Temporary restoration of peace and holding of election do not guarantee sustainable peace as seen in Iraq. Since economic adjustment often conflicts with political adjustment toward peace, a coherent and integrated approach between politics, economics, and peace agenda is important.

Lack of consolidated data and underdeveloped methodological tools to estimate the actual cost have further complicated the cause and effect analysis of Nepal’s conflict. The basic assumption of relative deprivation theory, Marxist theories of rebellion and theories of ethnic conflict can be safely applied in Nepal’s regime. The fundamental assumptions are that the greater the inequality, the greater the discontent. Intense and widespread discontent will lead to deep-rooted grievances, which can easily be translated into violent political conflict. Data on deprivation in Nepal’s selected resource-poor areas justify this theory.

There are less visible costs like collapsing food and health delivery systems and alarmingly declining income stream. It is difficult to keep records of such costs. The human development costs like casualties, disability and rape are easy to capture in figures. Therefore, the HDR 2005 elaborates psychological stress as a negative cost, which is difficult to reflect as full costs in the conflict analysis. Since direct and indirect costs, both the economic and human cost, have not been properly assessed, it is difficult to spell out the impact of conflict.

Nepal has lowest per capita income and highest poverty rates. Nepal Living Standard Survey, 2003-04, indicates that poverty in Kathmandu is 3.3 per cent and 42.9 per cent in rural eastern hills. The Gini coefficients have increased from 34.2 in 1996-97 to 41.4 in 2003-04. The problem is severe in the working of labour market. The wage rates are not at par with food prices to maintain purchasing power. Therefore, the lag in wages behind food prices due to labour market imperfections is an important cause of poverty and food insecurity.

As the security environment has deteriorated, higher trade deficit, soaring food prices, increased production cost and reduced profitability are being realised as the increased transaction cost which is motivating people to shift productive activities to short-term commercial gains. State machinery fails to avoid profiteering and rent-seeking activities, which, in turn, contribute to wider inequality between the rich and the poor. The important questions that need immediate answer are the policy challenges, likely impact of such challenges in sequencing and designing economic policies, and how the new policies should differ in post-conflict settings from those executed during the pre-conflict and conflict situations? This indicates the need for proposing a new set of priorities, which should be different from the past.

After the insurgency, diversified economic policies were implemented which were not based on the experience of other countries hit hard by conflict. The donors also failed to come up with differential packages needed during conflict. In some cases they even came out aggressively by tying up stringent conditionality with loan.

There was confusion and disagreement over partnership with revolutionaries although such initiative was found to reduce human and economic costs in other countries. In Nepal, the confusion created by people’s war to call Maoists either revolutionaries or terrorists restricted such partnership with combatants at a time when even the Maoists had shown their interest in being accommodative in priority projects.

The pre-conflict characteristics and legacy of conflict increase risk level to post-conflict situation. Therefore, as the challenge is rather serious, prioritisation is necessary even on the non-economic front. Radical political reforms have been sought in recent months. However, technical capacity to change is radically limited, necessitating the prioritisation of pace and nature of political reform.

To conclude, the fragile environment in terms of effectively implementing standard macroeconomic policies has their limitations in Nepal to adjust socio-economic costs of stabilisation in post-conflict setting. The priorities in macroeconomic stabilisation and social inclusion should therefore be reconsidered through different sequencing in reform initiatives. In the absence of functional public institutions too many interventions may be

counterproductive.

Nepal may opt for reprioritising the priorities under simple policy framework. Although adjustment efforts may take a longer period, the urgent priorities in economic restructuring should include reconstruction, re-establishment of functioning public institutions and stabilisation through the restarting of ailing economy. To correct imbalances created by the internal and external factors, the policies such as the security management, peace building and economic revitalisation should be taken simultaneously. It is difficult but possible.

Dr Pyakuryal is professor of Economics, TU