Friday, August 10, 2012

Conflict and development: what to do?

This is a chicken and egg situation. Investors, both domestic and foreign, mostly shun conflict zones, which therefore tend to remain -- or become -- poor, providing few employment opportunities other than ones that make the situation worse (child soldier, terorrist).

Some urge outside military and political intervention to break the cycle, but this is morally questionable and has rarely worked, Sierra Leone being a possible exception. Similarly forceful internal solutions, such as coups and revolutions, share the same objection. There are in any case areas where it is not feasible for anyone to provide an instant political solution, no matter how many troops and hardware they may possess.

Should we just avoid such areas and let them suffer, blaming the antagonists, i.e. the leaders? This would be unethical and grossly unfair to populations caught up in conflicts that are not of their making, most obviously in the case of children too young to understand why adults around them are hating and fighting. It would also be in the enlightened self-interest of other countries to support economic development in such regions to protect themselves against spreading of the conflict to their own territories.

I confess that when I worked at the OECD my first advice to certain governments that asked me how to attract foreign direct investment (FDI) was to stop their civil war, because this is more important to potential investors likely to contribute to development than the fiscal incentives which they clearly expected me to recommend. I realized, of course, that while this is sound advice it is not easy to put into practice. Since then, one or two of the countries concerned have, though, succeeded in doing so and are now also making headway with their investment policies.

Investors are right to minimize risk and seek safe havens. But it can also make sense for them to invest a proportion of their capital in conflict zones where fighting has subsided or where a new government has succeeded in providing at least temporary peace. By doing so, they can contribute to economic, and ultimately also political, stability. Young people who put down their weapons and take up jobs (or school places) can become productive members of society, providing a better basis upon which politicians can, if they have the ability and a genuine will to do so, build lasting and accountable power structures.

If government has at least some measure of effective control over its territory, it can focus on repairing or constructing infrastructure and develop a regulatory framework conducive to attracting and retaining investment. Initially, as has been the case in several such countries, this investment may come from a diaspora whose members have prospered after fleeing abroad from the conflict and who would be happy to return if there is a serious prospect of safety. At the same time, the government can improve its investment promotion agency so that potential investors worldwide can become aware of the actual situation. International aid can be focused on longer-term projects that contribute to improvements in the business environment so that private capital, large amounts of which are currently looking around the world for a profitable home, can be attracted.

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