Nepal's Civil War and Its Economic Costs

Gyan Pradhan
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
more » ... 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.