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Newsletter 10-34
March 2010

A Guide to Economic Growth in Post-Conflict Countries Executive Summary

Office of Economic Growth Bureau for Economic Growth, Agriculture and Trade,
U.S. Agency for International Development (USAID), Jan 2009

This Guide to Economic Growth in Post-Conflict Countries seeks to fill a gap in the information available to decision-makers faced with the urgent, all-encompassing needs of a country emerging from conflict. The Guide brings together lessons learned from past and current efforts to promote economic growth in post-conflict countries. It proposes a new approach and provides concrete recommendations for establishing effective economic growth programs that will improve well-being and contribute to preventing a return to conflict. The Guide does not provide a checklist applicable in all post-conflict settings, although it does provide the basis for constructing a checklist appropriate to a specific country context.

The lessons learned and program recommendation in the Guide also are applicable in situations where conflict has been limited to specific geographic regions within a country, such as northern Uganda and southern Sudan. However, because there still is much to be learned about how economic growth programs contribute to ending a conflict, it is unclear whether the concepts presented here also apply in countries currently in the midst of general conflict. Accordingly, the Guide's programming suggestions should not be applied unquestioningly in mid-conflict situations.

The Guide is intended to be practical: it can be applied in the chaotic circumstances that prevail in post-conflict settings. Part 1, A New Approach to Post-Conflict Recovery, describes the economic impact of conflict and suggests ways to set economic growth priorities. Part 2, Best Practices, discusses lessons learned and provides recommendation for seven specific sectors; 1) Macroeconomic foundations, including both fiscal and monetary policy and institutions; 2) employment generation; 3) infrastructure; 4) private-sector development, including both the private-sector enabling environment and enterprise development; 5) agriculture; 6) banking and finance; and 7) international trade and border management.

Economic Growth Programs: A Significant Part of the Solution

The purpose of economic growth programming in post-conflict countries is both to reduce the risk of a return to conflict and to accelerate the improvement of well-being for everyone, particularly the conflict-affected population. Economic issues may have contributed to the outbreak of violence in the first place, through the inequitable distribution of assets and opportunities or simply a widely held perception o inequitable distribution. Economic interventions need to be an integral part of a comprehensive restructuring and stabilization program. While economic growth is not the sole solution to resolving post-conflict issues, it can clearly be a significant part of the solution.

A New Approach

Evidence shows that early attention to the fundamentals of economic growth increases the likelihood of successfully preventing a return to conflict and moving forward with renewed growth. Since 40 percent of post-conflict countries have fallen back into conflict within a decade, it is critically important to heed this evidence and alter the familiar donor approach, which focuses first on humanitarian assistance and democracy-building, with economic issues sidelined to be dealt with later.

Start early: Paul Collier, professor of economics at Oxford University and leading expert on African economies, argues that external peacekeeper and robust economic growth have proven to be more critical than political reform in preventing a return to conflict.1 Accordingly, many interventions designed to facilitate economic growth can and should be implemented at the very beginning of the rebuilding process, much earlier than traditionally has been the case. Bureau for Economic Growth, Agriculture and Trade

Address the causes of conflict: It is critical to understand that paying immediate attention to economic growth does not mean doing the same thing that ordinarily is done in stable developing countries. Post-conflict environments demand a different approach. Countries emerging from violence have fundamentally different characteristics as a result of conflict. Most post-conflict countries were already poor and badly governed prior to the outbreak of violence. Their problems were almost always made worse by conflict. More importantly, the nature of many of their problems also changed. Post-conflict settings are characterized by physical and human destruction; dislocation, unemployment, and demobilization of combatants; a weak and fragile government; high expectations and a sense of urgency; and residual geographic, ethnic, or other tensions. Post-conflict economic growth programs must address as directly as possible the factors that led to the conflict, taking into account the fragility of the environment. Planning has to be based on much more than the narrow technical considerations of economic efficiency and growth stimulation. Programs also must be effective at expanding opportunities and increasing inclusiveness throughout the population; they should be judged in part on the basis of whether or not they help mitigate political factors that increase the risk of a return to hostilities.

What is required for success?

