Chapter Four: The Bretton Woods Institutions, Reconstruction and Peacebuilding

Abstract

The transition from war to peace is fraught with tension and the risk of a return to bloodshed. With so much at stake, it is crucial that the international community and local stakeholders make sense of the complex mosaic of challenges, to support a lasting, inclusive and prosperous peace. Recent missions, such as in Afghanistan, Somalia or Sudan, have highlighted the fact that there can be no one-size-fits-all approach to steering countries away from violence and towards stability.

This Adelphi offers a series of economic perspectives on conflict resolution, showing how the challenges of peacebuilding can be more effectively tackled. From the need to marry diplomatic peacemaking with development efforts, and activate the private sector in the service of peacebuilding aims, to the use of taxes and natural-resource revenues as a financial base for sustainable peace, this issue considers how economic factors can positively shape and drive peace processes. It examines the complex ways in which power and order may be manifested in conflict zones, where unpalatable compromises with local warlords can often be the first step towards a more lasting settlement. In distilling expertise from a range of disciplines, this Adelphi seeks to inform a more economically integrated and responsive approach to helping countries leave behind their troubled pasts and take a fuller role in constructing their futures.

Notes

See In Larger Freedom: Towards Development, Security and Human Rights for All (New York: Report of the Secretary-General to the General Assembly, A/59/2005, 21 March 2005). See also, Robert B. Zoellick, ‘Securing Development’ (Washington DC: United States Institute of Peace, 8 January 2009), available at http://siteresources.worldbank.org/NEWS/Resources/RBZUSIPSpeech010809.pdf.

For information on the mandates and framework of cooperation between these two institutions, as well as on the specific financing instruments (i.e., trust funds, SPF, PRGF, etc.), see http://www.imf.org/external/about.htm and http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,pagePK:50004410~piPK:36602~theSitePK:29708,00.html.

Afghanistan, for example, a country at the top of the international peace and security agenda, and the top of the US foreign-policy agenda, contributes only 0.02% of global output and even less to global exports. In contrast to its tiny economy, with GDP estimated at $15 billion in 2010, the Afghan war will cost the United States about $100bn in 2010 – twice what the US allocated to social and development aid across the world.

Some of the criticism continued even after enough evidence to refute was provided. See, for example, Graciana del Castillo, ‘Post-Conflict Reconstruction and the Challenge to the International Organizations: The Case of El Salvador’, World Development, vol. 29, no. 12, 2001, pp. 1969 and 1978–79.

For example, Mozambique signed its peace agreement in 1992 and ODA peaked at 80% of GNI. Ten years later, aid was still 55% of GNI, and in 2005–08 the country still relied on aid levels of about a quarter of its GNI.

John M. Keynes, The Economic Consequences of the Peace (New York: Harcourt, Brace and Howe, Inc., 1920).

For an overview of the non-economic aspects of the transition to peace, see Mats Berdal, Building Peace After War (London: Routledge for the IISS, 2009).

This is slowly changing. See, for example, Tony Addison and Tilman Brück, Making Peace Work: The Challenges of Social and Economic Reconstruction (London: Palgrave Macmillan, 2008); Ashraf Ghani and Clare Lockhart, Fixing Failed Sates (Oxford: Oxford University Press, 2008); and James K. Boyce and Madalene O'Donnell (eds), Peace and the Public Purse: Economic Policies for Postwar State-Building (Boulder, CO: Lynne Rienner Publishers, 2007).

As a general rule, both groups of countries have devastated or significantly distorted economies, their human and physical infrastructure are in shambles and major macroeconomic imbalances.

See Graciana del Castillo, Rebuilding War-Torn States: The Challenge of Post-Conflict Economic Reconstruction (Oxford: Oxford University Press, 2008), p. 40 and del Castillo, ‘Auferstehen aus Ruinen: Die Besonderen Bedingungen des Wirtschaftlichen Wiederaufbaus nach Konflikten’, der Überblick (Germany's Foreign Affairs), vol. 4, December 2006.

See Alvaro de Soto and Graciana del Castillo, ‘Obstacles to Peacebuilding’, Foreign Policy, vol. 94, Spring 1994, pp. 69–83 and del Castillo, ‘Peace Through Reconstruction’, Brown Journal of World Affairs, vol. VXI, issue II, Spring/ Summer 2010.

