08.02.2006
Reconstruction, Development and Sustainable Peace
№1 2006 January/March

There was great hope during the brief euphoria in 1989/90 that
the end of the Cold War would herald the beginning of a new era of
widely enjoyed improvements in economic welfare, prosperity and
peace achieved through greater harmony of interests and cooperation
within and between countries. Regrettably, though not surprisingly,
it is the sceptics who have turned out to be right.

Far from peace and harmony, over one hundred armed conflicts
have taken place since 1989. They have ranged in severity from
minor conflicts (at least twenty-five battle-related deaths) to
wars (one thousand or more battle-related deaths). Apart from civil
and international wars, a number of countries have experienced
inter-communal violence, genocide, coups and high levels of
organized crime.

There are certain characteristics that are shared by most
countries that have experienced civil wars: poverty, unemployment
and economic stagnation – with economic welfare and income security
deteriorating rapidly. The fact that rates of growth tend to be
much lower in war affected economies than in those that have not
experienced civil conflicts makes the underlying problems even
worse.

Clearly, economic conditions are of critical importance. But
they cannot be considered in separation from non-economic factors.
To achieve their objective, economic policies must therefore take
into account the capacity of a society (its institutions and
resources) to solve the problems created by the divisions and
tensions that are responsible for recurring violence.

Finally, the existing antagonisms, grievances and conflicts are
not the only reason why the world community needs to tackle the
causes of armed conflict. An international survey reflecting the
views of over one billion people found that there was widespread
pessimism about the future. People across the globe felt “unsafe,
powerless and gloomy” and feared that the next generation would
live in a world even less prosperous and safe, and more
internationally insecure (Survey on Security and Prosperity. World
Economic Forum, Geneva, 2004). These are exactly the conditions
that bred civil and international conflicts in the 1920s and 1930s,
culminating in the Second World War!

MAJOR CAUSES OF CIVIL UNREST AND CONFLICTS

1. Poverty. The fact that there is a strong
link between poverty and armed conflict is indisputable. Half of
the states experiencing such conflicts since 1989 fall in the
bottom quartile of the countries included in the UNDP Human
Development Index (HDI). With one-third of the remaining countries
in the next quartile, over 80 percent of the states that have
experienced civil conflicts are in the bottom half of the HDI.

The key economic characteristics that these countries share
include: low levels of income per head, and high unemployment
and/or underemployment levels. Not surprisingly, in most of them
over 40 or, even, 50 percent of the population is ranked as poor.
As a result, their levels of literacy, education enrolment ratios,
health standards and life expectancy are well below those in high
or even medium income countries – making it extremely difficult for
those living under these conditions to escape the poverty trap
through their own efforts.

Yet these links between conflict and poverty are not as simple
as they might appear. Not every poor country experiences civil
conflicts. For example, they have occurred since 1989 in only half
of the countries included in the list of “least developed and low
income countries” published by the UN Committee for Development
Policy.

2. Impoverishment, inequality and pessimism.
None of this need cause civil unrest and conflict if the general
feeling is that the burden of low development is shared fairly,
that there is a steady improvement in the country’s economic
performance which is benefiting all, and that those caught in the
poverty trap can expect with confidence that they will be able to
escape from it in the foreseeable future.

The problem is that in many low income countries none of these
conditions is satisfied. Income inequality has increased over the
last thirty years globally. To the extent that governments have
become either unable or unwilling to compensate for this through
income transfers, this means that the inequality of opportunity and
outcome has also gone up both within and between countries. No
wonder that the feeling of economic insecurity has increased
internationally, particularly among low income countries. People
feel less prosperous – notably in Africa, South America and the
Pacific Region – and generally less optimistic about the future.
The pessimism about their own and world future is now shared also
by the majority of those living in highly industrialized,
prosperous countries.

The danger is that, if nothing is done to reverse them, these
trends will create exactly the conditions in which people,
especially inhabitants of the poorest countries, can easily become
caught in the vicious circle of impoverishment, despair and
hate.

The process is familiar. The low level of development limits the
capacity of a country to produce the volume of output required to
satisfy the needs and aspirations of its population. Consequently,
employment opportunities are also limited so that unemployment,
actual and disguised, is invariably high. Unemployment reduces
income of those directly affected and, through the multiplier
effect, of the country as a whole.

