THe reconstruction of wartorn economies, and Peacebuilding operations

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THe reconstruction of war-torn economies, and
Peace-building operations

• Presentation at JBIC Research Institute
• Tokyo, January 10, 2002
• Jonathan Haughton
• Suffolk University and Beacon Hill Institute
• jhaughto_at_beaconhill.org
• http//mail.beaconhill.org/j_haughton

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three questions

• How much special attention should aid agencies
  pay to post-war reconstruction?
• How, if at all, does post-war economic
  reconstruction differ from the normal problems
  faced by aid donors wishing to foster economic
  development?
• What role does, and might, Japan play in
  providing development assistance to war-torn
  economies?

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Underlying goals

• Set the war-torn economies on the path to
  sustainable development.
• So must determine what policies are needed, and
  in what order, to move a war-torn economy from
  devastation to a path of sustainable economic
  recovery.
• Also,set out the potential role of aid donors in
  this process.

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Organization of ideas

• How serious is war?
• Characteristics of war-torn economies
• What needs to be done?
• Sequencing reconstruction
• Japanese aid to war-torn economies
• Should Japanese policy change?

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Basic facts

• 8 million died since 1990 130 million
  war-related deaths in 20th century.
• Half of the 20 poorest countries experienced
  major conflict in past decade
• gt40 countries in conflict since 1970
• End 2000 14 million refugees, 22 million of
  concern to UNHCR.
• More details in Table 1.

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Which economies are war-torn?

• 19 countries at least 0.5 population dead
• 9 countries, at least 5 of population dead
• More than 8 of population died in Afghanistan,
  Angola, Cambodia, Rwanda

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Refugee levels not falling

• In short, there is a problem that needs to be
  addressed.

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Generalizations about wars 1

• Drawn out, no clear end
• Uganda Amin 1971 Obote 1979 Museveni 1986
  still resistance in north.
• Implication Need clear winner (but include
  opposition too contrast Uganda with DRCongo
  under Laurent Kabila, or Liberia under Charles
  Taylor).
• Civil war hard to predict
• Prevention would be ideal, but it is rarely
  possible.
• Pre-war government often suppresses opposition
• Shows hardening of attitudes.

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Generalizations about wars 2

• Ethnic dimension in African wars, not elsewhere
• But religious differences sometimes important
  elsewhere. Ethnic and other divisions often
  emphasized by warring parties (e.g. Bosnia).
• Government breakdown in half of wars
• Yet sometimes government remains intact (e.g.
  Ethiopia)
• Outside powers often meddle
• U.S. and S.U. in cold war era now local powers
  (e.g. Rwanda in Congo).
• Implication Need to get outsiders to withdraw
  (e.g. Vietnam in Cambodia).

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Characteristics of war-torn economies 1GDP falls

• Investment shrinks
• Educational system weakened
• Infrastructure neglected
• Inputs (e.g. fertilizer) less available
• Trade becomes risky
• yet population continues to grow

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Characteristics of war-torn economies 2people
are displaced

• Refugees and Internally Displaced leave quickly,
  return quickly
• E.g. Mozambique, 1.5 m refugees (pop.12m)
• E.g. East Timor quarter of population fled to
  West Timor in 1999 most returned in 2000.
• Issue how help without creating dependency (e.g.
  Rwanda).
• Brain drain
• Issue try to lure back?
• Cambodian resentment Uganda success
• Remittances useful (El Salvador)

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Characteristics of war-torn economies 3security
improves slowly

• Weak police, resentful losers, suspicious
  population
• E.g. El Salvador Uganda not 100 settled
• Note Difficult to rebuild police (e.g. El
  Salvador)
• Demobilization need not create disorder often
  spontaneous
• E.g. Vietnam, Uganda (1992- ).
• Note Dont do prematurely recognize cost, and
  hence small peace dividend.
• Landmines 100m worldwide, 1,000 to clear
• Problem in Cambodia, Afghanistan.
• Belgium case.