See Graciana del Castillo, Rebuilding War-Torn States, pp. 33–35.

This argument was not at all accepted by the BWI when it was first raised in the early 1990s (see del Castillo, ‘Post-Conflict Peacebuilding: The Challenge to the UN’, CEPAL Review, vol. 55, October 1995, pp. 29–30; See, also del Castillo, ‘Post-Conflict Reconstruction and the Challenge to the International Organizations’, p. 1968; and del Castillo, Rebuilding War-Torn States, pp. 4, 20, 30, 133–4, 215 and 232). As Zoellick's statement shows, the Bank has now accepted this at the highest level, and the IMF has come to accept it in some cases. See Sanjeev Gupta, Tareq Shamsuddin, Benedict J. Clements, Alex Segura-Ubiergo, Rina Bhattacharya and Todd D. Mattina, ‘Rebuilding Fiscal Institutions in Postconflict Countries’, Occasional Paper no. 247 (Washington DC: IMF, 2005), for a discussion of how tax policy in post-conflict situations may require adopting policies that are not optimally efficient. Available at http://www.imf.org/External/Pubs/NFT/Op/247/op247.pdf.

See del Castillo, Rebuilding War-Torn States, p. 30.

For a comprehensive analysis of the role that the UN Security Council gives the BWI in peace and security, see Kristen E. Boon, ‘Coining a New Jurisdiction: The Security Council as Economic Peacekeeper’, Vanderbilt Journal of Transnational Law, vol. 41, no. 4, October 2008; and Boon, ‘Open for Business: International Financial Institutions, Post-Conflict Economic Reform and the Rule of Law’, New York University Journal of International Law and Politics, vol. 39, no. 3, 2007, pp. 513–81.

See del Castillo, Rebuilding War-Torn States, pp. 66–93 and pp. 103–221. For the evolution of this assistance up to 2008, see del Castillo, ‘Economic Reconstruction of War-Torn Countries: The Role of the International Financial Institutions', Seton Hall Law Review, vol. 38, no. 4, pp. 1280–1295.

For changes in conditionality at the Fund, see IMF, ‘Creating Policy Space – Responsive Design and Streamlined Conditionality in Recent Low-Income Country Programs’, 10 September 2009, p. 5, available at http://www.imf.org/external/np/pp/eng/2009/091009a.pdf. See also, ‘Review of World Bank Conditionality’, September 2005, available at http://siteresources.worldbank.org/PROJECTS/Resources/40940-1114615847489/webConditionalitysept05.pdf .

See Zoellick, ‘Securing Development’.

Ibid.

The ‘integrated approach to human security’, was a concept developed by former UN Secretary-General Boutros Boutros-Ghali in his Agenda for Peace in 1992. Under such an approach, military, political, economic, social, and environmental problems should be addressed jointly and coherently rather than separately as had traditionally been the case. That is the approach we advocated for El Salvador at a time when the peace process and the economic programme clearly clashed. See de Soto and del Castillo, ‘Obstacles to Peacebuilding’, p. 71.

For all information concerning World Development Report, including Concept Note, go to http://search.worldbank.org/all?qterm=WDR%202011.

The other parts of the World Bank Group also play an important role in supporting countries coming out of war. While the International Finance Corporation (IFC) supports economic recovery by helping to improve the investment climate and the financial sector, it also supports private participation in infrastructure, agribusiness and mining. The Multilateral Investment Guarantee Agency (MIGA) promotes foreign direct investment through the provision of political risk insurance, or guarantees, to investors and lenders against losses by noncommercial risks.

The IDA lends money (known as credits) on concessional terms (no interest charge, 35 to 40 years repayment and ten-year grace period). The IDA also provides grants to countries at risk of debt distress. The SPF replaced the Post-Conflict Fund (PCF) and the Low Income Countries Under Stress Trust Fund (LICUS TF) which had been in operation since 1998 and 2004, respectively. By going through a single fund, the Bank aimed to adopt a more unified approach in its support for these countries.

See IMF, ‘IMF Managing Director Dominique Strauss-Kahn Says Economic Recovery Linked to Global Stability and Peace’, Press Release no. 10/22, 31 January 2010, available at http://www.imf.org/external/np/sec/pr/2010/pr1022.htm.

