In 1996, the Maoist launched the "Peoples War" in Nepal claiming that the constitution was inadequate for ensuring freedom, justice and welfare for Nepalese people. The initial agenda of the Maoists was a change in the constitution and the establishment of a republic along the Marxist-Leninist-Maoist line. The insurgency spread throughout the country. In a period of 10 years, 13 thousand people lost their lives along with a significant loss of physical capital. In 2005, the Maoists declared cease-fire and entered a peace agreement with other political parties, ending the decade long war and putting forth a united opposition against the monarchy. In April 2006, King Gyanendra, the ruling monarch of Nepal, ceded absolute power, ending the long standing monarchy in the country. Nepal is now a democratic republic, run by a democratically elected interim coalition government headed by a Maoist Prime-minister, while the 400 member constituent assembly (parliament) is formulating a new constitution.
            The purpose of this paper is to explore the inter-relationship between conflict and poverty in Nepal. We hypothesize that conflict and poverty have a simultaneous causal relationship, with poverty providing one of the ingredients for conflict and conflict worsening poverty. Previous studies of conflict in Nepal, (Quy-Toan Do and Iyer (2007), Bohara et al, (2006), Murshed and Gates, (2005))[1], have not considered the two-way interrelationship between poverty and conflict. They assume that causation runs in one direction, with poverty being one of the independent variables influencing conflict in a single equation model. In this paper, we account for the two way relationship between conflict and poverty. Other variables possibly contributing to poverty and/or conflict are also examined. They include geographical terrain, caste/ethic divisions, infrastructure, land holdings, political participation and access to credit, communication, education and healthcare.
            Geographically, Nepal is divided into three ecological zones, Mountains, Hills and Terai (plains) and 5 development regions, Eastern, Central, West, Mid-West and Far-West, which encompass 75 districts. There is substantial variation among regions with respect to economic development and the intensity of conflict. In the econometric analysis, we use district level data for Nepal.  For conflict intensity, we have data on the number of people killed/injured/displaced/abducted by Maoists and the State from 1996-2006. Unfortunately, we do not have time series data on the other variables including poverty at the district level. We therefore conduct a cross national analysis at one point in time. Using district level information, we ask the following questions:  (1) Did poverty contribute to conflict in Nepal? (2) Did conflict affect the poverty? (3) What are the other socio/economic/geographical variables that influence poverty and conflict?

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