Public Finance & Economic Governance: Public Finance & Peacebuilding Processes

Post-conflict economic policy can be detrimental to or supportive of peacebuilding in two main ways: directly by exacerbating geographic or ethnic inequalities that may have originally caused the conflict, or indirectly by stoking inflation, failing to achieve economic growth, etc. This section will elaborate some of the specific considerations for public finance and economic governance with respect to the peacebuilding process.

Characteristics of post-conflict states

The Center for International Cooperation outlines several challenges to building capacity in post-conflict states: "states tend to be weak, illegitimate, and unaccountable, societies tend to be polarized with competing informal systems of "taxation," and much immediate public expenditure is undertaken by international donor agencies rather than the national government."1 Post-conflict environments frequently have an extremely low percentage of gross domestic product (GDP) raised from tax collection (revenue/GDP). The percentage of tax collection as a proportion of GDP is often used as an indicator of state strength, as it demonstrates the government's capacity to exert sovereign control over the state, shows a growing formalization of the economy, and also emphasizes a move away from dependence on overseas development assistance (ODA).2 This low percentage reflects the limitations of the post-conflict state. Exacerbating these challenges, in the peacebuilding phase, reconstruction expenditures are high and revenues are low. As a result, in many cases countries are severely indebted, imposing fiscal burdens and raising inflation rates.3

Go to Economic Recovery: Private Sector Development

Go to Democracy and Governance: Introduction: Definitions surrounding democracy: Democratic governance and sovereignty

[Back to Top]

The relationship between economic policy and peacebuilding

Economic policy choices at the delicate post-conflict stage can make or break the processes of peacebuilding and state consolidation. Getting macroeconomic management processes on track in ways that encompass sound fiscal policy and support reconstruction and poverty reduction objectives are vital to building a well functioning state and producing a durable peace.4 And yet, often there is lack of understanding between fields: economists may not be schooled in addressing peace and security issues, whilst peacebuilders may know little about economics. Public finance policies should be designed with consideration of post-conflict political and security challenges. Simultaneously, peacebuilding efforts should address the financial dimensions of statebuilding.5

[Back to Top]

Conflict and corruption

A key problem in public finance and economic governance is corruption, an issue that may be especially problematic in post-conflict settings.6 As highlighted by Carlo Lopes of the United Nations Institute for Training and Research and Thomas Theisohn of the United Nations Development Programme Capacity Development Group, "Corruption costs the developing world billions of dollars every year, debasing human rights, siphoning off resources, degrading the environment and derailing development, including capacity development" - all of which disproportionately affect the poor.7 On a broader scale, "...Corruption, together with war-profiteering, replaces long-term planning in the national interest. Corruption is a greater disincentive to community and private investment than equivalent taxation since its application is more random."8 Corruption also entrenches a culture of bribery that may distort markets and discourage incentives for private savings and investment.9

Though corruption is a broad term, encompassing a range of activities, it generally may be understood as "the misuse of public power, office or authority for private benefit - through bribery, extortion, influence peddling, nepotism, fraud, speed money or embezzlement."10 Corruption exists for a wide variety of reasons, which are dependent on economic and political institutions, incentives and opportunities.11

Anti-corruption strategies must be implemented at multiple levels to involve all relevant perpetrators and stakeholders, including the public sector and the private sector, and simultaneously institute market-oriented and administrative reforms and increase accountability through the use of audits and watchdog agencies.12 In the context of peacebuilding, anti-corruption measures should be implemented consideration of the current situation and the conflict environment."It is essential to evaluate historical and cultural sensitivities, understand existing vulnerabilities, and build supportive state structures that promote good governance and reduce poverty as a fundamental basis for change."13

Lopes and Theisohn argue that anti-corruption reforms should be implemented with full participation from a broad swath of society14 and be owned, designed and driven by the domestic government and its citizens; although, the international community can help to support the process. At times, it may also be appropriate for the private sector to initiate anti-corruption measures, given its increasing role in post-conflict economic recovery.15 However, third parties should monitor these initiatives to ensure accountability, as well as provide capacity development support when needed.16

Additionally, scholar Tony Addison recommends that anti-bribery measures be toughened, as "not a single prosecution for bribery overseas has yet been brought in a UK (or continental European) court...The widespread practice in Europe of granting tax relief for bribe payments overseas, as a 'necessary' business expense is a practice that must end."17 At the same time, the human rights discourse has prompted growing support for the use of positive conditionality - as opposed to punitive measures - in promoting reforms in the public sector.18

Go to Economic Recovery: Private Sector Development

Go to Democracy and Governance: Public Administration, Local Governance and Participation

Go to Justice and Rule of Law: Justice and Legal Reform/(Re)construction

[Back to Top]

Conflict sensitivity and economic governance

The issue of conflict sensitivity, or factoring considerations of conflict and peace into program and policy planning, implementation and monitoring and evaluation, is of great importance in issues of public finance and economic governance. Noting that resources are often limited in post-conflict contexts, precious resources need to be spent responsibly and wisely to address structural causes of war, support human development, and help to restore legitimacy in the leadership.

