Economic Development in Post-Civil War Societies

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Outline

• The post-civil war state• Traditional economic responses

– Disaster relief– Economic liberalization

• Economic priorities– Reviving the economy– Financing the peace– Sustaining economic reforms

BLUF

• Private sector development is fundamental to stabilization and recovery from conflict

• Sustained economic growth is the only long-term solution to poverty and economic inequality

• “Shock therapy” style reforms in post-civil war states have a high likelihood of igniting renewed violence

• Programs must focus on local level development in conjunction with rebuilding effective state institutions

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Why Focus on Post-Civil War States?

• Civil wars have become the most frequent and deadly forms of armed conflict since the end of World War II– 4 times as many civil wars as inter-state wars– Have killed 25 million people and displaced 75 million

• 42% of civil war states return to conflict• Economic factors are arguably the most common

reason why parties within a state return to violence

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Characteristics of Post-Civil War States

• Intense societal conflicts• Weak conflict dampeners

– Lacks tradition of peaceful dispute resolution• View adversaries as morally inferior• Regard other groups with distrust, detestation, and fear

– Deep and cumulative social cleavages

• Ineffective political and economic institutions– State lacks the capability to implement policies– Creates security dilemma

Conflict’s Economic Impact

• Micro-level– Loss of business assets– Increased operating costs– Migration of skilled labor

• Mid-level– Market networks and producer associations disappear– Illicit trade networks are strengthened– Decreased ability to trade

• Macro-level– Ineffective government institutions

• Incapable of enforcing laws• Lack of governmental services

– Destruction of infrastructure

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Natural Disaster Response

• Assistance agencies often approach the post-conflict environment from a disaster relief standpoint

• Goal: Meeting basic needs by the fastest means possible

• Problem: Relief programs undermining economic development– Direct provision of goods/services available locally

from the private sector– Lack of focus on development and sustainability

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Economic Liberalization

• Structural-adjustment mandatory for IMF and World Bank loans– Typically require institutional and economic reforms

• Privatization of state owned enterprises• Reduction of subsidies and other market-distorting government interventions

in the domestic economy• Liberalization of regulatory structures• Transparent and efficient institutions• Reduction in government spending

• Goal is to produce an economic system that encourages peaceful allocation of goods– Free market competition Þ efficient and fair allocation of goods and

services– Freedom for individuals to pursue interests

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Scope versus Strength

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Str

engt

h of

sta

te in

stitu

tions

(y

axis

)

Scope of state functions (x axis)

Quadrant I

Quadrant IV

Quadrant II

Quadrant III

Economist’s ideal position

Economist’s worst position

United States & Chile

EU, Saudi Arabia, Russia, & Venezuela

Somalia Zimbabwe & Iraq

Dangers of Economic Liberalization

• Structural adjustment programs create immediate social costs– Causes unemployment

• Shuts down state owned enterprises• Reduces the number of government employees

– Impact segments of population dependent on government subsidies– Increase the disparity in wealth distribution

• Economic dislocation spawns political unrest and violence– Capitalism is inherently competitive – it creates winners and losers– Market reforms often impact organized groups: university students,

civil servants, and urban workers

Economic Priorities of Peace Implementation

• Three sets of economic tasks are necessary to help secure post-civil war peace1) Sufficiently rapid economic revival to buy

confidence in the peace

2) Funding to implement specific commitments in the peace process

3) Economic foundations necessary to sustain peace over the long-term

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Reviving the Economy

• Provision of basic services– Garbage collection, sewage, electricity, power plants, and clean

water– Comparatively inexpensive, but often difficult to secure funding– Essential to building confidence in the government– Signal that there will be a “peace dividend”

• That the benefits of peace will outweigh the costs• Allows population to make an investment in rebuilding their lives

• Distribution of dividend must be equitable to all parties• Domestic security (law enforcement) essential for

economic investment

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Development at the local level

• Understand and account for current key market actors

• Increase sustainability by promoting commercial relationships

• Work with many lightly rather than a few intensively

• Identify opportunities for leverage and scale• Have an exit strategy

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Financing the Peace

• Some activities are essential to the peace process and must receive adequate funding– Demobilization and reintegration of armed groups– Resettlement of refugees– Salaries and training of civil servants

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Sustaining the Peace

• Institution focused– Legalization of property rights– Creation of judicial systems– Reorientation of production structures from war

economy to civilian industries and exports– Developing the capacity to survive without

external assitance

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Backups

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Market Democracy: Peace Through Conflict

• Both democracy and capitalism encourage conflict and competition– Democracy

• Political contestation – competitive multiparty elections• Civil society and private associations

– Markets• Competition for profits• Freedom for individuals to pursue interests

• Requires a framework of institutions– Competition is not self-regulating– Rules and regulations to govern the operation of the polity and

economy

• Problems arise if societal contestation becomes so intense that it cannot be channeled through existing institutions

Scope versus Strength

• Scope – Different functions and goals taken on by

governments– Category ranges of minimal, intermediate, &

activist

• Strength– Ability of states to plan and execute policies and to

enforce laws cleanly and transparently.

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Scope versus Strength

• Minimal functions– Providing pure public goods– Defense– Law and Order– Property rights– Macroeconomic management– Public Health

• Intermediate Functions– Addressing externalities– Education – Environmental Protection

• Activist Functions– Coordinating private activity– Fostering Markets– Cluster Initiatives

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Scope versus Strength

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Str

engt

h o

f st

ate

inst

itutio

ns (

y ax

is)

Scope of state functions (x axis)

Quadrant I

Quadrant IV

Quadrant II

Quadrant III

Economist ideal position

Economist worst position

The New Constitutional Wisdom

• Institutions Matter• Institutions are the critical variable in

development.

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The Supply of Institutions

• Organizational Design and Management– Study of management of private sector and public administration. (CH

2)

• Political System Design– Institutional design of the level of the state as a whole rather than the

individual agencies that compose it.

• Basis of Legitimization– Includes the systemic institutional design and the normative dimension

• Cultural and Structural factors– Institutional capacity is subpolitical and related to norms, values, and

culture.

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Transferrable Knowledge

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Component Discipline Transferability

Org Design & Mgmt Mgmt, Public admin, & economics

High

Institutional Design Political science, economics, & law

Medium

Basis of Legitimization Political Science Medium to Low

Social & Cultural Factors Sociology, Anthropology Low

The Demand for Institutions

• Game Theory is often applied to understand different bargains that might be achieved to bring about reform.

• Demand is created by exogenous shock such as, currency crisis, recession, hyperinflation, revolution, and war.

• Nation Building

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Making Things Worse

• International community knows how to supply government services

• much less effective at creating self-sustaining indigenous institutions.

• Focus on those dimensions of stateness that can be manipulated and built.

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Defining Iraq's Post-war Economy

Iraq's post-war economy was a complicated mix of different models, each of which required a different policy remedy.

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Model RemedyTransition Economy Creation of a market system, with openness to

trade and integration into global economy.Failed State Restoration of law and order, government

services and an open trade regime to resolve group grievances and halt economic decline

Rentier Economy Diversification away from oil and curbing the government’s authoritarian tendencies

Post-conflict Economy Restoration of social and physical capital, as well as stability, before initiating economic reforms.

Failed Take-off EconomyIncreased economic freedom, improved regulatory institutions and anti-corruption measures.

Conflict-Reducing Economic Policies

• Social investment funds – money disbursed to local projects that create temporary employment, build infrastructure, and provide basic services to low-income populations

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