This article was downloaded by: [Universidad de los Andes] On: 14 August 2013, At: 19:32 Publisher: Routledge Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK Conflict, Security & Development Publication details, including instructions for authors and subscription information: http://www.tandfonline.com/loi/ccsd20 The role of private sector actors in post-conflict recovery John Bray Published online: 14 Apr 2009. To cite this article: John Bray (2009) The role of private sector actors in post-conflict recovery, Conflict, Security & Development, 9:1, 1-26, DOI: 10.1080/14678800802704895 To link to this article: http://dx.doi.org/10.1080/14678800802704895 PLEASE SCROLL DOWN FOR ARTICLE Taylor & Francis makes every effort to ensure the accuracy of all the information (the “Content”) contained in the publications on our platform. However, Taylor & Francis, our agents, and our licensors make no representations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of the Content. Any opinions and views expressed in this publication are the opinions and views of the authors, and are not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be relied upon and should be independently verified with primary sources of information. Taylor and Francis shall not be liable for any losses, actions, claims, proceedings, demands, costs, expenses, damages, and other liabilities whatsoever or howsoever caused arising directly or indirectly in connection with, in relation to or arising out of the use of the Content. This article may be used for research, teaching, and private study purposes. Any substantial or systematic reproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in any form to anyone is expressly forbidden. Terms & Conditions of access and use can be found at http:// www.tandfonline.com/page/terms-and-conditions
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This article was downloaded by: [Universidad de los Andes]On: 14 August 2013, At: 19:32Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House,37-41 Mortimer Street, London W1T 3JH, UK
Conflict, Security & DevelopmentPublication details, including instructions for authors and subscription information:http://www.tandfonline.com/loi/ccsd20
The role of private sector actors in post-conflictrecoveryJohn BrayPublished online: 14 Apr 2009.
To cite this article: John Bray (2009) The role of private sector actors in post-conflict recovery, Conflict, Security &Development, 9:1, 1-26, DOI: 10.1080/14678800802704895
To link to this article: http://dx.doi.org/10.1080/14678800802704895
PLEASE SCROLL DOWN FOR ARTICLE
Taylor & Francis makes every effort to ensure the accuracy of all the information (the “Content”) containedin the publications on our platform. However, Taylor & Francis, our agents, and our licensors make norepresentations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of theContent. Any opinions and views expressed in this publication are the opinions and views of the authors, andare not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be relied upon andshould be independently verified with primary sources of information. Taylor and Francis shall not be liable forany losses, actions, claims, proceedings, demands, costs, expenses, damages, and other liabilities whatsoeveror howsoever caused arising directly or indirectly in connection with, in relation to or arising out of the use ofthe Content.
This article may be used for research, teaching, and private study purposes. Any substantial or systematicreproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in anyform to anyone is expressly forbidden. Terms & Conditions of access and use can be found at http://www.tandfonline.com/page/terms-and-conditions
The role of private sectoractors in post-conflict recoveryJohn Bray
Countries need active, equitable and
profitable private sectors if they are to
graduate from conflict and from post-
conflict aid-dependency. However, in the
immediate aftermath of war, both domestic
and international investment tends to be
slower than might be hoped. Moreover, there
are complex inter-linkages between
economic development and conflict: in the
worst case private sector activity may
exacerbate the risks of conflict rather than
alleviating them. This paper calls for a
nuanced view of the many different kinds of
private sector actor, including their
approaches to risk, the ways that they
interact and their various contributions to
economic recovery. Policy-makers need to
understand how different kinds of companies
assess risk and opportunity. At the same
time, business leaders should take a broader
view of risk. Rather than focusing solely on
commercial risks and external threats such
as terrorism, they also need to take greater
account of their own impacts on host
societies. Meanwhile, all parties require a
hard sense of realism. Skilful economic
initiatives can support—but not replace—
the political process.
Introduction
There is no question that countries need active, equitable and profitable private sectors if
they are to graduate from conflict and from post-conflict aid-dependency. War leaders and
their followers are less likely to return to fighting if they have an economic stake in peace.
ISSN 1467-8802 print/ISSN 1478-1174 online/09/010001-26 q 2009 Conflict, Security and Development Group
DOI: 10.1080/14678800802704895
John Bray is a political risk specialist with Control Risks, the international business risk consultancy. His
professional interests include private sector policy issues in conflict-affected areas; anti-corruption strategies for
both the public and the private sectors; and business and human rights. He is currently based in Japan but mainly
works on international assignments.
Conflict, Security & Development 9:1 April 2009
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External assistance has a vital role to play in the immediate aftermath of conflict, but the
long-term investment needed to withstand aid-dependency will most likely come from the
private sector, or not at all.
If all goes well, the social benefits of equitable private enterprise will help sustain the
legitimacy of the post-war political order. However, in practice there are two main
problems. The first is that both domestic and—still more—international investment tends
to be slower than expected or hoped in the aftermath of war. If the economic rewards of
peace are slow or invisible, there is an increased risk that conflict will resume. The second
concerns the complex inter-linkages between economic development and conflict. In the
worst case, private business—like poorly designed international aid1—may contribute to
political tensions, thus exacerbating the risks of conflict rather than alleviating them.
With the second problem in mind Julien Barbara concluded an earlier article for
Conflict, Security & Development by calling for ‘a more discerning approach’ to the positive
and negative contributions made by different private sector actors to peacebuilding.2
He went so far as to suggest that in some circumstances ‘private sector containment’ might
be necessary for peace.
This article responds to Barbara’s call for discernment. It argues that it is essential to
differentiate between different kinds of businesses, rather than speaking of the ‘private
sector’ as though it were a single entity. In particular, policy-makers require a realistic
appreciation of how different kinds of companies assess risk and opportunity in the
aftermath of conflict. At the same time, business leaders themselves should take a broader
view of risk. Rather than focusing solely on commercial risks and external threats such as
terrorism, they also need to take greater account of their own impacts on host societies.