Go to Economic Recovery: Economic Recovery Strategies - Strategies and Models: Context sensitivity

At the core of conflict sensitivity is an understanding of context. As scholars Boyce and O'Donnell note: "Postwar countries often share important features in common - notably a mismatch between fiscal capacities and needs as well as ongoing societal tensions that could precipitate the renewal of violent conflict. Yet there is also a great deal of diversity in postwar environments, and it is important to consider the differences among them in formulating public finance policies."19 The authors identify eight "key axes of differences in postwar environments," which should be considered in policymaking and strategy design.20

Of these context differences, several directly relate to public finance:21

  • The level of economic development;
  • The scale of external assistance;
  • The role of natural resource extraction, which could serve as a large source of revenue for the government;
  • The fault lines of conflict (i.e. ethnic, religious, regional), which could be exacerbated by poor policy planning and resource expenditures;
  • The history of relations with aid donors, including the level of indebtedness.22
[Back to Top]

Balancing priorities: Economic stabilization and peacebuilding

In the post-conflict environment, policy, programming and budgetary prioritization is a difficult enterprise. Scholar and practitioners alike contend that domestic authorities in post-conflict settings will have to "wrestle with the competing demands of economic stabilization and peacebuilding requirements. While the [economic stabilization] requires drastic cuts in government expenditure, the latter implies increased public spending to cope with the pressing requirements of the peace agenda."23

In achieving this balance, a variety of factors come into play. If either of the goals can be met with fewer resources (i.e., efficiency improves), or more revenue is found (e.g., from taxing a growing private sector or from external assistance), then this no longer becomes a zero-sum game, where trade-offs for economic stabilization impact peacebuilding, and vice-versa.24 Moreover, in the long and even medium term, the two goals are mutually reinforcing, meaning that investments in one will have spillover effects for the other. For example, public investment in securing peace will imply more robust private sector development and, consequently, improve the government's revenue generation capacity. Public investment in private sector development may in turn make conflict less likely.25

[Back to Top]

Sequencing public expenditure for peacebuilding

Choices around public expenditure are vital to building societal ownership of the peace; however, public finance issues are frequently left off of the peacebuilding agenda. As scholars James K. Boyce and Madalene O'Donnell write, "Answers to the process of how, as well as the outcome question of what, can strongly affect public attitudes toward the state and the depth and breadth of public support for peace. They also have a strong effect on the willingness of the public to pay taxes: revenue is needed to fund expenditure, but at the same time effective expenditure that responds to the needs of the people legitimizes revenue collection."26

There are different views however, on priorities that serve these objectives. Expert Tony Addison argues that following conflict, the structure of public spending must be "comprehensively reviewed and altered for communities and the private-sector to obtain the services and infrastructure they most need."27 In his view, economic recovery works best if it is broad-based. Scholar Paul Collier also emphasizes an infrastructure-first approach, but stresses jumpstarting the economy first, through prioritized investments in key areas. Specifically, he notes that, "[t]he most evident infrastructure needs are power, ports, and roads. Without reliable power the formal sector cannot develop."28 Anand Prathivadi Bhayankaram, however, makes the distinction between "hard" (i.e., physical) and "soft" (i.e., institutional) infrastructure, and argues that the former does little good without the management and principal-agent monitoring systems required for their operation and maintenance.29 Boyce and O'Donnell similarly point to the large shortfalls in institutional infrastructure, and the substantial investments needed in what they call the social infrastructure of peace: - i.e., the expenditures that redress the horizontal and vertical inequalities that are implicated in violent conflict.30 The Australian Government Overseas Aid Program (AusAid) emphasizes measures to redress historic disparities as well as assistance to demobilized ex-combatants and to the communities that will support their reintegration into civilian life.31

[Back to Top]

Most recent evolutions

This section provides an overview of some of the key evolutions in the field of public finance, economic governance and peacebuilding, aiming to provide a sense of recent trends.

