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The role of private sector actors in post-conflictrecoveryJohn BrayPublished online: 14 Apr 2009.

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Analysis

The role of private sectoractors in post-conflict recoveryJohn Bray

Countries need active, equitable and

profitable private sectors if they are to

graduate from conflict and from post-

conflict aid-dependency. However, in the

immediate aftermath of war, both domestic

and international investment tends to be

slower than might be hoped. Moreover, there

are complex inter-linkages between

economic development and conflict: in the

worst case private sector activity may

exacerbate the risks of conflict rather than

alleviating them. This paper calls for a

nuanced view of the many different kinds of

private sector actor, including their

approaches to risk, the ways that they

interact and their various contributions to

economic recovery. Policy-makers need to

understand how different kinds of companies

assess risk and opportunity. At the same

time, business leaders should take a broader

view of risk. Rather than focusing solely on

commercial risks and external threats such

as terrorism, they also need to take greater

account of their own impacts on host

societies. Meanwhile, all parties require a

hard sense of realism. Skilful economic

initiatives can support—but not replace—

the political process.

Introduction

There is no question that countries need active, equitable and profitable private sectors if

they are to graduate from conflict and from post-conflict aid-dependency. War leaders and

their followers are less likely to return to fighting if they have an economic stake in peace.

ISSN 1467-8802 print/ISSN 1478-1174 online/09/010001-26 q 2009 Conflict, Security and Development Group

DOI: 10.1080/14678800802704895

John Bray is a political risk specialist with Control Risks, the international business risk consultancy. His

professional interests include private sector policy issues in conflict-affected areas; anti-corruption strategies for

both the public and the private sectors; and business and human rights. He is currently based in Japan but mainly

works on international assignments.

Conflict, Security & Development 9:1 April 2009

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External assistance has a vital role to play in the immediate aftermath of conflict, but the

long-term investment needed to withstand aid-dependency will most likely come from the

private sector, or not at all.

If all goes well, the social benefits of equitable private enterprise will help sustain the

legitimacy of the post-war political order. However, in practice there are two main

problems. The first is that both domestic and—still more—international investment tends

to be slower than expected or hoped in the aftermath of war. If the economic rewards of

peace are slow or invisible, there is an increased risk that conflict will resume. The second

concerns the complex inter-linkages between economic development and conflict. In the

worst case, private business—like poorly designed international aid1—may contribute to

political tensions, thus exacerbating the risks of conflict rather than alleviating them.

With the second problem in mind Julien Barbara concluded an earlier article for

Conflict, Security & Development by calling for ‘a more discerning approach’ to the positive

and negative contributions made by different private sector actors to peacebuilding.2

He went so far as to suggest that in some circumstances ‘private sector containment’ might

be necessary for peace.

This article responds to Barbara’s call for discernment. It argues that it is essential to

differentiate between different kinds of businesses, rather than speaking of the ‘private

sector’ as though it were a single entity. In particular, policy-makers require a realistic

appreciation of how different kinds of companies assess risk and opportunity in the

aftermath of conflict. At the same time, business leaders themselves should take a broader

view of risk. Rather than focusing solely on commercial risks and external threats such as

terrorism, they also need to take greater account of their own impacts on host societies.

This includes the possibility that companies could contribute—often unintentionally—to

the underlying causes of political tension. Well-considered co-operation between public

and private sector actors increases the chances of a virtuous circle of peacebuilding rather

than a vicious circle of repeated conflict.

The legacies of war economies

Business of one kind or another—often including some form of ‘trading with the

enemy’—continues even in war-time. In that respect, ‘containment’ is scarcely an option.

The most important questions are not whether private sectors develop (the plural

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is deliberate) but rather how and when they do so, and how to channel commercial energy

in directions that are constructive rather than destructive.

In war conditions even more than in peacetime, business people require political skills to

survive, at least to the extent that they must be able to deal with—or at a minimum coexist

with—powerful military and political leaders. Post-war environments remain intensely

political, and in that respect Michael Pugh is correct to highlight the weaknesses of ‘technical’

economic strategies that fail to take account of the past and present political context.3 Both

from a policy-making and from a commercial perspective, conflicts leave painful legacies

which impede the rapid development of healthy private sectors. The task of addressing these

legacies requires a high degree of political astuteness, and there are no ‘quick fixes’.