This includes the possibility that companies could contribute—often unintentionally—to
the underlying causes of political tension. Well-considered co-operation between public
and private sector actors increases the chances of a virtuous circle of peacebuilding rather
than a vicious circle of repeated conflict.
The legacies of war economies
Business of one kind or another—often including some form of ‘trading with the
enemy’—continues even in war-time. In that respect, ‘containment’ is scarcely an option.
The most important questions are not whether private sectors develop (the plural
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is deliberate) but rather how and when they do so, and how to channel commercial energy
in directions that are constructive rather than destructive.
In war conditions even more than in peacetime, business people require political skills to
survive, at least to the extent that they must be able to deal with—or at a minimum coexist
with—powerful military and political leaders. Post-war environments remain intensely
political, and in that respect Michael Pugh is correct to highlight the weaknesses of ‘technical’
economic strategies that fail to take account of the past and present political context.3 Both
from a policy-making and from a commercial perspective, conflicts leave painful legacies
which impede the rapid development of healthy private sectors. The task of addressing these
legacies requires a high degree of political astuteness, and there are no ‘quick fixes’.
The first consideration is that in many cases—perhaps most—the structure of the
pre-war economy was deeply flawed, and this may have been one of the factors that
contributed to conflict in the first place. At a 2006 conference at London’s Royal Institute
of International Affairs (RIIA), Kanja Ibrahim Sesay of the National Commission for
Social Action in Sierra Leone pointed to some of the factors that contributed to state
failure and civil war in his country.4 These included excessive centralisation of decision-
making; elite monopolisation of wealth; a political culture focused on the capture of
resources for particular individuals rather than the generation of wealth for all; limited
organisational capacity in government; and a climate of mutual suspicion between
government and private sector. Even if restoration of the pre-war status quo were
achievable, it would rarely be desirable.
Second, while some kind of business almost always continues in wartime, protracted
conflict distorts and destroys normal commercial patterns. Some companies and
individuals adopt ‘coping’ strategies, adapting to new environments but following more or
less mainstream business objectives.5 For example, Somali entrepreneurs have proved
remarkably innovative in certain sectors, notably mobile phones, despite the absence of an
effective national government since the early 1990s.6 In other cases, business people have
developed new skills—and amassed huge profits—in smuggling, black-marketeering and
sanctions-busting. In the conflicts of the 1980s and 1990s, such as those in Lebanon and
Bosnia-Herzegovina, there were many examples of combatants trading with military
opponents across their various frontlines.
There is now an extended literature on the political economy of conflict.7 One of the main
themes of what has become a protracted debate is the extent to which the activities of both
national and international firms contribute to conflict rather than alleviating it, for example
Private sector actors 3
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by providing a resource that contributes to military leaders’ war chests. Globalisation has
enhanced the rewards of illicit private sector activity in conflict zones. One classic example is
the Democratic Republic of Congo (DRC); in 2003 a UN Panel of Experts issued a hard-
hitting report on foreign companies’ illegal involvement in the exploitation of natural
resources during the country’s civil wars in the late 1990s and early 2000s.8
Once conflict ends, one of the major tasks is to provide alternative sources of income for
former combatants through demobilisation, disarmament and reintegration (DDR)
programmes. In the first instance these are often financed through foreign aid.9 However,
aid resources are limited and the lasting reintegration of former combatants is not sustainable
without broad-based economic recovery, including the emergence of a dynamic private
sector. In 2007 UNDP official John Ohiorhenuan wrote of Liberia that ‘employment
opportunities are perhaps the single most important factor for sustaining the fragile peace.’10
However, wartime political and commercial dynamics often persist in some form once
the fighting has died down. Those who have gained power and influence through
patronage of quasi-legal or illegal commercial networks will wish to preserve their
positions. For example, Pain and Lister point out that post-Taliban Afghanistan scarcely
amounted to an ‘open economy’ because aspiring entrepreneurs have to contend with
existing commercial networks backed by powerful warlords.11 One outcome was that
investment by both national and international companies was much slower than policy-
makers might have wished. The result has been fewer economic opportunities for ordinary
people, and this has been a major factor increasing the risks of renewed conflict.
Mere promotional blandishments to investors will not be sufficient to address these
shortcomings. If they are to find answers, policy-makers need to take a realistic view of
how different private sector actors assess and respond to risk.
Risk and opportunity in conflict-affected environments
In the immediate aftermath of conflict, the overall pattern of risks may not look so
different from when fighting was still under way. The key problems include:
. Poor security. This includes the risk of crime from ex-combatants, as well as the
possibility of renewed fighting if the peace process breaks down.
. Lack of effective regulation. Government institutions typically lack experience and
technical capacity. The regulation that exists on paper may be based on pre-war models
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that are no longer appropriate, for example because they belong to a socialist era that has
now passed.
. Widespread corruption. Post-conflict environments are notorious for high levels of
corruption, among other reasons because of the ‘state of exception’—the idea that
exceptional circumstances place the main imperative on rapid spending, with
accounting controls as a secondary consideration.12
. Poor infrastructure. Basic transport and communications structure, as well as utilities
such as electricity and water, have often been destroyed.
The overall political framework is often determined by a ceasefire agreement that is based
on some kind of compromise between the main actors (as in Bosnia-Herzegovina and
Lebanon). It will be hard—if not impossible—for local individuals or companies to
present themselves as ‘neutral’ parties. Their religion, ethnic identity or region of origin
will almost always identify them with one side or the other. Even international companies
are likely to be identified with one side or the other because of their government contacts
or the backgrounds of their local partners, suppliers and sub-contractors.
