Private Sector Development: Private Sector & Peacebuilding Processes

This section focuses specifically on the interaction between private sector development, conflict and peacebuilding. Beginning with an overview of economic models of conflict, the section then moves to a discussion of some of the challenges and opportunities private sector development in peacebuilding entails, before outlining some of the stabilizing benefits.

Private sector and conflict dynamics

Economic models of conflict usually posit a fundamental choice that people make in maximizing their welfare: they can either produce or predate. That is, people allocate their resources between adding value to products (to be used or traded), or stealing valuable products from others.1 The former is by definition a productive activity; the latter is not (and is usually even destructive to some degree). This distinction is critical in the study of the post-conflict private sector, which is the embodiment of productive investment. In this vision of an economy, each time value is created, it can, to a greater or lesser degree, be contested by multiple other actors.

Three primary lessons for the private sector derive from the theoretical conflict literature. First, when initial resource allocations are extremely unequal between groups,2 the disadvantaged group will be incented to devote all of its resources to predation - a phenomenon termed the "paradox of power," because the less powerful side becomes the more dedicated fighter (its members have low opportunity costs, or "nothing to lose").3 Second, if there is a portion of the production sector that is uncontestable (i.e., not up for grabs), then investment in that sector will produce higher common welfare and raise the opportunity cost of conflict relapse4. Third, given the dialectic link between production and predation, economic growth cannot be considered a panacea for violent conflict.

Given these lessons, it is unsurprising that the health of the private sector bears heavily on the conditions and character of a conflict, as well as on the potential for conflict relapse in the economically, socially, and politically sensitive post-conflict environment.5 Moreover, private sector organizations may help to forge and expand the market institutions needed for economic recovery.

The 'private sector' is a heterogeneous group of diverse constituents which may alternately contribute to or detract from the peacebuilding process. Existing literature emphasizes that the role of private sector actors in violent conflict varies dramatically depending on a number of factors: sector (raw materials, manufacturing and production, services), supply chain structure, ownership and management, functionality of the regulatory environment,6 and numerous idiosyncrasies of the local context. Experts believe the influence of the private sector on the causes of conflict is more extensive than it seems; through their investment portfolios or through supply chains drawing on conflict-fueling resources.7

Just as the private sector may aggravate the conflict dynamic, the conflict dynamic also aggravates the health of the private sector. Economists considering this causal relationship note the following conditions common to civil war greatly affect chances for post-war recovery: the destruction of, and reduced investment in, physical and human capital;8 population and demographic shifts (e.g., due to migration, male military conscription, and increased birth and death rates); and reduced total factor productivity (TFP).9 Humphreys notes that TFP declines are most easily attributable to constraints on movement, which adversely impact workplace and market access (and hence production and trade respectively).10 Imai and Weinstein estimate that civil wars on average depress GDP growth rates by 2%.11 Finally, Collier divides economies into "war-invulnerable" sectors (including agriculture) and "war-vulnerable" sectors (including manufacturing, finance, distribution, transport, and construction), noting that the extent to which a sector depends on capital and trade will determine its vulnerability to war. He suggests that as the complex value-adding sectors of the economy are destroyed, reliance on natural resources increases, heightening the likelihood of future conflict.12 Topher McDougal provides a counterpoint to this view, arguing that production firms able to substitute local inputs for imports are better able to disperse their supply chains spatially and temporally, thus escaping predation.13

Moreover, violent conflict may result in the toppling or serious weakening of a government or its institutions. Economists examining development in stateless countries often balance the negatives (lack of enforced economic institutions such as property rights and contract enforcement) against the benefits (like economic deregulation and freedom from rent-seeking).14 Nenova describes that while certain industries have actually benefited from the lack of red tape, the Somali private sector is severely constrained in how far it may develop.15 Such an assessment fits with the New Institutional Economics as portrayed by Williamson, who describes tiers of institutions: informal norms, political and legal institutions, modes of governance, and common transactions. Without the second tier of government institutions, transactions may continue but will be limited in complexity and time horizons. Leeson argues that in the Somali case, the previous government was so given over to rent-seeking that it represented more of a burden than a boon for its economy. The general implication is that war will not likely benefit an economy unless it topples a kleptocratic regime.

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Engaging the private sector in peacebuilding

Does the private sector have a role to play in promoting peace and post-conflict economic recovery?Some say the private sector can serve in a positive role in easing tensions and spurring economic development. Others argue that the corporations lack the knowledge and capacity to participate in peacebuilding.