The immediate impact of low national income is that the
government’s taxable capacity is inadequate for the state to
provide transfer payments and social services needed to minimize
the social cost of unemployment and poverty. The long-term impact
is that low private and state income reduces the level of private
and public savings in the country and therefore – in the absence of
external assistance – both private and public investment. As the
rate of growth declines, it reduces the possibility of future
improvements in the standard of living.

Starting from an already low level of economic welfare, the
overall effect is greater economic insecurity and growing
dissatisfaction with the existing order. Political instability and
the risk of conflict increase. This encourages emigration of highly
skilled and educated labor and the flight of capital – making it
even more difficult to reverse the process of economic decline. The
vicious circle of poverty and stagnation continues; and with it the
likelihood of conflict.

The risk of civil war will be particularly high if there is a
sudden, sharp fall in output, employment and income, and no clear
sign that the country will be able to reverse it in the foreseeable
future. For instance, sharp falls in income and large increases in
unemployment preceded civil wars in Sierra Leone, Nigeria and
Indonesia. The same happened in Yugoslavia following the liberal
reforms in 1989. The country’s level of economic activity declined
by 15-20 percent and the rate of unemployment reached in some
regions 40 percent of the adult population fueling social
unrest.

3. Social divisions and political oppression.
The ease with which the “temptation” for violent conduct within a
state can be translated into action will be determined also by the
degree of its social cohesion and the nature of its political
institutions.

The best way to understand the origin of tensions that may lead
to conflict or war is to start with a simple model that eliminates
some of the most common causes of social divisions and
frictions.

A sovereign state will normally be protected against
disintegration into a multitude of warring factions if the
population is homogeneous and the existing inequalities are not a
divisive issue. The whole population shares the same racial
characteristics, national roots, language and religion. There is no
state-imposed discrimination against any section of society.
Everyone enjoys the same legal rights, has equal access to state
institutions and influence on the way they are run. Equally
important, existing economic inequalities (functional, horizontal,
personal and regional) are generally accepted as “fair.” Clearly,
under such conditions, the scope for divisions between capital and
labor, occupational or social groups and regions would not be large
enough for any subgroup within the state to advance by violent
action its interests at the expense of the rest. It would face
combined hostility of the majority and, therefore, certain defeat.
To succeed, attempts to improve economic and social conditions of
the whole country, or a particular minority, have to rely on
non-violent, political means.

The risk of conflict increases even if some of these conditions
are not satisfied. History shows that even a high degree of
demographic and cultural homogeneity may not fully eliminate the
possibility of civil unrest and war in conditions of large and
widening economic and social inequalities. This may take different
forms: uprisings or revolutions to change the status quo, military
coups to protect it, or the rise of organized crime and corruption
as a means of redistributing wealth.

The following scenario is not unfamiliar. The country most
likely to experience this tends to be at a low level of economic
development, with most of the population at or close to the
subsistence level of existence. Then a natural resource of
strategic importance to the world economy is discovered on its
territory. The discovery offers the prospect of a continuous stream
of foreign currency earnings and, consequently, the opportunity for
the country to transform its economy and social wellbeing within a
relatively short period to the levels enjoyed by medium or, even,
high income countries. All sections of the society are gripped by
high hopes for a time. Then the disillusionment and hostility to
the existing order set in. This happens when people realize that
the discovery will make little difference to their lives, as the
newly created wealth is concentrated in the hands of a minority who
also control, directly or through their surrogates, the levers of
power. Political oppression may protect the wealth, status and
power of the minority for a time. But, as history shows, it cannot
do so indefinitely. Moreover, if foreign corporations are involved
in the production of the resource and their governments are seen,
or believed to be, behind the minority who derive most of the
benefits from it, it may not take long before the civil conflict
spreads across the borders and assumes international
dimensions.

Whatever the overall state of the economy, the likelihood of
conflict will increase if economic inequalities are the result of
discrimination against certain groups of society because of their
nationality, race, religion, class or gender. Where this is the
case, members of the dominant social group invariably ensure that
the most attractive and lucrative jobs, including key political
offices at all levels, are occupied by those who belong to their
group. This enables them to control, in addition to the country’s
productive resources and the way that these are allocated, also the
army, the judiciary and the police. The privileged position enjoyed
by the group may be perpetuated by the fact that the best schools
and universities in the country are open predominantly to their
children.