The first consideration is that in many cases—perhaps most—the structure of the

pre-war economy was deeply flawed, and this may have been one of the factors that

contributed to conflict in the first place. At a 2006 conference at London’s Royal Institute

of International Affairs (RIIA), Kanja Ibrahim Sesay of the National Commission for

Social Action in Sierra Leone pointed to some of the factors that contributed to state

failure and civil war in his country.4 These included excessive centralisation of decision-

making; elite monopolisation of wealth; a political culture focused on the capture of

resources for particular individuals rather than the generation of wealth for all; limited

organisational capacity in government; and a climate of mutual suspicion between

government and private sector. Even if restoration of the pre-war status quo were

achievable, it would rarely be desirable.

Second, while some kind of business almost always continues in wartime, protracted

conflict distorts and destroys normal commercial patterns. Some companies and

individuals adopt ‘coping’ strategies, adapting to new environments but following more or

less mainstream business objectives.5 For example, Somali entrepreneurs have proved

remarkably innovative in certain sectors, notably mobile phones, despite the absence of an

effective national government since the early 1990s.6 In other cases, business people have

developed new skills—and amassed huge profits—in smuggling, black-marketeering and

sanctions-busting. In the conflicts of the 1980s and 1990s, such as those in Lebanon and

Bosnia-Herzegovina, there were many examples of combatants trading with military

opponents across their various frontlines.

There is now an extended literature on the political economy of conflict.7 One of the main

themes of what has become a protracted debate is the extent to which the activities of both

national and international firms contribute to conflict rather than alleviating it, for example

Private sector actors 3

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by providing a resource that contributes to military leaders’ war chests. Globalisation has

enhanced the rewards of illicit private sector activity in conflict zones. One classic example is

the Democratic Republic of Congo (DRC); in 2003 a UN Panel of Experts issued a hard-

hitting report on foreign companies’ illegal involvement in the exploitation of natural

resources during the country’s civil wars in the late 1990s and early 2000s.8

Once conflict ends, one of the major tasks is to provide alternative sources of income for

former combatants through demobilisation, disarmament and reintegration (DDR)

programmes. In the first instance these are often financed through foreign aid.9 However,

aid resources are limited and the lasting reintegration of former combatants is not sustainable

without broad-based economic recovery, including the emergence of a dynamic private

sector. In 2007 UNDP official John Ohiorhenuan wrote of Liberia that ‘employment

opportunities are perhaps the single most important factor for sustaining the fragile peace.’10

However, wartime political and commercial dynamics often persist in some form once

the fighting has died down. Those who have gained power and influence through

patronage of quasi-legal or illegal commercial networks will wish to preserve their

positions. For example, Pain and Lister point out that post-Taliban Afghanistan scarcely

amounted to an ‘open economy’ because aspiring entrepreneurs have to contend with

existing commercial networks backed by powerful warlords.11 One outcome was that

investment by both national and international companies was much slower than policy-

makers might have wished. The result has been fewer economic opportunities for ordinary

people, and this has been a major factor increasing the risks of renewed conflict.

Mere promotional blandishments to investors will not be sufficient to address these

shortcomings. If they are to find answers, policy-makers need to take a realistic view of

how different private sector actors assess and respond to risk.

Risk and opportunity in conflict-affected environments

In the immediate aftermath of conflict, the overall pattern of risks may not look so

different from when fighting was still under way. The key problems include:

. Poor security. This includes the risk of crime from ex-combatants, as well as the

possibility of renewed fighting if the peace process breaks down.

. Lack of effective regulation. Government institutions typically lack experience and

technical capacity. The regulation that exists on paper may be based on pre-war models

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that are no longer appropriate, for example because they belong to a socialist era that has

now passed.

. Widespread corruption. Post-conflict environments are notorious for high levels of

corruption, among other reasons because of the ‘state of exception’—the idea that

exceptional circumstances place the main imperative on rapid spending, with

accounting controls as a secondary consideration.12

. Poor infrastructure. Basic transport and communications structure, as well as utilities

such as electricity and water, have often been destroyed.

The overall political framework is often determined by a ceasefire agreement that is based

on some kind of compromise between the main actors (as in Bosnia-Herzegovina and

Lebanon). It will be hard—if not impossible—for local individuals or companies to

present themselves as ‘neutral’ parties. Their religion, ethnic identity or region of origin

will almost always identify them with one side or the other. Even international companies

are likely to be identified with one side or the other because of their government contacts

or the backgrounds of their local partners, suppliers and sub-contractors.

These conditions impede the commercial prospects of all kinds of businesses, whether

these are individual entrepreneurs, small and medium enterprises (SMEs) or international

companies. However, there are also opportunities arising first from the reconstruction

process itself and, more broadly, from the possibility that investors who are willing to take

the risks of being among the ‘first-movers’ can establish themselves before their more

nervous competitors.