Clear goals: Clear goals are critical, because-in the chaotic circumstances that characterize the post-conflict period-everything seems to be needed at once, and there may be many actors with differing priorities. Each post-conflict situation is different, but in general, economic growth programs should aim to:

  • reestablish essential economic governance functions and restore the government's legitimacy;
  • boost employment and improve well-being as quickly as possible;
  • address the root economic causes of the conflict; and,
  • stabilize the economy and position it to grow rapidly.

Sensitivity to context: In the post-conflict context, there must be heightened sensitivity to the political and social dimensions of the conflict. Economic growth programs must address these dimensions. Donors must consider the nature of the conflict, the nature of the peace, and the country's level of development as it emerges from the conflict. To be effective in such a sensitive political environment, every rebuilding decision should include a consideration of the impact it may have on the legitimacy of the government, on employment and improved welfare, and on equity or perceptions of equity for the various factions participating in the conflict.

A pragmatic approach: At the core of all donor-supported economic growth programs must lay a highly pragmatic approach, based on an understanding of the critical barriers to resuming growth. Such an approach addresses simple issues first, removes barriers to the informal sector, and is structured in a way that offers the greatest immediate benefits in an equitable manner.

Host-country ownership: Post-conflict economic growth programs need to be carried out with maximum host-country ownership of the reforms, using national systems as much as possible. In addition, initiatives should be developed through a well-coordinated process that integrates multiple donors and the host government. Donors need to make effective coordination mechanisms a high priority from the beginning.

How should it be done?

Donors should begin work in multiple areas immediately and simultaneously, and begin early on to build long-term capacity.

Focus on the basics: Economic growth programming should focus on the basics of a functioning economy, with early emphasis on short-term effectiveness in stimulating economic activity and creating jobs, rather than on longer-term economic efficiency. In general, short-term results should trump longer-term issues in terms of programming choices. There are, however, no hard-and-fast rules about these trade-offs. Judgment must be applied in every case.

Establish priorities: During the immediate post-conflict period, there may be a narrow window of opportunity to introduce difficult economic reforms. There also may be extreme limits on the government's capacity to implement change. Often, so many changes are needed that donors, working with the host country government, have to set immediate priorities on the basis of what will most quickly and most effectively generate employment and stimulate the economy.

Understand recurring trade-offs: Substantial structural challenges and the ever-present risk of a return to conflict mean that donors need to make decisions quickly, balancing specific trade-offs that are much more acute than in stable developing countries. Four trade-offs recur:

  • the need for effective economic solutions in the short-term while moving toward more efficient ones over time;
  • the tension between the need to achieve tasks urgently and the effect such actions (if they bypass local institutions) might have on the government's perceived legitimacy;
  • the conflicts that can arise between short-term and long-term objectives; and,
  • the desire to use the window of opportunity to make dramatic economic reforms immediately after the conflict, contrasted with most governments' very limited absorptive capacity to manage change.

Pay attention to sequencing: The termination of conflict creates an immediate rebound of economic activity, though typically not to pre-conflict levels. Donor and government consumption of local goods and services stimulates broader economic activity. Job-creation programs generate a temporary upsurge in employment and consumption. Donor and government investments in physical and social infrastructure stimulate demand in the short run and support growth in the medium and long term. Regardless of the effectiveness of donor-financed programs in the short run, however, it is the country's capacity to sustain economic growth that matters most for long-term success. Donors must work with local government and non-governmental entities to quickly restore the delivery of critical public services. This will almost always require the use of external actors because of the diminished capacity of host-country institutions following a conflict. Donors should seek to associate their activities and the activities of NGOs and contractors they support with the host government in a way that re-establishes its legitimacy. However, donors should avoid "quick-fix" approaches that bypass existing local capacity. Instead, donors should look for opportunities to make use of local capacity and begin rebuilding host-country capacity as quickly as possible. A greater role for host-country institutions in delivering services will be one of the most effective ways to re-establish the legitimacy of the host government. Donors and the host government must also communicate clearly and often to the public about what they are doing together to meet people's needs. These communications should be based on shared objectives for the post-conflict recovery and informed by the work of donor-host country coordination mechanisms. The highly stylized diagram that follows illustrates how post-conflict economic growth programming can be approached. Early emphasis on providing humanitarian assistance and expanding physical security must be accompanied by programs to provide jobs and critical public services, and reconstruct key economic infrastructure. Rapid growth requires sound economic policies to be established from the very beginning. In the longer term, programs must build the host country's capacity to elicit the self-sustaining growth of a healthy economy. As results are achieved in the immediate post-conflict period, donors should assess which initiatives should shift from an emphasis on effectiveness and short-term results to a more traditional emphasis on economic efficiency and long-term growth. The types of short-term programs that are appropriate for creating jobs and improving well-being immediately following a conflict cannot and should not be funded in perpetuity by donors. There must be the clear prospect of growth through sustainable, productive, private-sector employment to displace short-term donor programs. It must be kept in mind that the patterns shown in the diagram are purely illustrative; a great deal of flexibility must be built into programs to allow them to respond to rapidly evolving post-conflict circumstances.