These conditions impede the commercial prospects of all kinds of businesses, whether
these are individual entrepreneurs, small and medium enterprises (SMEs) or international
companies. However, there are also opportunities arising first from the reconstruction
process itself and, more broadly, from the possibility that investors who are willing to take
the risks of being among the ‘first-movers’ can establish themselves before their more
nervous competitors.
Contrasting private sector strategies
The willingness of businesses to assume these risks depends on their appetite for taking
chances, and this, in turn, is likely to depend on their geographical origin, their sector, and
their individual commercial strategies.
The common factors are, first, that in the immediate aftermath of conflict business
people naturally will look for opportunities that combine relatively small capital
investments with fast and preferably generous returns. Secondly, the companies most likely
to operate in conflict-affected environments are typically ‘juniors’ (to adopt an oil
industry term): smaller or less-established companies that follow a deliberate strategy of
taking high risks in the hope of winning high returns.
Private sector actors 5
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Variations by place of origin
Many analyses of private sector development distinguish between ‘local’ and
‘international’ business as though there were a clear divide between them.13 In practice,
one should think more of a spectrum with small, parochial operators at one end and truly
transnational companies at the other end. Arguably, most companies operating in
post-conflict zones are somewhere in the middle: even local companies typically benefit
directly or indirectly from international trading connections and sources of finance, while
international companies of course need to deal with local suppliers and sub-contractors.
In this respect, the pattern of peacetime business is similar to the pattern of war. Pugh and
Cooper have argued for the need to understand war economies as regional rather than
purely national or local phenomena.14 The same applies to economies ‘in recovery’.
Local businesses
Local entrepreneurs have the strongest possible motivation to set up businesses. As one
successful Bosnian businessman explained to this author in 2003, his original motivation
was very simple: the war had ended, his country was in ruins, and he was ‘hungry’.15 Major
constraints of course included limited access to finance and, in many cases, commercial
expertise.
Although business people who are based in—or come from—conflict-affected countries
have a strong personal motivation to assist with its recovery, they will not put their own
funds at risk unless they are reasonably confident of receiving a return. As Collier points
out, wartime economies are characterised by capital flight, and this may continue even
after the formal cessation of hostilities.16 Local conditions, at least in the short-term, may
not be radically different from the situation during wartime.
Diaspora investors
Diaspora investors have the potential to play a particularly important role. More than
most international operators, they have the local connections and, in many cases, the
personal motivation to contribute to their country’s reconstruction. While living abroad,
they may have picked up valuable expertise, in addition to amassing funds.
In Afghanistan, the two first mobile telephone companies both had diaspora
connections: Afghan Wireless Communications Company is a joint venture between the
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Afghan Ministry of Communications (20 per cent) and the US company Telecommunica-
tions Systems International (TSI), which owns 80 per cent.17 TSI was founded by Ehsan
Bayat, a US-based entrepreneur who was born in Kabul but left for the US in the 1980s.
Roshan, the rival Afghan mobile phone company, is a consortium led by the Aga Khan
Fund for Economic Development (AKFEED), which owns 51 per cent together with a
consortium of international investors.18 The Aga Khan’s Ismaili community is widely
dispersed across Pakistan, Afghanistan and Central Asia and AKFEED is widely respected
for its development initiatives. In 2007 these two phone companies were joined by a third
investor, the South Africa-based MTN.19
While diaspora investment can play an important role, it cannot be taken for granted.
The World Bank’s 2005 report on the Investment Climate in Afghanistan noted that the
total wealth of the Afghan diaspora was estimated at some five billion US dollars, much of
it in Dubai.20 Returnees had played an important role and, in addition to their access to
capital, typically had higher levels of education than business leaders who had never left
the country. However, at least initially, Afghanistan had less success than hoped in
attracting funds from overseas Afghans.
The ‘local connections’ of diaspora investors are not necessarily unproblematic. They
benefit from local knowledge and—often by necessity—may be willing to operate in the
informal economy. At the same time, ‘knowing how to operate’ and ‘dealing with the right
people’ may simply imply a willingness to compromise business standards, for instance by
paying bribes to powerful local figures.
Regional players
Regional players are somewhat similar in that they too benefit from local connections and
sources of knowledge. Regional geographical expansion often fits into their strategic plans,
and they may believe that greater familiarity with local conditions gives them a
comparative advantage over the major international players.
Bosnia’s FDI portfolio is an example. Austria is the leading foreign investor by far, and
this fits in with a wider pattern of Austrian investment in South-Eastern Europe. Austrian
retail banks have played a particularly important role in supporting local economic
recovery. After Austria, the next three leading investor countries are all former Yugoslav
states (see Figure 1): Serbian investment, in particular, jumped dramatically in 2007.
Private sector actors 7
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Afghanistan shows a slightly different pattern: by late 2005 Turkey accounted for more
than a fifth of officially recorded foreign investment which by then amounted to some
US$520m, followed by the US with 17 per cent and China and the UAE with less than 10
per cent each.21 Like Austria in South-Eastern Europe, Turkey appears to be playing an
important role as an expanding regional economy, exploiting a comparative advantage
by operating in relatively high-risk regions in Central Asia. Many of the US investors
may in fact be diaspora Afghans. Afghanistan’s two leading traditional trading partners
account for only five per cent each of officially recorded investment. However, this may
be because firms from these countries are more willing to operate in the informal
economy.
Major transnational companies
Truly global companies with international reputations to defend are unlikely to take the
risk of investing in a small and dangerous market unless they see commensurate ‘global’
opportunities. As will be seen, the extent to which they identify such opportunities
depends, in part, on the sector to which they belong.
Figure 1. Leading FDI stocks in Bosnia and Herzegovina as at December 2007 (em)Source: Data from the BiH Foreign Investment Promotion Agency—www.fipa.gov.ba
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Variations by sector
Industry variables include the scale of the investment needed, the means of getting paid
and the speed of return.22 The following examples illustrate the differences.