Again, past experience shows that, even if the ethics of such
discrimination could be justified, the longer it persists, the more
violent is the eventual civil conflict likely to be. This is
particularly true of the countries in which the state actually
institutionalizes such inequalities. The laws and the coercive
power of the state are then used to instigate, promote and
safeguard the discrimination in favor of a particular group because
of its color, nationality, religion or class.

Although institutionalized discrimination and political
oppression are not confined to low income countries, international
comparisons of ‘political freedom’ show that most of these
countries score well below high and medium income states on some or
all of the following: political participation, rule of law, freedom
of expression and lack of discrimination. According to an index of
political freedom produced in the early 1990s for the UNDP (Desai,
M. Measuring Political Freedom. In: Discussion Paper 10, London:
London School of Economics, 1992), virtually all countries that
have experienced civil conflicts, and for which relevant data are
available, are in the bottom half of the index. All these countries
are also ranked in the bottom 50 percent of the UNDP Human
Development Index.  

PRIMARY POST-CONFLICT OBJECTIVES

Economic welfare, social harmony and political stability are so
closely linked that all three must form an integral part of a
viable post-conflict strategy.
To have any chance of success, post-conflict strategies must
concentrate from the start on institutional changes and policies
that promote reconciliation, reconstruction and reduction in
absolute poverty and income insecurity. Unlike in the past, social
policy is now given much higher priority by international
organizations, ahead of structural and macroeconomic policies.

The re-ordering of the priorities is not sufficient, however,
without another important change in the institutional approach to
problems facing post-conflict countries. Governance and public
administration programs must be the cornerstone of the
peace-building efforts.

People in the states concerned must have an operational
criterion by which to judge whether those who govern them are
making a genuine effort to achieve the ultimate objective:
sustainable peace secured through widely shared improvements in
material wellbeing and respect for the rights of all citizens
irrespective of their ethnicity, creed, color, class or gender.

1. Reconciliation. If different groups within a
post-conflict country are not prepared to cooperate in solving the
problems that caused the civil discontent and war, the country’s
future will remain as bleak as its past. The effort to achieve
reconciliation of the warring factions is therefore of critical
importance; and that will depend on how the authorities deal with
four major problems, each of them more serious after the conflict
than before.

First, as all internal conflicts result in atrocities against
civilian population as well as the combatants, the old grievances,
resentments and animosities are likely to be felt even more
intensely. The war may also change ethnic balance of the population
in a region or country, as large numbers of people are forced to
flee their homes. The minority will now feel even more insecure
than before, a fact that the majority may exploit to ‘cleanse’ the
ethnic or religious character of their region or country by making
the minority’s life intolerable and forcing it to emigrate.
Anticipating this, a government genuinely determined to promote
reconciliation will act promptly after the conflict to outlaw
discrimination and threats against any group and will use the
law-enforcing agencies to implement the new laws. The
constitutional change will be fortified further with the reforms
that guarantee a genuinely democratic form of government. Where
major demographic imbalances exist and people are likely to vote
along ethnic, religious or racial lines, the new constitution must
make sure that the minorities are adequately represented in the
legislative, executive and law-enforcing branches of the state.

Second, unless internal order is re-established quickly, the end
of fighting will not stop the lawlessness created by civil war.
Past malpractices and the war inevitably discredit the existing
state institutions, especially the judiciary and the police. The
provision of internal order and security becomes, therefore, a
matter of high priority. An essential part of this task is to
ensure that people have confidence in the integrity of the relevant
state organs; and one way to achieve this is to enable different
groups to participate fully in all the law-enforcing
institutions.

Third, civil conflicts reduce the long-term capacity of a
country to recover. Apart from physical damage, casualties will
include a substantial number of highly qualified and skilled
people. Some of them are often specially targeted in such
conflicts. Many of those who survive, especially younger and more
dynamic among them, will flee the country attracted by the prospect
of higher living standards and better working conditions in the
world’s most advanced economies. The human capital will be further
depleted by a large number of those who come out of the war with
physical and mental disabilities. No post-conflict country can,
therefore, afford discrimination of any kind that prevents the most
productive employment of all those who are able to contribute to
the reconstruction process.