See IMF Survey Online, ‘IMF Chief Emphasizes Support for Haiti’, 1 April 2010, at http://www.imf.org/external/pubs/ft/survey/so/2010/car040110a.htm.

See Giovanni Andrea Cornia, Richard Jolly and Frances Stewart, Adjustment with a Human Face (New York: Oxford University Press, 1987). The area of adjustment with a human face can now be added to those in which theoretical and practical research by the UN eventually spilled over to the BWI. See Richard Jolly, Louis Emmerij, Dharam Ghai and Frédéric Lapeyre, UN Contributions to Development Thinking and Practice (Bloomington, Indiana: Indiana University Press, 2004).

See http://www.changes-challenges.org/story/dominique-strauss-kahn-successful-partnerships-africa'sgrowth-challenge.

The PRGT replaced the Poverty Reduction and Growth Facility-Exogenous Shock Facility (PRGF-ESF) Trust. The facilities are distinguished primarily by the duration of the financing and adjustment needs, and the conditionality standard. For the details see ‘A New Architecture of Facilities for Low-Income Countries,’ (Washington DC: IMF, 26 June 2009), available at http://www.imf.org/external/np/pp/eng/2009/062609.pdf. The reform became effective and operational in January 2010, when all lenders and subsidy contributors approved it. Most of the subsidy resources will come from IMF limited sales of gold reserves.

See ‘Eligibility to Use the Fund's Facilities for Concessional Financing’, Washington DC: IMF, 11 January 2010), available at http://www.imf.org/external/np/pp/eng/2010/011110.pdf.

See del Castillo, ‘Economic Reconstruction of War-Torn Countries: The Role of the International Financial Institutions', p. 1288, for the constraining requirements to qualify for EPCA. Because of this, the last middle-income country to use it was Lebanon in 2008, and the facility was only used once in 2009 by Guinea-Bissau.

See, ‘IMF Executive Board Approves US$114 Million in Aid to Haiti’, Press Release no. 10/17, 27 January 2010, at http://www.imf.org/external/np/sec/pr/2010/pr1017.htm.

Bosnia was removed from the PRGT list for concessional financing in 2003, but remained on the IDA list, and rightly so. In July 2009, shortly after joining the World Bank, Kosovo became IDA eligible but it is not included in the PRGT. So the PRGT and IDA lists differ in that the IDA includes Albania, Bosnia and Kosovo.

The Stand-By Arrangement (SBA) is a widely used facility that lends at market rates, after the country complies with specified conditionality. The length of a SBA is flexible, and typically covers a period of 12–24 months, but no more than 36 months, consistent with addressing short-term balance-of-payments problems.

Recent SBAs for post-conflict countries are of much longer duration than the ones in El Salvador and Bosnia in the early 1990s which were for 12–18 months. For example, Iraq has an SBA for two years, Angola for 27 months, and Bosnia for 36 months.

See Graciana del Castillo and Edmund S. Phelps, ‘The Right Way to Rebuild Georgia’, Project Syndicate, November 2008, available at http://www.project-syndicate.org/commentary/delcastillo6/English.

In 2007 the World Bank included post-conflict countries with other fragile states in the LICUS Initiative. In 2010, the IMF included post-conflict countries with other low-income countries. Although efforts to make assistance more effective for these more vulnerable countries are welcome, the lumping together of these countries is unfortunate since it leads to a ‘development as usual’ approach.

See del Castillo, Rebuilding War-Torn States, p. 47.

This rule in facts eliminates the possibility that the government runs a budget deficit and finances it through money creation. See del Castillo, Rebuilding War-Torn States, Chapter 9, pp. 166–190.

For more on aid channelled outside the government budget, see IMF, ‘Islamic Republic of Afghanistan: Sixth Review Under the Arrangement Under the Poverty Reduction and Growth Facility (PRGF)’, 21 January, 2010, available at http://imf.org/external/pubs/ft/scr/2010/cr1022.pdf.

Since 2004 the IMF has been increasingly involved in a public debate on its policies. See, for example, IMF: ‘Response to ActionAid International’, 17 May 2007, available at http://www.imf.org/external/np/vc/2007/051707.htm. Revisions concerning conditionality also represent a major change from earlier policy (see chapter four, endnote 24). In 2004, the organisation also engaged in a debate with ActionAid International on the impact of the IMF programmes on HIV/AIDS and other social programmes. This debate is indicative of the tradeoffs involved with regard to expenditure following crises: http://www.imf.org/external/np/vc/2004/093004.htm.