Mobile phone companies, like the first swallow of spring, are typically among the first to
invest in conflict-affected areas, even before ceasefires. There are several reasons for this.
First, the scale of investment for mobile phone networks is relatively low (often in the low
hundreds of thousands of dollars in the first instance). Secondly, returns are fast: the
operating companies start getting a return when the first subscriber makes the first call.
The third reason is that many developed markets are already reaching maturity.
By contrast, in war-impeded economies such as the DRC, there may be a pent-up demand
for mobile phones.
Construction companies are among the most active in a post-war setting because of the
obvious need for their services and because—in the case of international companies—they
are typically paid offshore and, to that extent, can claim a degree of financial and
contractual security. However, companies often hesitate to make long-term investments,
for example in the management—as distinct from the construction—of utilities, until they
are more confident of the political and security environment.
Transport and logistics companies in Afghanistan provide an interesting case study of a
sector where entrepreneurs have been able to exploit a first-mover advantage by providing an
essential service with little initial competition and low start-up costs. According to a
benchmarking study produced by the World Bank’s Multilateral Investment Guarantee
Agency (MIGA),23 many logistics companies were able to begin with a modest investment of
a few thousands or tens of thousands of dollars, often operating from a single-room office or
a hotel, and have been able to make hundreds of thousands or millions in return. Profit
margins will fall as conditions improve and competitors enter the market, but the well-
established first movers will continue to enjoy a strong advantage over their competitors.
Petroleum and mining companies go where the minerals are. Many of the most attractive
under-explored new opportunities are in hitherto conflict-affected areas: the DRC is an
obvious example for mining. Extractive industry companies are therefore typically among
the first to enter conflict-affected countries, sometimes including—notably in the case of
the DRC in the late 1990s and early 2000s—countries that are still at war. However, in the
first instance they are more likely to engage in exploration rather than the substantial
investments needed to build and develop mines or oil fields. Also, the companies that enter
Private sector actors 9
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high-risk environments are more likely to be small companies that offer their own
investors high risks in the hope of high returns. Behemoths such as BP, Shell, Exxon or Rio
Tinto are much more sensitive to risks to their reputation because they have more to lose.
Much of the debate on the political economy of conflict has focused on the impact of
companies in the natural resources sectors, particularly petroleum and mining. In the
worst case, oppressive national governments may use income from natural resources to
reinforce their authority—and finance their armed forces—without the need for
accountability to taxpayers. Meanwhile rebel movements in countries such as Angola and
Sierra Leone have used what have been called ‘conflict diamonds’, to finance their military
activities.24 A further concern is the debate about the so-called ‘resource curse’, the pattern
of which seems to suggest that an abundance of natural resources distorts and impedes
national economic development rather than enhancing it.25 Prominent examples that
seem to support the ‘curse’ theory include Nigeria under former President Sani Abacha
and Zaire (now DRC) under President Mobutu Sese Seko.
The major Western international companies are sensitive to these controversies and, as
will be seen below, leading industry associations are trying to address them. At the same
time there has, in recent years, been a trend in which state-owned companies—notably
from China, India and Malaysia—invest in high-risk regions where major Western
companies are reluctant to operate: Sudan is the classic example. The motivation is often
partly strategic—inspired by their governments’ determination to gain access to important
resources—rather than narrowly commercial. Long-term initiatives to address the
extractive sectors’ potential impact on conflict need to involve both Western and
non-Western companies—as well as businesses operating in other sectors.
Banks are among the ‘building blocks’ of economic development but tend to be
risk-averse. Retail banks are less likely to invest until they are confident of a degree of
political and regulatory stability. Standard Chartered Bank does have a record of setting up
in high-risk environments: it was among the first international banks to open branches in
post-conflict Sierra Leone and Afghanistan. That is, in part, because an important part of
its client base comes from diplomats and development specialists. At least in the early
stages of post-conflict development, retail banks typically hesitate to build up their local
client base too rapidly.
Hotels follow a somewhat similar pattern: Hyatt set up an operation in Kabul soon after
the fall of the Taliban in the hope of serving the diplomatic and aid official market.
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Mass tourism—which is notoriously susceptible to security concerns—tends to
develop much later.
Speed and sequencing
It follows from the above that there is a natural sequencing pattern, both in the
quantity of foreign investment and in the form that it takes. Immediately after a
ceasefire, there tends to be a substantial increase in aid, but this tails off over the
following decade as the memory of the conflict recedes and ‘aid fatigue’ sets in.26
The pattern of foreign direct investment (FDI) is somewhat different: there may be a
slight increase in investment flows immediately after the conflict, chiefly from those
seeking a first-mover advantage and those engaged with physical reconstruction.
The first steps will most likely be taken by smaller and less risk-averse companies in
sectors such as mobile phone sellers that have a realistic chance of making rapid
returns. However, the major increase is likely to come some years after the conflict has
ended once the infrastructure has been repaired, the necessary institutions are in place
and it is clear that the conflict is not likely to resume. At this stage, retail banks and
companies in sectors that require substantial initial investments are more likely to take
the plunge. If all goes well, private investment will replace aid as the economy
‘graduates’ from conflict.
Figure 2 illustrates that Bosnia-Herzegovina has followed roughly this pattern after a
particularly slow start: a study of Bosnia’s economic reconstruction by Tzifakis and
Tsardanidis refers to the first 10 years after the Bosnian war as a ‘lost decade.’27 Bosnia’s
prospects have always been limited by the fact that, with a total population of some four
million, it constitutes a relatively small market. The factors that further delayed economic
expansion in the post-war era included: the divisive political framework emerging from
the 1995 Dayton Agreement; a complex and poorly structured regulatory system; the slow
pace of privatisation; high levels of corruption; and the country’s post-socialist legacy as
exemplified by the continuation of the socialist-era Payment Bureaux until 2001.28
The country’s reform programme began to pick up only in the early 2000s and eventually
brought important results. For example, the abolition of the Payment Bureaux paved the
way for the expansion of the retail banking industry, notably including substantial
investments from foreign banks.