What should be done?

In the short term: During the early post-conflict period, donors may be required to carry out any or all of the following, to ensure a successful economic transformation and post-conflict recovery:

  • Vigorously promote local private-sector participation in relief and humanitarian assistance programs.
  • Phase down refugee camps as soon as possible, to encourage displaced families to return to their previous economic activities, except where such activities are no longer economically viable.
  • Ensure that the country has a viable currency, accepted for trade and commercial transactions.
  • Ensure that the government can make payments and collect revenues. Build the country's capacity to manage its fiscal responsibilities.
  • Avoid too much appreciation of the exchange rate, such as that which can result from large donor expenditures, which will reduce the country's export competitiveness.
  • Knock down as many obvious barriers to both formal and informal economic activity as possible, as quickly as possible. Such barriers could include everything from price controls to unnecessary administrative requirements. Consult widely with both the public and private sectors to understand what needs to be done to unleash economic activity.
  • Promote employment generation and stimulate the economy. For maximum effect, do not place undue emphasis on the ultimate sustainability of the activities. Rather, the immediate goal is to get labor and capital back to work, and quickly. Employment generation programs should include, but not be limited to, activities targeting ex-combatants.
  • Provide grants to a variety of groups, making the time-limited nature of donor funding clear from the outset. Grants may be made to support government-managed public works, for example, and should be made to a wide range of community organizations, businesses, and conflict-affected populations.
  • Reduce physical obstacles and eliminate barriers to movement and commerce, particularly for rural and agricultural markets. Promote the flow of market information, and encourage the development of regional and international markets for agricultural products. If needed, remove land mines; make emergency repairs to power systems, roads, railways, ports, and airports; restore basic utilities; and establish modern communications systems.
  • Establish procedures for handling property and contract disputes, including recognizing customary laws already in use. Establish a transparent, binding process to resolve the claims of former property owners returning to the country, balancing social and political constraints.
  • Do not view privatization as an all-or-nothing choice. Sell small state-owned enterprises (SOEs) to private investors or subject them to competition.
  • Consider sustaining or restarting some of the operations of larger SOEs to help generate employment. Avoid large, unsustainable subsidies to large SOEs, however, and introduce measures such as management contracts, hard budget constraints, and competition. Keep in mind that the longer term objective is to ensure there will be effective competition and, in many cases, privatization or liquidation of SOEs.
  • Focus on local investment and local employers (and possibly south-south investment) as a source of increased demand. Do not rely on foreign direct investment from developed countries to generate this demand in the short term, because most foreign investors will wait for the risk of resumed conflict to abate before they invest.
  • Ensure that basic economic data are collected to monitor economic stabilization and the growth of economic activity.

In the long term: As progress is achieved in each programming area (which will occur at different rates in different areas of activity) donors should shift away from short-term fixes and increase their emphasis on efficiency-enhancing, sustainable increases in productivity to maximize long-term economic growth.

Part 2 of the Guide, Best Practices, provides specific recommendations for achieving short- and long-term goals-and managing the transitions between them-in each major sector of economic growth activity.

Notes

Collier, Paul. 2007. "Post-Conflict Recovery: How Should Policies Be Distinctive?" Oxford University.

http://users.ox.ac.uk/~econpco/research/pdfs/PostConflict-Recovery.pdf.

Endnote

1. Collier, Hoeffler, and Söderbom (2007).


 

 
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