~Vdoy Ml O.Gl 16!~1 2l,72lAl !l,2!4.37 41.99

Ollilr~ ~Ol O.DI 230.34 1SJ32,!1 2l,lll.43 39.15 s.-B~D:~o~llll~mr..toliiiiSoilo(l]

welfare; Paudel and Saito [9] estimated consumption

function and found that tnmsfi:r of beyood ceiling land from

large holdings tD marginal and hmdless will not aoly change 1he

structure of land ownership but also the consumption pattem in

Nepalese ecooomy. The mean per capita consumption of large

households will decrease but percapita consumption of laodless

and marginal households increase substantially. Consequmtl.y,

using household level survey data (Cen1ral Bureau of Statistics

[3]), they estimatlld that how implementation of land reform

affeds percapitaconsumption ofbooseholds (see mble 3).

Likewise, Paudel and Saito [10] also estimated s1Dcbastic

fi:ontier function for Nepalese agriculture and fuund that

brusebold timns are operating less than fi:ontier and inefficieru:y

soun:es are common. Besides, 1he gap between fioolier and

actual production is 30"/a and mean technical efficiency scores

vary widely between household land sizes and regions.

According to them, land reform will tnmsfi:r land from

landlords tD the landless and marginal fimners who have hard

WOJking practices. If land reform policies were impl.emen!M and

inefficiencies were eliminatP1i, the agrirultural. productivity

would rise even using the same level of inpuls. Furthermore,

utilization of 1DlUSed land and consolidation of fragmented land

could reduce at least HI% of ioe.ffici.eocy in Nepalese

agriculture. Therefore, for simulation pmpose, we assume 1 0"/a

productivity can be raised by eHminating some of 1be

inefficiencies. We tenn this type of reform as productivity

llllgmenting reform in this study.

37

4. Analytical Framework

l)Model In order to study the impact of land reform, we use SAM

framewmic. A SAM is a square malrix which represeD1s an

ecooomy at a point of time and is wry useful fur ideolifying the

impact of a policy (fur detail, see Sadoulet and de Janvry [13]).

The matrix nmltiplicrmodel is given as:

(1) X=AX+F

(2) X=(I-AfF

(3) X=MF

Where, X is vector of total income or expenditure of the

endogenous accoun1s, F is vector sum of the expenditun:s of

the exogenous accounts, Lis column vector of the income of

exogenous accounts, A is a square matrix (nxn) of

coefficients of endogenous accounts, B is a n:ctangular

matrix (mxn) of coefficients with exogenous accounts as

rows and endogmous accounts as column. The matrix of

Multipliers and AF being the vector of shock!l, the vector of

impacts (M) is given as:

(4) M=(I-At (5) Ll.X= (I-At t.F

Similarly, induced impacts or the leakages are given as:

(6) .ll.L=B.Il.X

In this model, we take activities, commodities, factors,

enterprises and households as endogenous accounts and

government accounts, capital accounts, rest of the world

accounts as exogmous accounts. Moreover, in this model we

treat land endowment as policy variable (as exogenous

variable) while land input is one of the factors of production

and endogenous variable. Land input is the total operated

land in the economy while land endowment is total owned

land. Land endowment also includes unused land such as left

fallow land.

2) Simulation Samari01

We set three sceaarios to know the impacts ofland refonn in

Nepalese ecxmomy. Simulation 1: Because of the

implementation of current ceiling policy, i.e., FALRA 2002,

the large households lose their beyond ceiling land but

landless and marginal households will receive land We

simulate this change within the household categories in this

scenario and see the din:ct and induced impacts of land

reform. For this simulation, we assume that the households,

which either gain or lose their income as the result of land

reform, are exogenous. Simulation 2: We assume that if

pnxl.uctivity-augmenti.ng land reform were implemented, at

least 1 0% productivity of agricultural sectors (crops

pnxl.uctivity) would rise. Eliminating mainly two barriers­

utilizing the unused land and reducing land fragmentation

would gain this productivity. In this simulation, we assume

that crop production activities are exogenous; other activities

are endogenous and production of exogenous activities

increases by 10"/o. Simulation 3: This simulation is the

application of both the simulation 1 and simulation 2

simultaneously.