Finally, to achieve the primary post-conflict objectives it is
important to rebuild and, where necessary, create new state
institutions. That can be done on a lasting base only with strong
popular support; and to give such support people need to be
convinced that the new institutional framework offers them the best
chance to escape poverty, social divisions, oppression and war. It
was such a fundamental change in the attitudes and institutions,
and the extraordinary economic and social progress that followed,
that has transformed Western Europe over the last fifty years and
made possible the creation of the European Union. 

2. Reconstruction. Although the scale of
destruction inflicted by civil wars will vary from country to
country, the effect can be devastating even in conflicts of
relatively short duration.

The combined human and economic cost of the devastation can be
staggering. For example, as a result of the genocide in 1994 GDP
per capita in Rwanda is 25-30 percent lower than it would have been
without the conflict, with 60 percent of the population regarded in
2001 as poor and 42 percent unable to meet basic food needs (Lopez
H., Wodon Q. and Bannon I. Rwanda: The Impact of Conflict on Growth
and Poverty. In: CPR Social Development Notes. Washington D.C.:
World Bank, No. 18, 2004).

Food, shelter, clothing and medical service must, therefore, be
given priority in post-conflict countries in order to provide
people with the basic needs necessary for survival. What makes the
task of these countries even more difficult is that none of the
problems created by civil conflicts can be solved in isolation.

The process of reconstruction is bound, therefore, to take time.
According to World Bank estimates, even if external assistance is
available, it may take a low income country 4-5 years to develop
the capacity to use foreign aid effectively. The pressure to
achieve a rapid improvement in economic welfare will be
particularly great if public expectations of the benefits from
peace are unrealistically high.

The nature of civil wars and the size of their cost vary from
country to country, as does the capacity of individual countries
for rapid and successful reconstruction. Consequently, in assisting
post-conflict countries the international community must pay
special “attention to local knowledge and perceptions and listen to
the needs that are articulated by conflict affected countries and
their ideas about what can be done to address them” (Summary of
Proceedings. EGM on Conflict Prevention, Peace-Building and
Development.  UN/DESA, New York, 15 November, 2004).

3. Economic development and poverty reduction.
The success in achieving major improvements in economic conditions
depends on numerous decisions that have to be taken early in the
process of reconstruction. Two of these are of critical importance:
decision to adopt the goals that are consistent with the objective
of improving economic welfare, and decision to employ a system of
ownership and allocation of resources that is most likely to
achieve the main objective. 

The principal goals of economic policy adopted more than fifty
years ago by many countries are relevant to post-conflict states
because they were intended specifically to help prevent armed
conflicts within and between countries.

The first goal is to achieve high levels of employment and job
security in order to give everyone a stake in their country’s
future so that people do not feel ‘useless, not wanted’ and ‘live
in fear’ of the future. This was judged in the 1940s to be so
important that it was enshrined in the original UN Charter. The
second goal aims at sustaining the rate of growth required to
maintain high levels of employment and job security in the long
run. The third goal is to keep prices ‘stable’ so that the rate of
inflation does not make it impossible to achieve the other
objectives. The fourth goal is to ensure that the gains from
economic progress are distributed in a way that is widely regarded
as fair and, also, makes sure that nobody is allowed to exist below
a socially acceptable standard of living. The fifth goal is a
sustainable external balance (on the current plus long-term capital
account) to enable the country to preserve its economic
sovereignty, allowing it to pursue the other four goals.
The decision concerning the ownership of productive resources and
control over their allocation is much less clear-cut. The reason is
that productive resources, economic and social problems,
preferences and priorities tend to differ significantly even among
countries which appear to be very similar.

For instance, one problem that all post-conflict countries have
in common is inadequate provision of ‘public goods.’ This is an
area of economic activity where the state has had traditionally to
play an active role since the private sector is either unable to
provide such ‘goods’ (law enforcement, defense) or will do so only
for those who are able and willing to pay for them (healthcare,
education, housing). However, as the provision, nature and quality
of public goods vary from country to country, the extent to which
public and private sectors need to be involved will also vary.