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Characteristics of war-torn economies
4infrastructure in poor repair

• A tempting target
• E.g. Indonesian military in East Timor, 1999
• Problems more of neglect than destruction
• Donors like to fund bricks and mortar
• But recurrent cost problem remains

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Characteristics of war-torn economies
5macroeconomic imbalance

• Inflation
• Usually gt20, rarely gt100. Dollarization. Easy
  to end by reducing money supply growth.
• E.g. Cambodia 1993 115. 1994 1.
• Exchange rate overvaluation
• Due to e.r. restrictions. Easy to fix.
• Weak banks
• Burdened by bad loans. Weak supervision.
• Corollary Informal credit is important see
  Uganda case.
• Banking system relatively more important in
  richer countries, such as Bosnia

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Characteristics of war-torn economies 6low
revenue mobilization

• Vicious circle smaller tax base, tax rates
  raised, evasion increases
• Capacity of tax offices declines
• Helps explain inflation, large foreign debt
• Can use excises, sale of property more, but rapid
  increases in revenue mobilization are unrealistic
• E.g. World Bank pushed Uganda too hard, weakened
  tax office
• Tradeoff donor support helps, but weakens tax
  effort, as in East Timor

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Characteristics of war-torn economies 7economic
structure changes

• Hits high-asset, high-transaction-cost sectors
• Subsistence agriculture maintained, industry and
  trade shrink
• Implication With peace, industry and trade
  should rebound fast (but sometimes do not
  Mozambique, Ethiopia)
• Collier Capital stock may be too large and need
  to shrink, even after peace
• Implication Investment may be slow to recover
  after war is over.

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Characteristics of war-torn economies 8social
services break down

• Unlike most LDCs IMR rises, life expectancy
  falls, educational enrollments fall, malnutrition
  rises
• Health role of migration, weakened public
  health, emigration of physicians
• Education teachers unpaid, flee countryside
• Food entitlements fall crops destroyed or
  confiscated, inputs hard to get

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Characteristics of war-torn economies
9institutions weakened

• As mentioned above (health, education, tax
  system, banks and their supervision), plus
• Inexperienced, demoralized civil service
• E.g. Afghanistan lack phones, desks, materials
• E.g. DRCongo teacher pay
• Property rights eroded
• Social infrastructure (trust, networks)
  weakened
• Courts/judicial system
• Statistical service
• Agric. Extension, RD
• Note Tradeoff for donors do job now, or create
  capacity.

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Characteristics of war-torn economies 10some
plusses

• Donor interest
• Afghanistan, East Timor not DR Congo
• Emigrés
• War-time entrepreneurs
• "the extreme void ... in a way makes
  institution building easier (comment on
  Cambodia)

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What needs to be done, and in what order?

• Conventional view Main foci of post-war
  reconstruction should be
• Humanitarian relief
• Establishment of security
• Political rebuilding (incl. Elections)
• Physical reconstruction

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The new wisdom

• Peace and development are complementary.
• Note Japans Ministry of Foreign Affairs
  supports a comprehensive approach.
• Implication Need to think about, and work on ,
  economic reconstruction from early on.
• Example El Salvador

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Traditional emphases

• Lake training, resettlement, rural
  reconstruction, aid, debt relief, IFR,
  performance criteria pragmatism OK
• Kumar political, social, economic
  rehabilitation macroeconomic stability
• Ball checklist
• Collier et al. repatriate capital labor,
  signal credibility
• Kyle markets slow to develop.

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Whats missing?

• Sharpening of and resolution to debates there is
  considerable controversy
• Sense of priorities/sequencing

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Debates 1

• Common wisdom
• Role of government in post-war reconstruction
  should be large (Stewart)
• Markets feeble

• My view
• Post-war govts. lack skills, should be small
  (Collier)
• Allow markets to spring up (Pecs Kyle)

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Debates 2

• Common wisdom
• Manage exchange rate, creating undervaluation
  (Collier), or moving slowly from overvaluation
  (Kumar).

• My view
• Neither. Cut trade restrictions, and grope for
  sustainable e.r. as quickly as possible.

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Debates 3

• Common wisdom
• Encourage émigrés to return (Lake, Collier)
• Early land reform

• My view
• No. They are hard to integrate, useful source of
  remittances.
• Some will drift back later.
• Land reform takes time

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Debates 4

• Common wisdom
• Set up a Fund for War-Torn Economies

• My view
• No. The Bretton Woods Institutions and others
  should build the needed flexibility into existing
  programs, even to countries in arrears

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Debates 5

• Common wisdom
• Donors should attach conditions to aid.