Recently, there has been a trend toward the belief that the private sector can play a significant and positive role in the promotion of sustainable peace and economic recovery.16 It is argued that local business has a particularly vital role for economic regeneration in peacebuilding.17 Scholar Nick Killick argues, "perhaps the biggest obstacles to maximizing this potential are a lack of recognition that the private sector has a role (amongst business communities themselves, NGOs, and the international community) coupled with a lack of understanding of what that role might be."18

Proponents of a role for business in peacebuilding argue that the private sector's skills and financial capacities are well-suited to the post-conflict context. "Local private sectors have much to contribute through their economic influence and political contacts, their (relatively) large financial resources, their skilled workforce, their capacity to drive balanced development and their connections at all levels of society." And yet, companies themselves are notably absent from this debate.19 While many have publicly committed to principles of corporate social responsibility, most view active peacebuilding and conflict resolution to be outside their sphere of responsibility.20 A Collaborative Learning Projects report states that they "have not encountered a company that has made peace-building an intrinsic part of its company policy."21

Despite this, the vast sum of private actors that do not directly engage in war economies are likely to almost uniformly concede that conflict is ultimately bad for business. Economic collapse, decline in skilled labor force, destroyed infrastructure, foreign direct investment decreases, combined with weakened regulatory capacity and state institutions, often high security costs, less direct state support and other collateral damage takes a significant toll on the viability of a local business environment. Correcting these factors, and taking a stake in their prevention bodes well in the self-interest of companies that must plot a path for their own survival.22

In addition to the direct ways that locally-operating firms may contribute to conflict and peacebuilding, foreign-operating firms may also have spillover effects. On the negative side, firms may purchase resources that fuel conflict. They may also pay wages to refugees or asylum-seekers who may in turn remit a portion to help fund rebel groups. Collier and Hoeffler point out that "by far the strongest effect of war on the risk of subsequent war works through diasporas... Presumably this effect works through the financial contributions of diasporas to rebel organizations."23

On the positive side for post-conflict countries, those same refugees or asylum-seekers paid by foreign-operating firms may send home remittances that will contribute to the rebuilding efforts of individual households or entire communities. Remittances may also be social in nature. For instance, foreign firms that employ refugees and asylum-seekers during a conflict may be investing indirectly in the human capital of the post-conflict country if the employee returns home.24 Such social remittances from expatriate workers returning home ("reverse brain drain," or "brain circulation") have been linked to development outcomes both in post-conflict countries and developing countries more generally.25

The private sector's perceptions of their role in peacebuilding

Companies are already involved.Most companies rightfully claim that they are already involved in aspects of conflict mitigation activities on a daily basis, whether through community relations campaigns, development initiatives, or local partnerships.
Companies prefer to focus their efforts on the local working environment.Companies find it easier to define their role as "peace-makers" in terms of the local communities in which they operate, since they have the greatest political and economic leverage there. Companies do not consider such local efforts to be political acts and therefore feel comfortable with them. Local efforts are more tangible actions that show direct results for the company in lowering the costs of their operations.
Companies want to leave a positive legacy.They acknowledge that their ability to contribute to a stable and peaceful environment is increasingly linked to their bottom line, since establishing a positive legacy is critical to a company's ability to obtain future contracts.
Reasons companies believe that peacebuilding is outside their responsibilities. Companies view conflict resolution and peace building as part of the political domain.
Therefore, they see it as something from which they should remain separate and neutral as outsiders in a country.

Companies do not see conflict resolution and peace building as part of corporate social responsibility.Outsiders may assume that corporations are committed to CSR are therefore also committed to conflict resolution and peace-building. However, company representatives see CSR as distinctly different from peace-building in that CSR is related to their core operations and peace-building is not. Often, companies are more comfortable adhering to pre-defined codes of conduct than proactively engaging in peace building.
Companies think conflict resolution is too big a job.Companies are committed to preventing conflict to the best of their abilities. But they are often unsure what is expected of them in peace-building, and think that typical conflict resolution such as actively negotiating between warring parties is better left to professionals, while the company maintains its focus on conducting its business in a "neutral" manner.
Collaborative Learning Projects, "Issue Paper: The Role of Business in Conflict Resolution and Peace Building" (Cambridge: Collaborative Learning Projects, Corporate Engagement Project, February 2003).

