In the aftermath of war securing economic stability and reviving institutions are among the first priorities. As a CFR Working Paper I wrote last year noted, “negative economic shocks of just 5 percent can increase the risk of a civil war by as much as 50 percent in fragile environments. Additionally, donor assistance, which can account for 20 percent to as much as 97 percent of a country’s GDP, is unsustainable in the long term. Building local business capacity and supporting homegrown entrepreneurs can help curb this risk.” The private sector plays a pivotal role as a “stabilizing force.”
A recent IMF Working Paper took a look at post-conflict economies and found some eyebrow-raising numbers that show just how hard it is to stop the cycle of violence and the relapse into conflict. “Countries emerging from a conflict struggle to break the curse of Sisyphus, with 20 percent relapsing into a subsequent conflict in the first year and 40 percent within five years after the end of conflict, primarily because of the economic legacy of conflict and because the factors that trigger violence in the first place—such as dysfunctional institutions and social grievances—remain unresolved.”
It is not only that reviving the economy is a challenge following the on-the-ground destruction of war. It is that the uncertainty ahead and perceptions of instability depress future economic expansion. Or as the IMF paper states succinctly, “the risk of a new bout of conflict inhibits economic growth.”
According to the Working Paper research, which assessed 146 cases of conflict in 94 countries, “real GDP per capita growth barely accelerates after the end of a conflict, with an average of 1.5 percent a year over the subsequent five years, and shows significant cross-country variation, ranging from -10 percent in Liberia to 20 percent in Bosnia and Herzegovina.” Among the factors that make a positive difference in spurring growth: human talent and the durability of institutions. Notes the paper, “we find that global real GDP growth and net foreign direct investment (FDI) flows are statistically significant factors, with economically large effects on the post-conflict growth process.”
What might actually not help, despite expectations and customary practice: foreign aid, peacekeeping presence, and IMF-backed programs. This is in part because the economies may not be able to absorb the influx of foreign donor dollars and in part because of a possible signaling effect. Write the Working Paper’s authors, “UN peacekeeping operations do not appear to be a significant factor in determining the strength of post-conflict economic growth. This, we believe, is related to the relationship between the risk of conflict recurrence and international peacekeeping operations, which may signal a greater level of risk that in turn depresses economic activity.”
So what does work? The working paper finds there is no one magic answer to stopping conflict’s return, but rather an assembly of solutions that combine to make a difference. The key is to build conditions that can allow growth to happen while reconciliation takes hold. A critical factor is inclusive growth that is shared among wide swathes of society--not simply growth that is funneled to and enjoyed by a narrow few.
Concludes the paper:
the empirical findings… suggest a strategy for reconciliation and recovery centered on three main pillars—implementing growth-enhancing policies, reforming dysfunctional institutions, and addressing urgent social needs—to reduce the risk of conflict recurrence and pave the way to broad-based, sustainable growth in real GDP per capita after the end of a conflict. Sound macroeconomic management helps to sustain the pace of economic recovery and prevent a relapse into conflict; strengthening institutional capacity is necessary for addressing longstanding grievances, reducing the risk of future civil conflicts, and raising the economy’s growth potential over the medium term.