Nepal's civil war and the changing sources of income: The role of sectoral shifts and remittances in mitigation and recovery

Given the increased worldwide unrest and a large number of displaced individuals, understanding the economic impacts of civil war has been the subject of growing attention by academics and policymakers. The 10‐year civil war in Nepal from 1996 to 2006 provides an opportunity to assess the impact of civil unrest on income sources and remittance patterns. In this study, we examine the changes in household income generating processes over the period of the Nepali civilwar. Using survey data from the Nepal Living Standards Survey (NLSS) in 1995/1996 and 2010/2011, we observe household income and remittance patterns before and after the civil war. Specifically, we employ a difference‐in‐difference estimator that focuses on the heterogeneity in civil unrest within Nepal to examine how the civil war impacted the sources of household income. Within the context of a slower growth rate of income after the revolution for those in the hardest hit districts, we find that there was also a change in the composition of income sources. In particular, our results suggest that there was a shift from a reliance on wages in the nonagricultural sector to wages in the agricultural sector; that there was a shift from external remittances to internal remittances; and finally that home production—the market value of items produced and consumed within the household—may be taking the place of income in regions hit by unrest. “People living in zones of war are maimed, killed, and see their property destroyed. They may be displaced or prevented from attending school or earning a living. To the extent that these costs are borne unequally across groups, the conflict could intensify economic inequality as well as poverty. The destruction (and deferred accumulation) of both human and physical capital also hinder macroeconomic performance, combining with any effects of war on institutions and technology to impact national income growth. Understanding the economic legacies of conflict is important to the design of post‐conflict recovery” (Blattman & Miguel, 2010).