1960s:

  • Public finance policy in the developing world was left largely to the discretion of "moderate interventionist" governments and "developmental states" by the major economic powers and IFIs.32
  • In order to head off secular terms of trade declines predicted by Third World economists, public finance was geared to promote domestic industry using a combination of legal tools that included (in fiscal policy) effective rates of tariff on imports, import tariff rebates on imports for exporting industries, directed credit (often contingent on meeting performance standards to simulate competition), licensing and (in monetary policy) exchange controls.33
1970s:

  • The 1972 oil crisis, the American abandonment of the gold standard, and volatile commodities prices made macroeconomic management at the national level much more difficult for small economies. At the same time, First World banks were pushing cheap credit financed by petro-dollars, resulting in a mounting debt burden in poor countries.34
  • Some countries continued on the ISI path, putting greater emphasis on "second-stage" policies of export promotion to keep deficits in check.
  • Others grew less confident about economic theory in general, and the lack of evidence of economic "takeoff" made distributional issues seem like less of a temporary problem, thus shifting IFI lending priorities toward meeting "basic needs."35
  • Development cooperation projects were based on donor-driven projects with their own management structures outside the public sector.36
  • As aid money became for the first time a significant proportion of developing world budgets and exchange rates in the US were hiked up, debt grew uncontrollably, undermining efforts to mobilize capital for industrial growth, and prompting a series of economic collapses that would effectively serve to justify later IFI strictures on domestic fiscal policy.37

1980s:

  • The debt crisis of the late 1970s and early 1980s empowered the US Treasury, the IMF, and northern private banks to impose government retrenchment on developing countries.38
  • The Washington Consensus, a term often used synonymously with "globalization" and "neoliberalism," took hold with increased focus on fiscal discipline and tax reform; interest rate, FDI, and trade liberalization; "competitive" exchange rates, privatization; deregulation (to facilitate market entry/exit); and securitization of property rights. Economists increasingly touted the benefits of allocative efficiencies and dismissed the idolization of industrialization.39
  • The international financial institutions (IFIs) consequently forced a shift from tariffs to value added taxes, in order to reduce trade barriers and protectionism,40 as well as the privatization of state owned enterprises and the dismantlement of ISI policy regimes through conditional lending and structural adjustment programs.41

1990s:

  • During the 1990s, donors began to return leadership of development and recovery strategies back to governments.42
  • Sector Programs, direct budget support, and "partnership" rhetoric replaced conditionality.
  • The OECD Convention on Combating Bribery of Public Officials in International Business took effect and became the predominant institutional mechanism for combating bribery of foreign public officials.43
  • Autonomous revenue authorities (ARAs) became a key symbol of government's credible commitment effective, fair and competent public management.44
  • In 1996, the HIPC Initiative began to adjust debts owed to donors as a way of relieving financial burdens for some of the world's poorest countries. Continuing into the present decade, 33 countries have been approved for debt relief

2000s:

