Enhancing the private sector contribution to post-war recovery in poor countries:part 1:comparative analysis

Enhancing the private sector contribution to post-war recovery in poor countries:part 1:comparative analysis

Reassessing means of facilitating private sector contribution to post-war recovery

Violent conflict has become more frequent in developing countries in the last two decades, and international support for peace making has become more important. Yet, post-war reconstruction in these countries has proven to be difficult and prolonged despite high levels of foreign aid. This paper by Bruck, FitzGerald and Grigsby analyses the duration and nature of post-war reconstruction in aid-dependant countries and studies the effectiveness of international cooperation in supporting reconstruction efforts. How much have post-war recovery policies contributed to the building of sustainable long-term development? Is monetary stabilisation – advocated by international lenders – a sufficient condition for effective post-war reconstruction and reduction of poverty levels? What is the role of the private sector in the reconstruction process?

To answer these questions, the paper presents a comparative analysis of Nicaragua and Mozambique; two agricultural economies that have undergone severe ideological civil wars and that have received large volumes of aid. The inheritance of the wartime economy in both countries has been a key constraint on post-war growth, especially through the damaged commercial networks, the loss of trust and the weakening of market institutions. Foreign aid has underestimated the importance of these institutions and has failed to design and support reconstruction policies specific to the post-war situation.

The main argument is that private sector behaviour determines the speed and sustainability of recovery and that therefore, civil and economic institutions should receive priority funding by donors and governments to accelerate post- war growth and poverty reduction. Findings include suggestions that:

  • In agrarian economies, post-war reconstruction based on small farmers can be more rapid as they are able to respond rapidly to access to land and labour. In addition, better redistributive effects can be obtained reducing poverty more rapidly
  • The extent of the “peace dividend” - reduction of military expenditure and the redirection of resources towards civilian production – may be much less than expected, constraining production recovery and delaying reduction in poverty
  • In countries with a reduced export capacity, external debt servicing limits the capacity to translate reduced military expenditure into increased social expenditures and represents a very high burden on the economy making reconstruction a more difficult process
  • The clear sequencing but gradual implementation of government reforms, in the construction of economic institutions with a broad supporting consensus seems essential to the recovery of the private sector after a war
  • A sustainable growth process requires attainment of solvency in three dimensions: the external sector, the fiscal sector and the private sector.

Policy implications include the need to:

  • Shift international donors emphasis from finance towards production, especially to poor farmers in war-affected rural areas
  • Suspend the principle debt payments for countries in post-conflict reconstruction to avoid bilateral aid being diverted to maintaining multilateral debt service
  • Relate the “highly indebted poor countries” (HPIC) initiative to post- conflict reconstruction to maintain health and education commitments and to reduce private sector uncertainty
  • Focus structural adjustment assistance on the strengthening export capacity and the financial sector
  • Coordinate government and donor aims in order to lay foundations for long- term growth (combining asset rebuilding, infrastructure improvement and private sector development programmes) and to reduce inter-group and inter-regional inequality.
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