Nepal, the poorest country in South Asia with a high incidence of income poverty and markedly low levels of human development, has experienced violent civil conflict over the past 7 years. The “People's war” launched by Maoist guerrillas against the state has led to widespread loss of lives and livelihoods and has had serious negative effects on the country's development prospects. This paper examines the economic causes of the civil conflict in Nepal. We show that relative deprivation and related economic grievances are key causal factors of the conflict. However, our analysis also goes beyond demonstrating the links between economic deprivation and conflict and attempts to locate the conflict within the political economy of the country. We, therefore, show deprivation and conflict to have been the outcome of an uneven process of development that led to the social and economic exclusion of large segments of the population. Given that the conflict in Nepal began during a period of economic liberalization, we also examine the links between economic reform and conflict and argue that reform is likely to have had some negative distributional effects that may have intensified the conditions for violent insurrection against the state.