Some argue that the key issue is a lack of capacity or understanding of what is needed and what role the private sector should play.26 There remains also a deep reluctance amongst the private sector to become involved in what are perceived as largely "political" matters. Killick argues that this thinking is flawed for two reasons: because few sectors are more politically active when their interests are threatened than the private sector, and secondly, because peacebuilding is multi-faceted and includes a number of needs which lie firmly within the capacities, skills and resources of the private sector.27 Local businesses have better aligned incentives resulting from being a part of the society in conflict.28

Critics of a peacebuilding role for business argue that the private sector can never be a neutral actor in peacebuilding and will always prioritize their own interests above local needs. As stated in a Colloborative Learning Projects report, "Much of this debate is falsely based on the assumption that companies operating in conflict areas are neutral actors, separated from and unrelated to the environment of violence in which they operate. This assumption is untrue."29 Some argue that, as with all third party actors in conflict context, "corporations become part of that context, and therefore part of the conflict."30 However, some scholars have also suggested that the co-evolution of armed actors and the private sector during violent conflict may actually help bring about the end of hostilities.31 Certainly, as mentioned in the sections above on the private sector's relationship to conflict and peacebuilding, the impacts of the private sector on conflict dynamics are almost never simple.

Whether intentional or not, companies are often complicit in the conflict, and they can only play a positive role in conflict resolution or peacebuilding once they are seen by communities as not to be contributing to the conflict.32 The greater the levels of corruption and exploitation (perceived or real), the more antipathy there will be towards the private sector and the more difficult it is for them to have a peacebuilding role. Local communities are often highly distrustful of the private sector, while legitimacy and impartiality are necessary attributes of a peacebuilding actor, including the local private sector. Any efforts to engage the business community must therefore take into account and, if necessary, address negative perceptions.33

Nick Killick et al, offer several strategies for addressing the criticisms of private sector involvement in peacebuilding. Overcoming obstacles, they argue, will require a shift in attitudes away from a disproportionate focus on TNCs and away from the thinking that the private sector is only an agent of economic development divorced from the wider peacebuilding process, or else negative drivers of conflict.34 This would require awareness-raising amongst the private sector itself, but also amongst other local and international peacebuilding organizations. Further research into identifying the different types of roles according to the size and nature of the business community as well as the type and stage of the conflict is also needed. Thirdly, more practical initiatives supported by the international community and studied by NGOs and scholars, would be useful.35 For instance, Richard Locke's identification of industry associations as effective promoters of labor and environmental standards might be put into practice without too much difficulty.36

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Stabilizing effects of private sector

The following is a partial list of the potential ways in which private sector actors can help to stabilize post-conflict situations.

Generation of higher GNP per capita

Collier has stressed that poor countries tend to have greater likelihood for conflict onset.37 This statement, while statistically verifiable, glosses over the specific causal mechanisms that might be at work in such an association.

Grows the tax base

Most often cited among the causal mechanisms at work in relating higher GNPs to lower incidence of violent conflict is stronger government institutions (due to a larger tax base) that can structure and diffuse conflicts (e.g., by way of a legal system), enforce regulations that promote equitable and sustainable development, and put down violent eruptions (e.g., a strong police force). It should be noted, however, that the efficacy of such institutions does not rely solely on their funding, but also in their institutional design, management, and regulatory style. On a related note, the larger the tax base, the less a post-conflict country will have to burden itself with debt in its early years.

Employment generation

The private sector gives individuals a non-violent way of providing for themselves and their families.38 Moreover, the more people are employed in a society, the more likely the economy is to leverage its export earnings into a domestic multiplier effect, creating a positive endogenous growth feedback loop.

Raising the value-added-to-total-value ratio in goods

Bolstering the private sector - especially the manufacturing and production sectors - is not only a way of keeping much downstream value-added in country (as diamond-rich Botswana has done by attempting to build a gem-faceting industry). It is also a way of raising the ratio of value that domestic industries add to an export product to the total value on the world market. When this ratio rises, the opportunity cost of becoming a looter also rises, producing a more peaceful country.