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Despite its many problems, Bosnia-Herzegovina may be one of the more fortunate
post-conflict countries, benefiting from—among other advantages—its proximity to the
European Union (EU). Many African countries—even the more successful ones—are less
fortunate. Mozambique, whose civil war came to an end in the early 1990s, is regarded as
one of the more successful post-conflict countries but its recent ODA flows (US$1,611
million in 2006, according to the OECD) far outmatch FDI (US$154 million in 2006
according to UNCTAD).29 The figures for Uganda, another comparatively successful
post-conflict country, are similar: US$1,551 million in ODA in 2006, compared with only
US$307 million in FDI.30
The recent aid/investment figures for the DRC, whose civil war came to an end in 2003,
point to a dramatic influx of aid in the immediate aftermath of its peace agreement.
In 2003, it received US$5.4 billion in ODA, followed by US$1.82 billion in 2004 and
2005.31 By contrast, FDI flows have been much slower. According to revised estimates by
UNCTAD, FDI stocks actually contracted in 2005, although there was an inflow of an
estimated US$180 million in 2006.32 As elsewhere in Africa, mobile phone companies
(including Vodacom and MTN from South Africa and Celtel from the Netherlands) have
been well represented.33 There is no doubt of the DRC’s mineral potential, so FDI in the
mining industry is likely to be especially important. However, would-be investors face
Figure 2. Bosnia and Herzegovina: ODA flows compared with FDI (US$m). Source: Dataon aid receipts from Tzifakis and Tsardanidis, ‘Economic Reconstruction for Bosnia andHerzegovina’, 22; and OECD Journal on Development: Development Co-operation—2007Report, 193. Data on FDI from European Bank for Reconstruction and Development
(EBRD) country statistics, http://www.ebrd.com/country/sector/econo/stats/mptfdi.xls(accessed 10 December 2008).
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considerable political risks, as exemplified by the government’s decision in 2007 to review
61 mining contracts that had been drawn up in the previous 10 years, and were considered
to have been unduly advantageous to investors.34
The DRC’s post-war political institutions are at best in a relatively early stage of
development: it remains a classic case of a post-conflict country that combines high
political risks with the potential for high commercial returns. Against a background of
renewed conflict in eastern DRC in late 2008, it is too early to predict with confidence how
far private investment flows will be able to provide the country with the financial resources
that it needs.
Managing the private sector ecosystem
The 2004 UNDP report on Unleashing Entrepreneurship: Making Business Work for the Poor
adopts a metaphor from the natural world when it refers in several places to the existence
of a private sector ‘ecosystem.’35 In a similar vein, economic analysts often refer to a
country’s ‘investment climate’, a term which the World Bank defines as the ‘location-
specific factors that shape the opportunities and incentives for firms to invest productively,
create jobs and expand.’36
Certain climates favour particular commercial ecosystems that, as in the natural world,
contain larger, smaller and micro-entities as well as predators, parasites and, no doubt, the
equivalents of dung-beetles. The challenge is to create a symbiotic private sector ecosystem
rather than a predatory one or, worse still, a commercial desert. In a post-conflict setting it
is particularly important to create job opportunities and improve livelihoods in rural
areas—and this as an area that is often neglected.37 The task of meeting these challenges
demands the collaboration of a variety of actors: business and civil society as well as
national and international policy-makers.
In defining appropriate policies, there may be a role for certain kinds of aid
conditionality, particularly if these are intended to avoid destructive economic patterns
that increase the risk of a resumption of conflict.38 However, particularly in
conflict-affected societies, the wide range of variables means that it is difficult to define
precise or predictable formulae. There is therefore no unique path to recovery based on the
IMF or any other model.39 Nevertheless, certain patterns have begun to emerge.
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The central role of the state
The first is the key role of the state in creating an enabling environment for the private
sector. Few observers now favour the minute regulatory involvement characteristic of
old-style socialist administrations. There is also a near-consensus among business people
as well as ordinary citizens on the central role of the state in setting rules, particularly
where these govern the provision of physical security, the rule of law, property rights and
financial frameworks.
Where national governments are unable to provide physical security, the continued
presence of multinational security forces—such as those co-ordinated by UN
peacekeeping operations (UNPKO)—is a matter of economic as well as political
importance. However, investors understand as well as—or better than—politicians that
external intervention is at best a temporary solution pending the emergence of a viable
political settlement.
Similarly, the repair of physical infrastructure such as roads or electricity supplies is an
important first step to recovery. However, long-term economic as well as political recovery
demands the creation of effective national institutions and regulatory frameworks. As the
British economist Tony Addison puts it, it is a lot easier to ‘pour concrete’ than to establish
effective and accountable institutions.40 However, the latter is what is required to restore
economic confidence in post-conflict environments.
After the end of the Ugandan civil war in 1986, the Kampala Government took a series
of steps to restore and reinforce property rights. This included returning property owned
by Asians who had been expelled in 1972. At the time this was a painful measure because,
in the meantime, the properties concerned had been occupied by local people. However,
this approach brought results. By 1986 two thirds of Ugandan private wealth was held
abroad and by the mid-1990s Uganda was attracting substantial repatriation, and this
contributed to private sector investment in the country’s coffee boom.41
The key factors that make for a business-friendly ‘enabling environment’—notably
security, anti-corruption measures and the rule of law—are as important to local
entrepreneurs as they are to international companies. Indeed, World Bank research shows
that small and informal firms often suffer more than medium and large companies from a
poorly developed investment climate.42 Not surprisingly, small and informal firms find it
harder to obtain loans from a formal financial institution. They are also less likely than
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larger firms to be confident that courts will uphold property rights, or to believe that
regulations will be interpreted consistently.