The same is true of those activities that are normally carried
out entirely or predominantly by private corporations. Insecurity
and general lack of confidence make it difficult to attract private
investment, both domestic and foreign. Although the problem is
common to all least developed economies, it will be particularly
serious in post-conflict countries. Hence, the government has to be
involved either directly or by providing subsidies to encourage
private investment. The subsidies may have to be substantial to
attract foreign private investment. Even Europe was unable to avoid
this problem after WWII; private investors returned to Western
Europe only after it had completed its postwar reconstruction and
recovery.

Yet, this experience is not equally true of all sectors, regions
or countries, including those emerging from a civil war. Despite
the risks and uncertainties, private international investment will
flow into a region or country devastated by internal conflict if it
has resources that promise a high return on the capital
invested.

As a result, the method and the means used to achieve
post-conflict economic objectives will have to be flexible and
pragmatic. This was the approach adopted in the two most successful
postwar recoveries on record, those in Western Europe and Japan.
All the countries involved pursued very similar welfare enhancing
economic goals. But the success that they achieved was the result
of different priorities and policies – determined by each country’s
needs and public preferences.

4. External economic assistance. Few questions
of international economic policy have attracted as much attention
since the 1940s as external assistance: its size, the form in which
it is provided, conditions attached to it, its management and
monitoring. Moreover, although it is almost sixty years since it
was offered and implemented for a short time only (four years), the
Marshall Plan remains for many people the ‘ideal’ form of external
assistance. There are still regular calls for ‘New Marshall Aid’ to
be given to this or that region of the world. What those who
advocate this usually have in mind is the financial aspect of the
assistance that the U.S. gave to Western Europe between 1948 and
1951. It was on an unusually large scale (around $150 billion at
today’s prices) and most of it (over three-quarters) consisted of
grants. The loans accounted for slightly less than 10 percent of
the total and the repayment terms were, especially by present day
standards, exceptionally generous. They were to start in 1952 and
to be spread over a period of thirty-five years at a fixed rate of
interest (2.5 percent).

However, though the financial side of Marshall Aid deserves the
attention that it has received, it is important not to overlook a
number of equally relevant aspects associated with the Aid.

First, other things being equal, external
assistance is most likely to succeed when the recipient’s needs and
donors’ interests coincide, as was the case with U.S. assistance to
Western Europe and Japan after WWII.  Otherwise, the danger is
that it will be given for the benefit of donors and, therefore, do
little to solve the recipient’s problems.

Second, it is essential for the receiving
country to determine its objectives and priorities and to be able
to pursue the policies most likely to realize them. A successful
strategy can be developed and implemented, therefore, only through
an active cooperation between the donors and the recipient. This
may not be easy to achieve in the absence of a genuine coincidence
of interests.

Third, a single donor, preferably an
international organization coordinating the activities of various
donors, is needed to avoid waste and the risk of failure caused by
inconsistencies between the objectives and policies, duplication of
effort and uncoordinated completion of projects. When there are
several donors, the danger is that each may pursue its own goals so
that waste on a large scale becomes unavoidable, not least because
of unnecessarily large bureaucracy that administration of
uncoordinated foreign aid requires.

Fourth, donors must not insist on the
reciprocity in policies such as trade liberalization that may
impose serious long-term costs on the recipient. Contrary to the
practice that became increasingly common toward the end of the last
century, the U.S. liberalized unilaterally its trade in the second
half of the 1940s to give other countries easier access to its
market, making it possible for them to boost their inadequate
dollar reserves.

Fifth, it is imperative that foreign donors do
not impose on the receiving countries the nature, timing and
sequencing of economic policies – each of which can result in
unacceptable social costs and the risk of conflict. It is for this
reason that West European countries were not prepared to risk
either internal deregulation or external liberalization until their
economies were ready for such fundamental changes. For example, all
of them had achieved full employment by the early to mid 1950s and
completed their postwar recovery by the end of the decade. Yet,
although the exact timing differed from country to country, they
removed import quotas in the early 1950s, abolished domestic price
controls in the second half of the decade and made their currencies
convertible into the U.S. dollar at the end of 1958. Tariff
reductions came in the 1960s and early 1970s, more than a decade
after most of the countries had become structural surplus
economies, earning large balance of payments surpluses at full
employment. It took even longer for exchange controls to be
abolished: at the end of the 1970s, during the 1980s and early
1990s. By that time Western Europe had also, thanks to the
countries’ economic success achieved through cooperation, managed
to realize the centuries-old dream of many Europeans: lasting peace
and the creation of the European Union.

