Preventing and Rebuilding Failed States Amid Global Economic Crisis: What are Realistic Options for U.S. Policy? Woodrow Wilson International Center for Scholars Washington, D.C., June 5, 2009 A Guide to Economic Growth in Post-Conflict Countries James T. Smith, Editor for Office of Economic Growth Bureau for Economic Growth, Agriculture, and Trade

Session C: Economic Development How Can the Political Economies of Fragile and Failed States Be Transformed into National Growth Economies? “Toward sound management of the economy and aid”

Main Messages Economic growth - Critical for success Reforms and programs need to: –Start right away –Be done differently –Achieve immediate widespread impact Short-term actions contribute to achieving long-term objectives

Why Post-Conflict EG ? 40% return to conflict in < 10 years Frequent occurrence in poor countries Traditional approaches often failed –Growth rebound inadequate –High unemployment persists –Ad hoc or no EG program Early, robust EG improves the odds

I. Approach to Post-Conflict Recovery Political Context –Weak and fragile government –High expectations – a sense of urgency –Powerful Old Interests; Ex-Combatants Economic Context –Destroyed Infrastructure, lost lives, IDPs, refugees –High-cost, high-risk, fragmented economy Nature of the Conflict Nature of the Peace

Post-Conflict Goals Re-establish economic governance Restore legitimacy of government Boost employment and well-being Address root economic causes Stabilize the economy Position economy to grow rapidly

What’s required for success? Clear goals Sensitivity to post-conflict political and social context Pragmatic, coordinated approach Host country ownership Do EG early! Do EG differently!

How should it be done? –Focus on the basics –Establish priorities –Understand recurring trade-offs –Pay attention to sequencing –Anticipate transition to the long- term

Basic steps to employment generation Provide jobs with grants to many groups; employ both ex-combatants and unemployed civilians Stimulate the economy Knock down administrative barriers to formal and informal economic activity Make emergency repairs to key infrastructure Eliminate barriers to movement and commerce Get some SOE’s working again Focus on local investment and local employers

Four Recurring Trade-Offs Effectiveness vs. Efficiency Urgency vs. Legitimacy Short-term vs. Long-term Window of Opportunity vs. Absorptive Capacity

Trade-Off: Effectiveness vs. Efficiency Immediate impact –Small-scale, expensive informal electricity suppliers vs. large-scale, low-cost power grid Jobs Now –Unsustainable make-work jobs vs. productive, longer-term private sector employment

Trade-Off: Urgency vs. Legitimacy Urgent Passage of: –A Company law –A Banking law Urgent provision by International NGO’s of: –Health and Education –Agricultural research and education

Trade-Off: Short term vs. Long term FISCAL POLICY AND INSTITUTIONS PRIORITY AND SEQUENCING OF ASSISTANCE ItemUrgentImmediateIntermediateConsolidating Expenditure control Receipts management Indirect (tariffs, excise, sales) tax control Direct (income and payroll) tax control Fiscal policy planning and management capacity Economic and fiscal statistics Reform of tax policy High-intensity level of assistance Lower-intensity level of assistance No assistance during phase

Trade-Off: Window of Opportunity vs. Absorptive Capacity Restoring Food Production –New Varieties and Improved Production Processes vs. Off-the-Shelf Technologies Increasing Staff Capacity –Scholarships for long-term training vs. Adequate staff for functioning institutions

Key Trade-Offs –Effectiveness vs. Efficiency Jobs versus restructuring the economy –Urgency vs. Legitimacy –Short-term vs. Long-term Revenues versus opening the economy (e.g., by cutting tariffs on imports) –Window of Opportunity vs. Absorptive Capacity

II. Best Practices Macroeconomic Management Fiscal Policy and Institutions Monetary Policy and Institutions Employment Generation Infrastructure Private Sector Development Private-Sector Enabling Environment Enterprise Development Agriculture Banking and Finance International Trade and Border Management

Support existing managers Operating contracts PUBLICPUBLIC TA and/or outsourcing contracts for bill collecting, fleet maintenance Management contracts with incentives for performance LeasesConcessions PRIVATEPRIVATE Will only work if there is full cooperation from present managers Introduce discipline; private firm runs company; similar to receivership; managers must have full control Private firm operates & maintains; investment funded by public sector Private firm operates & maintains; investment by private firm Regulation is necessary for monopoly segments Infrastructure -- Continuum between Public and Private

Main Messages Economic growth - Critical for success Reforms and programs need to: –Start right away –Be done differently –Achieve immediate widespread impact Short-term actions contribute to achieving long-term objectives

Where to find “A Guide to Economic Growth in Post-Conflict Countries”