5. Relaltl and Dileuuiom Thble 4 shows the resulls of Rimnlation of three scmarios.

We fuund that in simulation 1, the shock is the transfer of income

from large to laDdless and marginal households as the result of

implemenlation of ceiling policy. In this policy, agrialltmal.

production increases by 4.88% while non-agriaJltuml

production increases by 2.34% resulting total domestic

production to be increased by 3.21%. GDP increases by

3.49o/o, mban income increases by 2.27% and rural income

increases by 6.55% resulting increase in total household

income by 4.95%. As the leakages effecls, govemmentnMmJC

increases by 2.39"/o, saving increases by 2.64%, foreign

exchange increases by 2.49"/o and employment increases by

4.20% in Nepalese economy. Distributive refonn bas more

impact on agricultural production and rural income than on

oon-agricuhural production and mban income. This shows that

ttislnbutive reiimn is pro-poor.

In simnlation 2, the shock is the increase in agricultural crops

producti.on by 10%. This type of policy bas higher impact on

macro-economy compared to distributive land reform.

Agricultural production increases by 8.63% while

oon-agricuhural production iDcreases by 2.54% causing total

domestic production and GDP to be iDcreased by 4.61% and

5.11% respectively. In this policy simulation, both mban and

rural income iDccease substaolially by 4.34% and 5.62%

respectively, this raises total household income by 5.14%. As

the resuh of leakage effects. government revenue increases by

327"/o, saving increases by 5.07"/o, foreign exchange increases

by 2.53% and employment increases by 7.48"/o. In SAM

fi:mncwmk, productivity m1gmmting refonn bas higher impact

than redistn'butive reform.

In sirrw1ation 3, agricultmal. prodw:tion increases by

10.48% while Dl)ll-agricultund production increases by 5.39"/o

38

......

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15091.15 0.00 iJ.U6i 4.20 0.00 1119.19 7.41 0.00 13S3.17 U'J'

resulting total domestic production to rise by 7.12%. The

large am:xmt of increase in agricu1tura1 production brings up 1be

rise of GOP by 7 .55o/o. Similarly, Ulban iorome increase by

5.42% aod rural iorome inaeases by 9.34% with 7.88% rise in.

total household income. The induced impac1s of this policy

altemative are increase in. govemme:m l"llVEIDlll by 7.55%,

increase in. saving by 6. 74%, inaease in. foreign exc:bange by

6.67% aod inaease in employment by 8.97%. Simulation 3 is

the policy option in wbicb bo1h types of refmms are used

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simulflmEx>usly. rn filet, land refimn sboold be dooe in such a

way that bo1h refurm measures Wlllk together to boost the

productivity of Nql8lese economy reducing poverty and

inequality. Comparing between 1hree policy samrios given by

three simulations, we clearly sec that Hl"/o productivity

augnurting refurm has bigbc£ impacts that redistributive refurm

and bo1h reforms simubaneous1y (simulalioo. 3) has the highest

impacts amoog 1he 1hree al:remalivc policies.

Furthermore, table 5 shows the sector-wise and

household-wise changes in. production aod income due to the

implemmtation of three types of land reform policies. In

simulation 1, the rcdisb:ibutivc land reform policy creates shock

on laJge, lll8Jginal. and landless bousebolds. Since, large

households in all three regions have beyood cwrent ceiling lalld;

implemmtatinn of redislribulive land reform policy will bring

them negative shock in. their in.come wbile in case of landless

and lll8Jginal. households in. all three regions, this type of land

reform brings positive shock on their iorome.. Simulation 2 in.

table 5 is the impact of 10% inaease in. agricultural production.

of crops.. rn this simulation, we see the shock in 1he production of

paddy, wheat aod olher grains aod crops. By the multiplier effect,

this shock will bring positive cballges in. an sectors and

bousebolds, metrtjonable are land input (1 .82% incceases).labor

(6.46"/o increases). total household iorome increases by 5.14%.

rn sinmlation 3, we see that both types of sbock are present and

the impact in. production and in.come is larger. This policy op1icn

is the best amoog three in 1mns of increasing bo1h produdicn

andiorome..