Local entrepreneurs and SMES play a particularly important role in post-conflict
recovery because, if all goes well, they are likely to provide one of the main sources of
employment. Conversely, if they fail to benefit, the legitimacy of the post-conflict political
order will come into question. In both Iraq and Afghanistan, there have been complaints
that decisions on the award of reconstruction contracts tended to favour large
international companies at the expense of local competitors. In the DRC one of the most
sensitive—and potentially explosive—questions for the mining industry concerns the
future status of artisanal miners.
International advisors may be able to play a constructive role by advising on the most
important reform measures. For example, the World Bank’s Foreign Investment Advisory
Service (FIAS) conducted diagnostic reviews of the investment climate in Sierra Leone and
Liberia.43 Both reports emphasised the need for reforms to the local legal frameworks.
External advisors have no mandate to engage in partisan political debate. What they can
do is to help prepare the analysis and lay out the options on which national leaders must
decide.
The timing of reforms
Collier argues that there is an unparalleled opportunity for reform in the relatively fluid
period in the immediate aftermath of conflict: it is important to seize it, and the Ugandan
case study cited above is a positive example.44 In a similar vein, Mendelson-Forman and
Mashatt refer to the ‘golden hour’, a term borrowed from the medical literature
representing ‘a crucial moment that could mean the difference between life and death for a
critically ill patient’.45 They argue that there is also a ‘golden hour’ in the world of
post-conflict transformation when—early on in the reconstruction process—the
international community has the opportunity to ‘lay a foundation for a full economic
recovery from conflict or to set the path for a recurrence of fighting’.46
Whether, or not, one accepts the ‘golden hour’ analogy, there is growing agreement on
the need to embark on legal and regulatory reform sooner rather than later. Stating that
this is desirable is not to underestimate the difficulties. In interviews in Bosnia in 2003, this
author encountered the view that earlier reform would have been difficult or impossible
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in the fraught political conditions of the mid- to late 1990s.47 A counter-argument is that it
is harder to implement reforms later on because delays make it easier for those with
post-conflict vested interests to entrench their positions.
With both local and international investors in mind, Schwartz and Halkyard therefore
argue for the need to ‘eliminate as many regulatory risk barriers to entry as possible; and
avoid complex bidding arrangements meant to maximize the revenues from licenses,
concessions or asset sales.’48 The priority is to create a regulatory environment that
promotes private investment, competition and consumer benefits.
Promoting FDI
As discussed above, the pace of FDI is likely to be relatively slow in the immediate
aftermath of conflict, and this raises the question what can be done to accelerate it.
The most important measures are the same as for domestic investors: legal institutional
and regulatory reform to improve the security of property rights. At the same time there is
a continuing debate on the extent to which special incentives may play a role in attracting
foreign investment.
In a discussion on the role of tax incentives in attracting FDI, Morisset argues that tax
incentives are less important than such factors as ‘basic infrastructure, political stability
and the cost and availability of labour’.49 This is not to say that they are irrelevant: ‘tax
incentives affect the decisions of some investors some of the time’.50 They may be among
the instruments that host governments can include in their portfolio, but are by no means
the only tool that they have to attract FDI, much less the most important one. This general
truism will apply all the more in post-conflict environments.
A similar point applies to political risk insurance (PRI). In a 2004 study on Bosnia,
I argued that PRI was most useful in cases where the post-conflict environment had
improved, and investors had already identified attractive opportunities.51 In those
circumstances, PRI could help tip the balance between risk and opportunity in favour of
going ahead with investment. It therefore made the greatest difference in the early 2000s,
by which time this tipping point was in sight, rather than in the mid- to late 1990s when
the overall environment was too risky, or the mid-2000s by which time many of the worst
problems had already been solved.
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In the Bosnian case PRI provided by MIGA was particularly useful in facilitating
investment by Austrian retail banks, whose local branches were then able to serve as a
source of credit to emerging local companies. MIGA has sought to play a similar role in
Afghanistan through the Afghanistan Investment Guarantee Facility (AIGF). The facility
includes features that are designed to facilitate the development of the local private sector.
For example, a portion of AIGF can be used to insure transactions that involve loans by
a foreign financial institution or the local branch of a foreign bank to local Afghan
businesses.52 The objective is to foster a commercial ecosystem in which international and
local enterprises complement each other.
The private sector and peacebuilding
Overall, the most important contribution that companies can make to peacebuilding is to
concentrate on the responsible fulfilment of their core commercial activities—whether
these concern telecoms, financial services or mineral development—thus increasing wealth
and creating the economic conditions for post-conflict recovery. However, wealth creation
is not in itself sufficient to resolve conflict: indeed it may actually help create the
conditions for conflict if the benefits of short-term economic recovery are unevenly
distributed. The question therefore arises whether companies can do more to contribute to
peacebuilding.
In recent years, there has been increased emphasis on the need for Corporate Social
Responsibility (CSR) or, to use the term favoured by the OECD, Responsible Business
Conduct (RBC). Whatever term is used, it should be clear that the responsible business
agenda must cover companies’ mainstream commercial activities—for example their
treatment of employees and the consequences of their engagement with government
agencies—and not just well-meaning but peripheral philanthropic sponsorships.