Contrasting private sector strategies

The willingness of businesses to assume these risks depends on their appetite for taking

chances, and this, in turn, is likely to depend on their geographical origin, their sector, and

their individual commercial strategies.

The common factors are, first, that in the immediate aftermath of conflict business

people naturally will look for opportunities that combine relatively small capital

investments with fast and preferably generous returns. Secondly, the companies most likely

to operate in conflict-affected environments are typically ‘juniors’ (to adopt an oil

industry term): smaller or less-established companies that follow a deliberate strategy of

taking high risks in the hope of winning high returns.

Private sector actors 5

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Variations by place of origin

Many analyses of private sector development distinguish between ‘local’ and

‘international’ business as though there were a clear divide between them.13 In practice,

one should think more of a spectrum with small, parochial operators at one end and truly

transnational companies at the other end. Arguably, most companies operating in

post-conflict zones are somewhere in the middle: even local companies typically benefit

directly or indirectly from international trading connections and sources of finance, while

international companies of course need to deal with local suppliers and sub-contractors.

In this respect, the pattern of peacetime business is similar to the pattern of war. Pugh and

Cooper have argued for the need to understand war economies as regional rather than

purely national or local phenomena.14 The same applies to economies ‘in recovery’.

Local businesses

Local entrepreneurs have the strongest possible motivation to set up businesses. As one

successful Bosnian businessman explained to this author in 2003, his original motivation

was very simple: the war had ended, his country was in ruins, and he was ‘hungry’.15 Major

constraints of course included limited access to finance and, in many cases, commercial

expertise.

Although business people who are based in—or come from—conflict-affected countries

have a strong personal motivation to assist with its recovery, they will not put their own

funds at risk unless they are reasonably confident of receiving a return. As Collier points

out, wartime economies are characterised by capital flight, and this may continue even

after the formal cessation of hostilities.16 Local conditions, at least in the short-term, may

not be radically different from the situation during wartime.

Diaspora investors

Diaspora investors have the potential to play a particularly important role. More than

most international operators, they have the local connections and, in many cases, the

personal motivation to contribute to their country’s reconstruction. While living abroad,

they may have picked up valuable expertise, in addition to amassing funds.

In Afghanistan, the two first mobile telephone companies both had diaspora

connections: Afghan Wireless Communications Company is a joint venture between the

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Afghan Ministry of Communications (20 per cent) and the US company Telecommunica-

tions Systems International (TSI), which owns 80 per cent.17 TSI was founded by Ehsan

Bayat, a US-based entrepreneur who was born in Kabul but left for the US in the 1980s.

Roshan, the rival Afghan mobile phone company, is a consortium led by the Aga Khan

Fund for Economic Development (AKFEED), which owns 51 per cent together with a

consortium of international investors.18 The Aga Khan’s Ismaili community is widely

dispersed across Pakistan, Afghanistan and Central Asia and AKFEED is widely respected

for its development initiatives. In 2007 these two phone companies were joined by a third

investor, the South Africa-based MTN.19

While diaspora investment can play an important role, it cannot be taken for granted.

The World Bank’s 2005 report on the Investment Climate in Afghanistan noted that the

total wealth of the Afghan diaspora was estimated at some five billion US dollars, much of

it in Dubai.20 Returnees had played an important role and, in addition to their access to

capital, typically had higher levels of education than business leaders who had never left

the country. However, at least initially, Afghanistan had less success than hoped in

attracting funds from overseas Afghans.

The ‘local connections’ of diaspora investors are not necessarily unproblematic. They

benefit from local knowledge and—often by necessity—may be willing to operate in the

informal economy. At the same time, ‘knowing how to operate’ and ‘dealing with the right

people’ may simply imply a willingness to compromise business standards, for instance by

paying bribes to powerful local figures.

Regional players

Regional players are somewhat similar in that they too benefit from local connections and

sources of knowledge. Regional geographical expansion often fits into their strategic plans,

and they may believe that greater familiarity with local conditions gives them a

comparative advantage over the major international players.

Bosnia’s FDI portfolio is an example. Austria is the leading foreign investor by far, and

this fits in with a wider pattern of Austrian investment in South-Eastern Europe. Austrian

retail banks have played a particularly important role in supporting local economic

recovery. After Austria, the next three leading investor countries are all former Yugoslav

states (see Figure 1): Serbian investment, in particular, jumped dramatically in 2007.