The above mentioned policy altcmal:ivm of land refurm

increase bouscbold inamx; factor income and, sectoral

pnxhu:tion causing Nepalese economy to achieve higher

economic growth mte. As the economy will grow and the

distribution pattern changes, wba1 may be the impact on poverty

and inequ.alicy? The inoome oflandless and lll8Jginal. households

will increases as the result of b:an.sfi:r of land ownership and it

will help to nlduce poverty and achieve equity. We have seen

fu:nn simulation resul1B that economy grows substantially. We

preserrt the resul1B of inequality analysis before and afu:r all three

types of refonn policies in table 6.

SoaR:•; Aldbarl' •timiD

Ba•clioc 0.31

(0.07) 0.18

(0.06) o.ss

(0.11)

-· 0.25 (0.06)

0.13 (0.05)

0.45 (0.10)

Simulolim2

0.31 (0.07) 0.18 (0.06) o.ss

(0.11)

Simulation 3 0.25

(0.06) 0.13

(0.05)

0.46 (0.10)

Nolo: StoDdard emr of eolimlll in ( ), colculatod lll95% C<lllfideDoe iDiorwJ.

Moreover, in. the redistributive reform (simulation 1 and

simulation 3), landless households will acquire rcdistnbuted

1aod aod they will not be landless anymore. Instead, they

will fall in. the category of marginal households. Similarly,

the large households will lose their beyond ceiling 1aod aod

fall in. the category of medium households. Additionally, 1he

decrease in. income of large households is less than 1he

39

increase in income of landless and marginal households

resulting substantial increase in rural income, which

evideru:es lhe importance of land refunn in Nepal.

In baseline, Gini coelliciEirt is 0.31, Theil index is 0.18

and coelliciEirt of variatioo is 0.55 (see table 6). As lhe result of

impleJllfllbltion of redismbutive land refunn, iru:quality reduces

in simulatioo I but in case of 10'/o productivity augmenting

refunn, iru:quality does not change. If buth refunns are

implemeored togelirei; inc:qualityreduces as similar in lhecase of

dis1ributive refimn policy.

6. Conclusion Redislributivc land refimn increases income of poor

households and reduces inequality. Increase in productivity of

crop sec1Drs due 1D refimn bas more impact oo economy as it

increases productivity of all sectms including income of all

households lreeping inequality 1mchangro Furthermore,

implemmting bo1h types of refonns simnltanoousJ.y produce

lmge impact oo Nepalese economy by gaining buth equity and

eflicieJlcy. 1berefure, we reooDllllOild 1hat buth types of refimn

should be implem"""" simul1aoeously in Nepal to reduce

poverty, iru:quality and 1D achieve Jlf01lllO' economic growtll.

The process of land refimn bas beeo vety slow in Nepal.

One of lhe reasons is 1hat people including politicians do not

realize lhe poJeotia1 gain funn land refimn. FU111reonore, wiJhout

any simulation, it is bard to know 1he quantitative effects.

1berefure, we estima1elhe elfeclg in 1bis paper expecting great

impact fur impl""""""tioo oflhe refimn..

Though, Govemment of Nepal being unable 1D mfuroe

comprehensive land refunn, it is dJe 1Dp priority agenda of

almost all oflhe political pm1ies (ruling and oppositioo~ Because

of !he lack ofslllble govornmcnt fur many l""' (almost fur 22

)"'l"S), 1bis agenda could not be imp!- properly. Once

s1rong govornmcnt is funned, !hc:re is feasibility ofland reform.

Howev<:I; in SAM model price is assumed conslllnt and

exogeoous. This type of fixed price model does not cap1Dre lhe

substitotioo elli:cm. In addition, in SAM model, some sectms

nmst be la:pt exogeoous. This bas disadvantage of over

calculation of change in income, oulput and other variables. In

coo1lmy, COID]l'JJDble geneml equilibrium (CGE) model assumes

price as endogenous and cap1Dres lhe subs1itutioo elli:cm.

~ in CGE model, all sectms are assumed <:l1dog<mus;

labor madret is cleared and may give micro-economic

consistent elfeclg of policy. Therefure, 1D oveiOO!lle lhe

bottlenecks 1hat arise in SAM fimnewoik; we suggest using

COID]l'JJDble geneml equilibrium (CGE) modeling fimnewolkto

studylhe impact ofalii:mativc policy scenarios oflandrefimn in

Nepal, which is also lhe topic fur our furlher researoh.

References [I] Adhikari, C. B. and Bjomdal, T. "Can Land Refurm be

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