Economic Development in Post-Civil
War Societies
Outline
• The post-civil war state
• Traditional economic responses
– Disaster relief
– Economic liberalization
• Economic priorities
– Reviving the economy
– Financing the peace
– Sustaining economic reforms
2
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
3
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
4
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
6
Natural Disaster Response
• Assistance agencies often approach the postconflict 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 efficient and fair allocation of goods
and services
– Freedom for individuals to pursue interests
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Scope versus Strength
Strength of state institutions (y axis)
Quadrant I
United States &
Chile
Quadrant II
EU, Saudi Arabia,
Russia, &
Venezuela
Economist’s ideal
position
Quadrant III
Somalia
Quadrant IV
Zimbabwe &
Iraq
Economist’s worst
position
Scope of state functions (x axis)
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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 peace
1) 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
12
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
13
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
Strength of state institutions (y axis)
Quadrant I
Quadrant II
Economist ideal
position
Quadrant III
Quadrant IV
Economist worst position
Scope of state functions (x axis)
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The New Constitutional Wisdom
• Institutions Matter
• Institutions are the critical variable in
development.
21
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
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
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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
24
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.
Model
Transition Economy
Remedy
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,economic
before initiating
economic
reforms.
Increased
freedom,
improved
Failed Take-off Economy regulatory institutions and anti-corruption
measures.
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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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