In fact, the Fund reinforces the linkage between the programmes it supports and the goal of poverty alleviation and growth, and acknowledges the importance of taking exceptional measures to protect the poor during the current crisis.

It is no exaggeration to argue that aid information has been, and remains, one of the most chaotic aspects of reconstruction. Without this information, governments will not be able to design their policies effectively. Not much change has taken place since the problem was first identified. See Susan Woodward, ‘Economic priorities for successful peace implementation’, in Stephen J. Stedman, Donald Rothchild and Elizabeth M. Cousens, Ending Civil Wars: The Implementation of Peace Agreements (Boulder, CO: Lynne Rienner, 2002), chapter 7, p. 200.

See http://www.haiticonference.org/story.html.

The problem of lack of integration in rural development programmes is certainly not new, nor is it restricted to conflict countries. In 2007, the Independent Evaluation Group of the World Bank concluded that Bank policies were pushing African governments to cut or eliminate fertiliser subsidies, decontrol prices and privatise. Although they may have improved fiscal discipline, they had failed to achieve food security. The findings led Robert Zoellick to declare a Green Revolution for Africa as one of his top priorities on his appointment as president. The report is discussed in: http://www.brettonwoodsproject.org/art-558763. See also Celia W. Dugger, ‘World Bank Neglects African Agriculture’, New York Times, 15 October, 2007; and ‘Malawi: Can it Feed Itself?’, The Economist, 3 May 2008.

A notable exception to the fragmented approach to rural development is the Millennium Villages Project in Africa, which has produced important positive results after only three years of operation. See Earth Institute at Columbia University, Millennium Promise and UNDP, Harvest of Development in Rural Africa: The Millennium Villages After Three Years, 2010, available at http://www.millenniumvillages.org/docs/MVP_Report_2010FINAL.pdf.

See IMF, ‘Creating Policy Space’, p. 4, in which the Fund has accepted the need for improvements in targeting subsidies to the most needy low-income countries to ensure social protection during crises.

Fertiliser and seed subsidies in Malawi (a non-conflict country) adopted in 2004 amounted to 6% of current expenditure (close to 2% of GDP). In two years they increased to close to 9% of current expenditure and 2.5% of GDP (calculated with IMF data). Three years later, the IMF recognised that ‘recent robust economic growth has enabled one of Africa's poorest countries to make real strides in reducing chronic food insecurity and progress toward poverty reduction and development targets’; see IMF Survey Online, ‘Malawi New IMF Loan Boosts Prospects for Sustained Growth’, 1 April 2010, available at http://www.imf.org/external/pubs/ft/survey/so/2010/car033110a.htm.

In the mid-1990s, with the support of the BWI and the US, Haiti reduced tariffs on rice production from 35% to 3% as part of sweeping trade liberalisation reforms; as a result, a country that once produced all the rice it consumed has now become dependent on rice imports to support its population. See Josiane Georges, ‘Trade and the Disappearance of Rice’, TED Case Studies, no. 725, June 2004, at http://www1.american.edu/TED/haitirice.htm.

Quoted in Andrew Martin, ‘So Much Food, So Much Hunger’, New York Times, 20 September 2009.

In Vietnam, the combination of a relatively educated but cheap labour force, and untapped natural resources (oil and gas, gold, gemstones and tungsten), made the country attractive to foreign investment early on in its reconstruction. Although countries like the DRC, Angola and Afghanistan are rich in natural resources, they largely lack the security and human resources needed. Although these countries always find investors greedy for these resources that are willing to take increased risk, improved labour skills could make the countries more attractive to investment and would create more links to the national economy. Otherwise, particularly when foreign labour is necessary, it may lead to enclaves, without much impact on the local economy.

The latter two are problems to be addressed in Afghanistan, where the Aynak contract contemplates the employment of local labour but the required skills are not easily available in the country, and where water is a scarce commodity.

The last two are key areas to be addressed in Timor Leste.

See del Castillo, ‘Economic Reconstruction of War-Torn Countries, pp. 1285–87.

Additional information

Notes on contributors

Graciana del Castillo

Graciana del Castillo is a Senior Research Scholar at Columbia University, New York.