• My view
• At first its unrealistic.
• Keep later conditions simple and credible.

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Debates 6

• Common wisdom
• Governments should undertake difficult reforms
  first, to establish credibilty.

• My view
• No. If governments consistently make good
  decisions, credibility will follow. They need to
  build capacity to tackle hard issues.

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sequencing

• Everything seems so urgent.
• But financial, administrative, managerial
  resources are limited, so need to set priorities.
• See paper for details. Comes from logic, and
  observation of other cases.

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Non-controversial

• Early on
• Secure main ports, roads
• Food aid, if required
• Tools and seeds
• Later
• Rehabilitate infrastructure, but selectively

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More controversial

• Short-run
• Debt service not a priority later renegotiate
• Macroeconomic stability urgent, easy
• Revenue mobilization urgent
• Make exchange rate convertible for current a/c,
  to foster trade
• Early demobilization unrealistic police reform
  urgent

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..

• Short-run (cont.)
• End food aid, seed and tools early, w/in 1 yr.
• Rarely necessary to spend to bring refugees
  home (e.g. Rwanda, Kosovo, E. Timor)
• Dont oversell donor coordination

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controversial

• Medium-term
• Bank reform can wait a year or two
• Educational rehab can wait
• Private health care will fill most of void,
  except clear public health needs (e.g. cholera)
• Land reform is not urgent

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Case study 1 Uganda

• Nat. Resist. Movement to power in 1986 recovery
  slow until 1992 reforms
• World Bank aid to MoFinance, Central Bank
  successful also to roads.
• WB projects not successful in
• Health medicines sold for private profit
• Education only37 of funds got to schools
• Why? Weak ministries inadequate dialog.

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Case study 2 East timor

• UNTAET constituted functioning government,
  restored law and order, rehabilitated schools,
  roads, power, port
• UNTAET criticised for inadequate attention to
  building local capacity seen as distant,
  arrogant. A two year window?

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Case study 3 El salvador

• WB successful in donor coordination,
  macroeconomy, community schools
• Efforts to establish professional local police
  were half successful
• Slow judicial reform
• Politicised appointments
• Donor aid below expectations

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Case study 4 mozambique

• Finnish health project in Manica province was
  especially successful. Why?
• Early start.
• 17 year commitment.
• Focal donor.
• Appropriate scale.
• Private subcontractor.

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Japanese aid to war-torn economies

• Aid to War-torn economies is large (1.6bn), but
  a relatively modest 12 of all aid

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Explaining the Japanese aid pattern

• Goals of 1992 Charter
• alleviate famine and poverty, on humanitarian
  grounds and
• encourage the economic development of LDCs, as a
  way to encourage peace and prosperity in an
  interdependent world.
• Emphasis on self help.
• No mention of war-torn economies.
• Medium-term Policy, 1999, adds
• Need for policy dialog.
• Emphasis on human security.
• Brief mentions of war-torn economies in context
  of Africa, and former Yugoslavia.

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Examples Japanese aid to peace building

• Kosovo 1999. Direct fund support for NGOs
  providing housing, repair kits, medical supplies.
• Nigeria 2001. Funding for pre-election conflict
  management prevention conference.
• 2001 Aid for refugee relief.
• For Afghanistan, Tajikistan, Pakistan, Colombia,
  Rwanda, Indonesia, Ethiopia, Eritrea and
  FYRMacedonia
• Since 1972, sent 1,500 defense force personnel
  abroad as part of peacekeeping operations.
• To Angola, Cambodia, Mozambique, El Salvador,
  East Timor, Rwanda and Bosnia.

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three questions revisited 1

• How much special attention should aid agencies
  pay to post-war reconstruction?
• Answer A lot
• Note Donor patience essential as
  rehabilitation takes a generation.

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three questions revisited 2

• How, if at all, does post-war economic
  reconstruction differ from the normal problems
  faced by aid donors wishing to foster economic
  development?
• Answer Key difference is weakness in
  institutions.
• Note Capacity building is difficult, and
  successful models are elusive.

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three questions revisited 3

• What role does, and might, Japan play in
  providing development assistance to war-torn
  economies?
• Answer Not clear that role needs to be
  redefined.
• Key Issue Where is Japans comparative
  advantage in aid giving?
• Note Separate aid as finance from aid as
  information