  • Since the millennium, increased emphasis has been given to accountability of and to domestic institutions, as well as recognition of the necessity for nationally owned development and economic recovery strategies. Accountability, transparency, participation and nationally-developed development frameworks became common principles in peacebuilding, post-conflict economic recovery and peacebuilding.
  • In terms of public finance expenditure management, there has been a shift from traditional budget schemes to the Medium-Term Expenditure Framework (MTEF) for planning national budgets, the Public Expenditure Management (PEM) method for designing and allocating budgets and the sector wide approach (SWAP) for increasing coordination between sectors and increasing efficiency of budget allocation.
  • In the mid-2000s, the international community announced plans at the G8 Summit to provide debt relief for 18 of the world's most indebted countries, most of which are in Africa.45
1. Madalene O' Donnell, "Public Finance in Post-conflict Statebuilding," (New York: Center on International Cooperation, March 2005), 1.
2. Stephen Spratt, External Debt and the Millennium Development Goals: A New Sustainable Framework, (Washington, DC: The World Bank, 2007), 8.
3. Tony Addison, From Conflict to Recovery in Africa (Oxford: Oxford University Press, 2003), 256.
4. Peacebuilding Commission, "Buttressing the State's Fiscal Capacities: Comparative Lessons from Budget Support," United Nations Peacebuilding Commission, November 8, 2007, 1. And Addison, From Conflict to Recovery in Africa, 256.
5. James K. Boyce and Madalene O'Donnell, "Peace and the Public Purse: An Introduction," in Peace and the Public Purse: Economic Policies for Postwar Statebuilding," ed. James K. Boyce and Madalene O'Donnell (Boulder: Lynne Rienner Publishers, Inc., 2007), 2.
6. Boyce and O'Donnell, "Peace and the Public Purse," 9-10.
7. Carlos Lopes and Thomas Theisohn, Ownership, Leadership and Transformation: Can We Do Better for Capacity Development? (New York: United Nations Development Programme and Earthscan Publishers Ltd., 2003), 116.
8. Addison, From Conflict to Recovery in Africa, 6.
9. Lopes and Theisohn, Ownership, Leadership and Transformation, 116 and Kenneth M. Dye and Rick Stapenhurst, "Pillars of Integrity: The Importance of Supreme Audit Institutions in Curbing Corruption," The Economic Development Institute of the World Bank, 1998, 2.
10. Lopes and Theisohn, Ownership, Leadership and Transformation, 115.
11. Ibid.
12. Dye and Stapenhurst, "Pillars of Integrity," 3.
13. Lopes and Theisohn, Ownership, Leadership, 117.
14. Ibid.
15. Ibid, 119.
16. Tony Addison, From Conflict to Recovery in Africa, 282.
17. Ibid.
18. Peter Uvin, Human Rights and Development (Bloomfield: Kumarian Press, Inc, 2004), 83.
19. Boyce and O'Donnell, "Peace and the Public Purse,"2.
20. Ibid, 3-4.
21. Ibid.
22. Though Boyce and O'Donnell do not add this last caveat, it is discussed in James K. Boyce, "Post-Conflict Recovery: Resource Mobilization and Peacebuilding," Working Paper 159, Political Economy Research Institute, UMASS-Amherst, February 2008, 8.
23. Gilles Carbonnier, Conflict, Postwar Rebuilding and the Economy: A Critical Review of the Literature (New York: WSP International, 1998).
24. Boyce and O'Donnell, "Peace and the Public Purse."
25. Paul Collier et al, Breaking the Conflict Trap: Civil War and Development Policy, (World Bank and Oxford University Press, 2003), 124-5.
26. Ibid., 9.
27. Addison, From Conflict to Recovery in Africa, 256.
28. Paul Collier, Post-Conflict Recovery: how should policies be distinctive? (Oxford: Centre for the Study of African Economies, 2007).
29. P.B. Anand, Getting infrastructure priorities right in post conflict reconstruction, Presented at the Making Peace Work conference, (Helsinki: UNU-WIDER, 2005).
30. Boyce and O'Donnell, "Peace and the Public Purse,"9.
31. Ibid., 9.
32. Alice Amsden, Escape from Empire: The Developing World's Journey Through Heaven and Hell (Cambridge: MIT Press, 2007) and David Kennedy, "The 'Rule of Law,' Political Choices, and Development Common Sense," in David M. Trubek and Alvaro Santos (eds.), The New Law and Economic Development: A Critical Appraisal (Cambridge: Cambridge University Press, 2006), 95-173.
33. Ibid., and Werner Baer, "Import Substitution and Industrialization in Latin America: Experiences and Interpretations," Latin American Review,vol. 7 no. 1 (1972): 95-122.
34. Kennedy, "The 'Rule of Law,'" 110.
35. Ibid.
36. Adapted from a presentation by Barry Ireton, as published in: Mick Foster, "New Approaches to Development Co-operation: What Can We Learn From Experience with Implementing Sector Wide Approaches?" (London: Overseas Development Institute, October 2000), 7.
37. Kennedy, "The 'Rule of Law,'" 114-7.
38. Ibid., 117.
39. Ibid., and John Williamson, "What Should the World Bank Think about the Washington Consensus?" The World Bank Research Observer vol. 15 no. 2 (2000): 252-3.
40. Joseph Stiglitz, Globalization and Its Discontents, (New York: W.W. Norton and Company, Inc., 2003), 13.
41. Adapted from a presentation by Barry Ireton, as published in: Mick Foster, "New Approaches to Development Co-operation: What Can We Learn From Experience with Implementing Sector Wide Approaches?" (London: Overseas Development Institute, October 2000), 7.
42. Adapted from a presentation by Barry Ireton, as published in: Mick Foster, "New Approaches to Development Co-operation: What Can We Learn From Experience with Implementing Sector Wide Approaches?" (London: Overseas Development Institute, October 2000), 7.
43. "OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions," Organisation for Economic Co-operation and Development.
44. Robert R. Talierco, Jr., "Administrative Reform as Credible Commitment: The Impact of Autonomy on Revenue Authority Performance in Latin America," World Development vol. 32 no. 2 (2003): 213-232.
45. BBC News, "Cautious Welcome for G8 Debt Deal," BBC News, June 12, 2005.

The news, reports, and analyses herein are selected due to there relevance to issues of peacebuilding, or their significance to policymakers and practitioners. The content prepared by HPCR International is meant to summarize main points of the current debates and does not necessarily reflect the views of HPCR International or the Program of Humanitarian Policy and Conflict Research. In addition, HPCR International and contributing partners are not responsible for the content of external publications and internet sites linked to this portal.