Generation of bridging social capital

Robert Putnam has described two types of social capital: "bonding" social capital works to keep groups cohesive, while "bridging" social capital works to build understanding across different groups.39 Because private sector businesses ideally operate in an ethnically-blind, profit-maximizing fashion, they may create backward and forward economic linkages in production networks that might not otherwise have been created. Saumitra Jah argues that in Indian port cities where Muslim sea traders came into frequent contact with Hindu businessmen, the incidence of ethnic riots was perceptibly lower than in other Indian cities, even hundreds of years after the Muslim monopoly of the sea trade in the Indian Ocean came to an end.40 The contact hypothesis which states that members of different groups will develop trust in environments in which each has equal status, they are engaged in cooperative activity, they come into personal contact, and there are established norms regulating the interaction.41 As long as it is mutually beneficial, trade (both domestic and international) seems to satisfy the conditions of the contact hypothesis, as it implies a repeated interaction that generates self-enforcing norms.

Private infrastructure investments

In the case that foreign enterprises are eager to enter the post-conflict country (most often to exploit natural resources), this interest may be leveraged to encourage private contributions to public infrastructure, speeding up the usual timetable of interest (which normally progresses chronologically from mobile telephones in the immediate aftermath of war, to electricity around year 3, and finally water and transportation much later). Schwartz, Hahn and Bannan argue that selective privatization of infrastructure through concessions, the establishment of political risk insurance, and good faith efforts on the part of government to meet its obligations for publically-contracted goods and services, may all significantly push up the timeline at which private sector actors are willing to invest in infrastructure.42

Goods and services provision

One obvious way that the private sector helps to foster peace is simply by providing needed goods and services. Many goods would be out of the price range of most people in a developing country (barring stealing them) were they not produced, or at least assembled, domestically. Moreover, to the extent that goods and services are produced locally, consumer expenditures on them will tend to stay in the country to a larger degree.

Improvement in the terms of trade

The more a country produces for export (or substitutes would-be imports with domestic manufacture), the better its terms of trade will be, and generally the lower its inflation rate. These twin improvements will help domestic businesses buy the components they require from abroad more easily, while preserving the purchasing power of consumers and making conflict relapse less likely.43

Incentivation of good governance

As noted above, the existence particularly of an industrial manufacturing sector may incentivize good governance, even in parts of the country not fully secured from predatory activity. This is because industrial manufacturing exhibits complex value-adding mechanisms that cannot easily be hijacked by predators. Unlike in the case of valuable raw materials, manufacturing and other forms of industrial production often takes "useless" raw or intermediary goods and transform them into valuable products through the application of technical knowledge and physical capital. Thus, it is something akin to the goose that laid the golden eggs - it pays not to kill it, but to feed it.44

Reduces/reverses "brain drain"

Finally, by offering employment and making more goods and services available, the private sector encourages those who might otherwise wish to leave the country (taking their skills with them) to stay. Moreover, a booming post-conflict economy may also begin the process of "reverse brain drain."45 These returnees may bring valuable skills with them from abroad to be reinvested in the local economy, sometimes termed "social remittances."