Finally, external donors have the responsibility to ensure
through careful monitoring that the essential post-conflict
strategy agreed originally is implemented; and to discontinue
development assistance when the recipient is failing to do so
because of widespread corruption. Equally important, they have the
responsibility to prevent their own commercial interests from
encouraging international corruption and failure, especially in
post-conflict countries.

5. Domestic economic policy. Consistency of
policy objectives is among the most important principles for
successful reconstruction and development. If poverty is at the
root of civil conflicts, making its reduction through economic
development the key objective of economic policy, a macroeconomic
policy whose main goal is a low and stable rate of inflation –
irrespective of what happens to employment and growth – is clearly
inconsistent with the overall objective. As inflation is for
various reasons (widespread shortages, pent-up demand) a common
problem in these countries, the pursuit of low and stable prices
requires a highly restrictive macroeconomic policy. The result is
deflation, economic stagnation, unemployment, low job security and
income, greater poverty and inequality – exactly the conditions
that give rise to conflict.

Economic and social costs of deflation will be even greater if
the objective of price stability is contradicted by policies that
are, by their very nature, inflationary. Premature price
deregulation, a sharp increase in indirect taxes and massive
devaluation of the currency, especially when they are implemented
at the same time, may give rise to runaway inflation. Yet these
policies were forced on many transition economies in the 1990s,
usually as a precondition for external assistance. The result has
been unnecessarily heavy economic and social costs. Similar policy
inconsistencies in a country that has just experienced civil war
are certain to result in a revival of old hostilities and conflict,
a totalitarian form of government, or emigration of the young and
those with vocational and professional qualifications and
skills.

To avoid similar inconsistencies and outcomes, it is also
essential that no structural policy that can be effective in
achieving the post-conflict objective of improving economic welfare
should be ignored for the sake of some economic dogma. All
industrial countries have used a wide range of policies to achieve
and maintain their present levels of affluence: industrial,
regional, and other that involved active collaboration between the
state and the private sector.

Countries that are heavily dependent on exports of one or two
primary commodities may need to use a combination of such policies
to diversify their output. The capacity for product diversification
is much greater in large than in small countries. However, whatever
the size, countries need to diversify their economies to reduce the
vulnerability to external shocks and the risk of a debilitating
deterioration in terms of trade. The risks are especially serious
in the case of countries dependent on exports of a single primary
commodity. Again, it is important not to be dogmatic about the
nature of economic diversification, as branching out into other
primary commodities, manufactures or services may be equally
beneficial.

The consistency between the objectives and policies is also of
critical importance in the pursuit of external economic policy.
With the exception of a few small, mainly oil-rich states, all
developing countries are essentially in fundamental disequilibrium
(i.e. unable to reconcile their internal and external economic
objectives). The problem is particularly serious in post-conflict
countries. Premature liberalization of trade and capital flows by
these countries may easily exacerbate their economic problems and
thus jeopardize the whole strategy of reconstruction, development
and conflict prevention.

There are several reasons for this. First, their totally
inadequate foreign currency reserves will be drained quickly for
purposes other than reconstruction and development. Second, trade
liberalization will reduce government income. Import taxes are a
major source of income in many developing countries, as they were
for a long time, for instance, in the United States. Third,
premature liberalization of trade makes it difficult to phase
economic diversification and modernization carefully in order to
avoid major losses in economic welfare (M. Panic?. Globalization
and National Economic Welfare. Palgrave/Macmillan: London and New
York, 2005).

* * *

The close link between economic prosperity, optimism about the
future and peace is not a recent discovery. It was the realization
of the importance of this link that made the German Government
under Bismarck lay down the foundations of the modern welfare state
in the 1880s. And it was the appalling brutality and cost of WWII
that paved the way for a completely different approach to
macroeconomic management and collective social responsibility in
the 1940s.

 Unfortunately, not everyone has benefited from the new
order. Many countries are still as poor and vulnerable to civil
unrest and conflicts as they have been for centuries. These
conditions make it impossible for them to escape – without
assistance from the international community – from the
poverty-conflict trap, no matter how much they might wish to do so.
That much is generally recognized and accepted. What we still need
is a consensus on how to achieve this objective.
In a ‘globalized’ world, lasting prosperity and peace are possible
only through collective commitment and effort.