Business responsibility in weak governance zones
The challenges of conducting business responsibly are all the greater in countries and
regions where governance standards are poor: these obviously include countries that have
been—or still are—affected by conflict. The OECD has drawn up a Risk Awareness Tool for
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Multinational Enterprises in Weak Governance Zones, and this emphasises the need for
‘heightened managerial care’ including, for example, extra measures to ensure that
companies are fully briefed on the backgrounds and connections of their business
partners.53
Both the Risk Awareness Tool and the OECD’s Guidelines for Multinational Enterprises
are voluntary for companies, as are the UN Global Compact’s ten principles.54 In recent
years, NGOs in particular have called for binding international regulation to govern the
activities of international companies.55 Significant progress has in fact been made in the
field of anti-bribery legislation: all OECD member states now have laws establishing extra-
territorial jurisdiction over companies from their countries that pay bribes to foreign
officials, whether the bribe is paid at home or abroad.56 The 2003 UN Anti-Corruption
Convention has established the foundations of a truly global anti-corruption regime.
By contrast, progress in other fields—notably human rights—remains slow.
In June 2008 John Ruggie, the UN Secretary General’s Special Representative on
Business and Human Rights, presented a report entitled Protect, Respect and Remedy to the
UN Human Rights Council.57 Ruggie emphasises the need both for business to respect
human rights and for states to protect potential victims. However, he has stopped short of
calling for an international treaty on business and human rights, partly because of the
difficulties in enforcing it.58 In practice, voluntary initiatives and international regulation
can—and should—complement each other rather than being seen as opposites.59
The need for ‘conflict sensitivity’
In any case, regardless of the state of the international legal regime, companies—like
public-sector agencies—have an enlightened self-interest in ensuring that their projects
and policy interventions reduce the risk of conflict rather than exacerbating it.
The oil, gas and mining industries have come under particular scrutiny both in relation to
the possibility that they could—directly or indirectly—help finance conflict and because of
their wider developmental impacts. Extractive industry companies typically spend millions
of dollars on exploration, with uncertain returns, but once projects come into production
the profits are enormous. However, there are limited employment opportunities for local
people, particularly in regions with low educational standards. The main beneficiaries all too
often turn out to be national governments and companies rather than the local communities
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that suffer most from environmental impacts. The local conflicts associated with the
petroleum industry in Nigeria’s Niger Delta are now regarded as a classic illustration of
negative social impacts: the challenge for petroleum and mining companies is to learn from
painful past experiences and to avoid similar scenarios in future.
By contrast, the business model—and the social impacts—of the mobile phone industry
are completely different. As noted above, initial investments are lower, financial returns are
faster and, of course, the local customer base is much wider. Mobile phones assist
micro-entrepreneurs, for example, by making it easier to check market prices. In doing so,
they make a contribution to broad-based economic development which may genuinely
alleviate the risks of conflict.
Many of the most important lessons for business derive from the experience of
development agencies. In her groundbreaking book Do No Harm, Mary B. Anderson
focussed on the role of aid organisations. Since then, she and her colleagues have adapted
many of the principles that she developed for aid agencies to the private sector.60 She
points out that in conflict situations, companies can hardly expect to be neutral. There are
always ‘winners and losers’. Almost everything that companies do will have an impact on
the underlying conflict one way or another. It is therefore important to identify
‘connectors’—actions and projects that will bring people together rather than dividing
them. Employment is often a particularly sensitive issue in terms of who benefits most
from job opportunities and where they come from. Both aid agencies and companies need
to design their recruitment policies accordingly.
Specifically with regard to the private sector, the United Kingdom-based NGO
International Alert likewise has been promoting the principles of conflict sensitivity,
initially with a particular focus on the extractive sectors. Publications include a
Conflict-Sensitive Business Practice Toolbox for Extractive Industries, and a follow-up
publication for engineering contractors.61
The principles of conflict-sensitive business practices and development are becoming
better and better understood: the major challenge is how to implement them most
effectively. Within companies, one of the biggest challenges is to ensure that they are
understood and fully applied by operations managers and not just by CSR specialists.
More broadly, there is an obvious need to ensure that the principles of conflict sensitivity
are applied not just by larger Western companies but also by smaller and niche companies
from all parts of the world, as well as by local entrepreneurs. This dissemination process is
only just beginning.
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Collective business initiatives
Collective business initiatives play an important role in helping to raise standards
and promote best practice, both internationally and locally. Examples with a bearing on
post-conflict development include the banks that have adopted the Equator Principles, a
set of guidelines for making project financing decisions.62 These include a commitment to
adopt the International Finance Corporation’s (IFC) social and environmental
performance standards when making project financing decisions. Meanwhile, the UN’s
Global Compact initiative has played an important role both in giving advice on the
principles of conflict risk assessment, and in promoting public-private policy engagement
on how to promote responsible business in conflict-affected areas.63 At the same time,
industry associations—such as the International Petroleum Industry Environmental
Conservation Association (IPIECA)—are producing their own guidance documents for
companies operating in conflict zones.64
Collective business initiatives can also play a valuable advocacy role at the local level.
Individual business people—such as those in the former Yugoslav successor states—
frequently complain of a lack of understanding by local and national administrations. In the
former Yugoslav states, this is the legacy not so much of conflict as of the socialist era that
preceded the conflict. Rather than taking the measures needed to stimulate business in the
first place, overstaffed local administrations have placed more emphasis on raising taxes to
ensure that they have sufficient income to avoid town-hall redundancies. Part of the answer
may come from the development of genuinely representative business associations that are
better placed to articulate private sector concerns and propose solutions.65
SMEs are often under-represented in political dialogues on governance and economic
reforms, in part because the associations that represent them are poorly organised and
have limited political clout. In its 2006 assessment of Liberia’s post-war investment
prospects, the FIAS pointed to the need for a ‘transparent and institutionalised process’ to
establish dialogue between the government and the private sector.66 Existing Liberian
business associations tended to be aligned on both ethnic and sectoral lines and many
appeared to face internal governance problems.
In research visits to Montenegro and Georgia (both of which are transitional and—at
least to some extent—conflict-affected economies) conducted on behalf of the US
development agency CHF International in 2006, this author was struck by the comparative
neglect of the agricultural sector.67 The reasons in part seemed to stem from the priorities
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of the metropolitan elites leading the two countries’ national administrations. Both there
and in many other countries the agricultural sector is poorly represented in national policy
discussions, and this is all the more damaging for the obvious reason that it provides one
of the main sources of livelihoods in rural areas.
