The occurrence of wars between countries decreased considerably after the Second World War. However, wars and conflicts within countries continued. Nepal’s evolutionary history is also characterised by wars, conflicts and fighting. The wars were aimed at achieving geographical expansion and control over natural and other resources and assets. The conflicts that happened after the 1950s were all in-fighting aimed not at geographical expansion and possession of resources but at wresting political power. A decade-long conflict from 1996-2006 was fully focused on changing the political regime, in other words, grabbing political power. The conflict ended with the monarchical and multi-party system of governance changing to a federal democratic republic.

During this conflict, Nepal lost a huge number of humans and a large amount of human assets. Some 17,000 persons were reported missing or killed. Additionally, the economic loss was even bigger than the human loss. Foreign aid, among other factors, played a big role in causing both types of losses. While the stated objective of foreign aid is to support development in general non-stated objectives including commercial, political and strategic goals prevailed.

During this conflict, Nepal received foreign aid commitments totalling nearly Rs295.6 billion, an average of Rs29.56 billion per year. The second year of the conflict recorded a 139.71 percent increase in aid commitments. In the middle of the conflict (2001-02), foreign aid commitments increased by 53 percent; and just one year before the peace accord was signed, foreign aid commitments increased by 60 percent.

This was a kind of official development assistance, meaning it did not directly lead to direct and economic losses. Nonetheless, humanitarian and military aid, and arms trade, tactfully not included in the definition of official development assistance of the Organisation for Economic Cooperation and Development, prevailed in a built-in way with the official development assistance to Nepal.

Many countries of the North, also known as the rich countries and donors, not only continued pursuing general commercial, political and strategic objectives, but also arms production because of an excess production capacity that they were left with after the end of World War II. The arms trade continued either officially or illegally. Arms producing countries kept on providing state subsidies to the producers and exporters of arms and ammunition. In 1990 alone, the official arms trade was recorded at as high as $50 billion. Some estimates for the same year put illegal sales at three times the official trade volume, that is nearly $150 billion.

Foreign aid, otherwise known as the arms trade, left Nepal with two irrecoverable losses—economic loss and human loss. The economic loss, or the cost of the conflict, was caused by lost production in the economy. If the literature on trade-related theories is to be taken as a reference, the loss a typical civil war-torn developing country incurs is equivalent to one year's gross domestic product.

Recovering years of gross domestic product losses cannot be imagined. In 2007, writing in a paper on civil war, economists Paul Collier and Anke Hoeffler estimated the human costs (death, disease and displacement) as being roughly equivalent to another one to two years of the initial gross domestic product loss for the country engaged in a civil war. If we were to add both these costs—the value of the forgone production costs and human costs—Nepal's losses would be beyond estimate.

While foreign aid could have possibly funded some social development schemes and perhaps, brought the warring parties around the negotiating table, it also played a negative role. First, aid was used for consumption rather than for production and creation of capital assets. Second, because aid, even it if was not directly a trade of arms built-in, is always fungible. Since aid was fungible, increased aid availability prompted the government to recruit more and more security personnel. Third, the development budget was not only diverted from production, but it was also used for protecting the lives of the existing and newly recruited security forces. Fourth, national resources were used by the insurgents for illegal arms imports that the government could not control or check. Finally, the government was also prompted to buy more arms using its own meagre revenue resources.

There was no alternative to raising more resources. But the resource constraints were mitigated by an increasing volume of foreign aid to Nepal—aid supposedly financed some social development programmes, otherwise, the government had to allocate funds from its own resources. The conflict continued.

It is obvious that an increase in foreign aid to Nepal increased the employment of security personnel (not needed for a peace-loving country with no capacity to fight with either of the two giant neighbours, India and China). In addition, an increase in foreign aid helped to increase arms imports by the government because they were essential to protect the lives of the security personnel. The insurgents also needed arms to fight, and more importantly, to protect themselves.

One may still argue that increased foreign aid during the conflict helped to increase the government's income or the economy, and that increased procurement of political, strategic and commercial, especially military, hardware helped to bring the conflict to an end. This could be true. Nonetheless, seen from the angle of lost production and loss of human assets, the cost of the foreign aid that Nepal received during the conflict clearly outweighed the benefits that it could bring to the country.

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