This paper estimates the macroeconomic effects of increased spending on defense and internal security necessitated by the decade-long Maoist insurgency in Nepal. An investment equation is specified to examine the relationship between defense spending and investment. The estimation results indicate that there is a significant negative effect of defense spending on investment. A simple Harrod-Domar growth relationship is used to estimate the effect of the increase in defense spending on economic

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... rowth. This analysis suggests that between 1996 and 2006, the opportunity cost of the conflict in terms of lost output has been about 3 percent of Nepal's current GDP.