Business and conflict resolution
While the prime role of companies is to concentrate on their core businesses, there may be
questions concerning their ability to play a more explicit part in conflict resolution. These
questions are sensitive ones. It is understood that business associations are entitled to
lobby governments concerning, for example, tax regimes. However, neither individual
companies nor business associations can make a plausible claim to a democratic mandate,
and it is therefore questionable whether they can claim the popular legitimacy needed to
justify a wider political involvement. In the worst case, they run the risk of being accused of
attempting ‘regime capture’—distorting the political process in order to advance the
personal interests of elites who hold narrow views of their political and economic
responsibilities. In this sense, ‘regime capture’ was, for example, a feature of Slobodan
Milosevic’s Serbia.
However, while such warnings need to be taken seriously, there are positive examples of
business playing a constructive peacebuilding role. One case comes from Northern Ireland,
where the local branch of the Confederation of British Industry (CBI) made an important
contribution by spelling out the economic consequences of conflict to rival leaders, and
introducing the notion of a ‘piece dividend’ into the local political vocabulary. 68 Similarly,
in the early 1990s South African business helped facilitate the transition from the apartheid
regime to democracy by fostering communications between rival political parties.69
In Colombia business-led peace initiatives have made an important contribution at the
local level: for example, by changing to a co-operative business model, promoting public
policy dialogue and championing sustainable development in deprived areas in an attempt
to address the economic sources of conflict.70
Business is most effective when it avoids the appearance of partisanship in the sense of
supporting one particular actor or political party, but instead points to the economic costs
of failing to end conflict—and to the dividends that accrue from achieving peace.
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Policy implications: changing paradigms
War is the ultimate zero-sum game: winners take all, often including the lives as well as the
livelihoods of their opponents. By contrast, the paradigm for a sustainable business is a
series of repeatable transactions from which both sides benefit.
The winner-takes-all paradigm does not disappear when a peace treaty is signed. War
is politics by other means: all too often politics is war by other means. In this sense
economics also may be a form of war: the political control of economic resources to
favour particular communities or individual rent-seekers at the expense of the wider
community. The Afghan warlords’ dominance of local trading networks is one example.
The ethnic-political-commercial nexus that controlled parts of Bosnia long after the
fighting ended is another; and the continued influence of Kosovo’s underground
networks supported by political interests is a third example. The ultimate objective of
economic policy-makers must be to change the war paradigm in favour of a model of
business engagement that is based on co-operation rather than conflict, and that is
therefore truly sustainable.
In order to achieve this shift, government policy-makers and development specialists
need to factor private sector concerns into their calculations at every stage. This requires
a nuanced view of the many different kinds of private sector actors, including their
approaches to risk, the ways that they interact and their various contributions to
economic recovery. Perhaps the most important single requirement is to focus on the rule
of law and the development of an equitable regulatory environment at the earliest
possible moment, and not as an afterthought once the reconstruction of physical
infrastructure is under way. Meanwhile, companies themselves need to take a more
sophisticated view of their own contributions to peacebuilding, learning from the
development agencies’ soul-searching on the need for conflict sensitivity in all aspects of
economic development.
Finally, all parties require a hard sense of realism. Private sector actors are neither the
source of all ills nor the solution to all dilemmas. Private sector development can alleviate
some post-conflict problems, and no lasting economic recovery is possible without it.
At the same time, it needs to be remembered that peace processes are inherently and
inevitably political. Skilful economic initiatives can support—but not replace—the
political process.
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AcknowledgementsThis article is based on a background paper commissioned by the United Nations DevelopmentProgramme in connection with its report, Post-Conflict Economic Recovery: Engaging Local Ingenuity,Crisis Prevention and Recovery Report 2008, UNDP Bureau for Crisis Prevention and Recovery,New York. I am particularly grateful Karen Ballentine, who commissioned the original paper, and toan anonymous Conflict Security and Development reviewer for their advice and suggestions. I retainresponsibility for all errors of fact or judgement.
Endnotes1. On the potential complexities of aid impacts see
Anderson, Do No Harm.
2. Barbara, ‘Nation Building and the Role of the Private
Sector’, 591.
3. Pugh, ‘Post-war Economies’.
4. Bray, Public-private Partnership, 2.
5. Banfield, Gunduz and Killick, Local Business, Local
Peace, 2.
6. Nenova and Harford, ‘Anarchy and Invention’, 2.
7. See, for example, Berdal and Malone, Greed and
Grievance; Collier and Hoeffler, Greed and Grievance in
Civil War; Ballentine and Sherman, The Political
Economy of Armed Conflict; Berdal, ‘Beyond Greed and
Grievance’; and Banfield, Gunduz and Killick, Local
Business, Local Peace. Collier, Economic Causes of Civil
Conflict.
8. UN Panel of Experts, Letter Dated 15 October 2003.
9. For a review of DDR policy issues, see UNDP, Post-
Conflict Economic Recovery, 65–73.
10. Ohiorhenuan, Challenge of Economic Reform, 17.
11. Lister and Pain, Trading in Power, 1–2.
12. See Large, Corruption in Post-war Reconstruction; Le
Billon, ‘Buying Peace or Fuelling War’; Galtung and
Tisne, ‘Integrity after War’.
13. See, for example, Banfield, Gunduz and Killick, Local
Business, Local Peace, 16–35.
14. Pugh and Cooper, War Economies in a Regional Context.
15. Interview conducted in Vitez, Central Bosnia, November
2003.
16. Collier, Post-conflict Recovery, 7.
17. Bray, International Companies and Post-Conflict Recon-