1. Raul Caruso, "An Introduction to the Economics of Conflict: A Selected Survey of Theoretical Economic Models of Conflict," Social Science Resource Council.
2. This is termed "horizontal inequalities," and differ from "vertical inequalities" which measure intra-group inequalities (with the unit of analysis often taken as the entire nation). Horizontal inequalities are thought to precipitate violent conflict more effectively than vertical ones because preexisting groups have the cohesion to operate collectively to redress grievances, approximating the rational actors in economic models of conflict. Cramer (2003) points out that neither horizontal nor vertical inequalities - both "snapshot" measures - adequately captures the deeply psychological and trans-historical quality of exclusionary socio-cultural practices, like India's caste system.
3. Jack Hirshleifer, "The Paradox of Power," Economics and Politics 3 (1991): 177-200.
4. Raul Caruso, "Butter, Guns and Ice-Cream: Policy Implications of Theoretical Conflict Economics," MIT International Review (February 2009).
5. Jessica Banfield, Virginia Haufler and Damian Lilly, "Transnational Corporations in Conflict Prone Zones: Public Policy Responses and a Framework for Action" (London: International Alert, September 2003), 13.
6. Topher McDougal, "The Liberian State of Emergency: What do Civil War and State-Led Industrialization Have in Common?" The Journal of Peace Economics, Peace Science, and Public Policy (2009).
7. Switzer and Ward, "Enabling Corporate Investment in Peace".
8. Paul Collier, "On the Economic Consequences of Civil War," Oxford Economic Papers 51 (1999), 168-183.
9. Macartan Humphreys, "Economics and Violent Conflict," Harvard Program on Humanitarian Policy and Conflict Research (2003).
10. Ibid.
11. Kosuke Imai and Jeremy M. Weinstein, "Measuring the Economic Impact of Civil War," CID Working Paper No. 51, Harvard Center for International Development (2000).
12. Collier, "On the Economic Consequences of Civil War."
13. Topher L. McDougal, "Survival Strategies of Production Firms in Civil War: The Case of Liberia," (conference paper, London School of Economics, 2008).
14. Tatiana Nenova and Tim Harford, "Anarchy and Invention: How Does Somalia's Private Sector Cope Without Government?" Viewpoint No. 280, Public Policy for the Prinvate Sector (Washington, D.C.: World Bank, 2004).
15. Tatiana Nenova, Private Sector Response to the Absence of Gvernment Institutions in Somalia (Washington, D.C.: World Bank, 2004).
16. Collaborative Learning Projects, "Issue Paper: The Role of Business in Conflict Resolution and Peace Building," (Cambridge: Collaborative Learning Projects, Corporate Engagement Project, February 2003), 1.
17. Nick Killick et al., "The Role of Local Business in Peacebuilding," (Berlin: Berghof Research Center for Constructive Conflict Management, February 2005), 20.
18. Ibid.
19. Collaborative Learning Projects, "Issue Paper: The Role of Business in Conflict Resolution and Peace Building."
20. Ibid.
21. Ibid., 3.
22. Killick, "The Role of Local Business in Peacebuilding."
23. Collier, Paul & Anke Hoeffler, "Greed and grievance in civil war," (Policy Research Working Paper No. 2355, Development Research Group. Washington DC: World Bank, 2000).
24. Dutch Institute for International Studies, "Diasporas and Fragile States," (DIIS Policy Brief, Copenhagen, DIIS, October 2008).
25. Homira G. Nassery, "Reverse Brain Drain: Afghan-American Diaspora in Post-Conflict Peacebuilding and Reconstruction," manuscript (Kabul: American International School of Kabul, 2003), and AnaLee Saxenian, The New Argonauts: Regional Advantage in a Global Economy (Cambridge: Harvard University Press, 2006).
26. Killick, "The Role of Local Business in Peacebuilding."
27. Ibid.
28. Ibid.
29. Collaborative Learning Projects, "Issue Paper: The Role of Business in Conflict Resolution and Peace Building."
30. Ibid.
31. See, e.g., Charles Tilly, Coercion, Capital, and European States (Cambridge: Basil Blackwell, 1992), Topher L. McDougal, "The Liberian State of Emergency: What do Civil War and State-Led Industrialization Have in Common?" (Working Paper, Working Group on Violent Conflict & Economic Institutions, MIT 2008), and Jeremy Weinstein, "Autonomous Recovery and International Intervention in Comparative Perspective" (Working Paper No. 57, Stanford: Stanford University Center for Global Development, 2005).
32. Collaborative Learning Projects, "Issue Paper: The Role of Business in Conflict Resolution and Peace Building."
33. Killick et al., "The Role of Local Business in Peacebuilding."
34. Ibid.
35. Ibid.
36. Richard Locke, "Opportunities in Building More Sustainable Supply Chains," (presentation at the Sloan School of Management, MIT, Cambridge, MA, 19 September 2008).
37. Paul Collier et Anke Hoeffler, "Greed and grievance in civil war."
38. Collier, "Post-Conflict Recovery: How Should Policies be Distinctive?"
39. Robert D. Putnam, "E Pluribus Unum: Diversity and Community in the Twenty-first Century," Scandinavian Political Studies, 30 no. 2 (2007), 137-174.
40. Saumitra Jha, "Trade, Institutions and Religious Tolerance: Evidence from India," Manuscript (2007).
41. G. Allport, The Nature of Prejudice (Reading, MA: Addison-Wesley, 1954).
42. Jordan Schwartz, Shelly Hahn and Ian Bannon, "The Private Sector's Role in the Provision of Infrastructure in Post-Conflict Countries," Trends and Policy Option No. 1 (Washington, D.C.: Public-Private Infrastructure Advisory Facility (PPIAF), 2004).
43. Bojanic, "Inflation in Post-Conflict Countries."
44. McDougal, "Survival Strategies of Production Firms in Civil War."
45. Homira G. Nassery, "Reverse Brain Drain: Afghan-American Diaspora in Post-Conflict Peacebuilding and Reconstruction," manuscript (Kabul: American International School of Kabul, 2003).

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