Private sector actors 7

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Afghanistan shows a slightly different pattern: by late 2005 Turkey accounted for more

than a fifth of officially recorded foreign investment which by then amounted to some

US$520m, followed by the US with 17 per cent and China and the UAE with less than 10

per cent each.21 Like Austria in South-Eastern Europe, Turkey appears to be playing an

important role as an expanding regional economy, exploiting a comparative advantage

by operating in relatively high-risk regions in Central Asia. Many of the US investors

may in fact be diaspora Afghans. Afghanistan’s two leading traditional trading partners

account for only five per cent each of officially recorded investment. However, this may

be because firms from these countries are more willing to operate in the informal

economy.

Major transnational companies

Truly global companies with international reputations to defend are unlikely to take the

risk of investing in a small and dangerous market unless they see commensurate ‘global’

opportunities. As will be seen, the extent to which they identify such opportunities

depends, in part, on the sector to which they belong.

Figure 1. Leading FDI stocks in Bosnia and Herzegovina as at December 2007 (em)Source: Data from the BiH Foreign Investment Promotion Agency—www.fipa.gov.ba

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Variations by sector

Industry variables include the scale of the investment needed, the means of getting paid

and the speed of return.22 The following examples illustrate the differences.

Mobile phone companies, like the first swallow of spring, are typically among the first to

invest in conflict-affected areas, even before ceasefires. There are several reasons for this.

First, the scale of investment for mobile phone networks is relatively low (often in the low

hundreds of thousands of dollars in the first instance). Secondly, returns are fast: the

operating companies start getting a return when the first subscriber makes the first call.

The third reason is that many developed markets are already reaching maturity.

By contrast, in war-impeded economies such as the DRC, there may be a pent-up demand

for mobile phones.

Construction companies are among the most active in a post-war setting because of the

obvious need for their services and because—in the case of international companies—they

are typically paid offshore and, to that extent, can claim a degree of financial and

contractual security. However, companies often hesitate to make long-term investments,

for example in the management—as distinct from the construction—of utilities, until they

are more confident of the political and security environment.

Transport and logistics companies in Afghanistan provide an interesting case study of a

sector where entrepreneurs have been able to exploit a first-mover advantage by providing an

essential service with little initial competition and low start-up costs. According to a

benchmarking study produced by the World Bank’s Multilateral Investment Guarantee

Agency (MIGA),23 many logistics companies were able to begin with a modest investment of

a few thousands or tens of thousands of dollars, often operating from a single-room office or

a hotel, and have been able to make hundreds of thousands or millions in return. Profit

margins will fall as conditions improve and competitors enter the market, but the well-

established first movers will continue to enjoy a strong advantage over their competitors.

Petroleum and mining companies go where the minerals are. Many of the most attractive

under-explored new opportunities are in hitherto conflict-affected areas: the DRC is an

obvious example for mining. Extractive industry companies are therefore typically among

the first to enter conflict-affected countries, sometimes including—notably in the case of

the DRC in the late 1990s and early 2000s—countries that are still at war. However, in the

first instance they are more likely to engage in exploration rather than the substantial

investments needed to build and develop mines or oil fields. Also, the companies that enter

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high-risk environments are more likely to be small companies that offer their own

investors high risks in the hope of high returns. Behemoths such as BP, Shell, Exxon or Rio

Tinto are much more sensitive to risks to their reputation because they have more to lose.

Much of the debate on the political economy of conflict has focused on the impact of

companies in the natural resources sectors, particularly petroleum and mining. In the

worst case, oppressive national governments may use income from natural resources to

reinforce their authority—and finance their armed forces—without the need for

accountability to taxpayers. Meanwhile rebel movements in countries such as Angola and

Sierra Leone have used what have been called ‘conflict diamonds’, to finance their military

activities.24 A further concern is the debate about the so-called ‘resource curse’, the pattern

of which seems to suggest that an abundance of natural resources distorts and impedes

national economic development rather than enhancing it.25 Prominent examples that

seem to support the ‘curse’ theory include Nigeria under former President Sani Abacha

and Zaire (now DRC) under President Mobutu Sese Seko.

The major Western international companies are sensitive to these controversies and, as

will be seen below, leading industry associations are trying to address them. At the same

time there has, in recent years, been a trend in which state-owned companies—notably

from China, India and Malaysia—invest in high-risk regions where major Western

companies are reluctant to operate: Sudan is the classic example. The motivation is often

partly strategic—inspired by their governments’ determination to gain access to important

resources—rather than narrowly commercial. Long-term initiatives to address the

extractive sectors’ potential impact on conflict need to involve both Western and

non-Western companies—as well as businesses operating in other sectors.

Banks are among the ‘building blocks’ of economic development but tend to be

risk-averse. Retail banks are less likely to invest until they are confident of a degree of

political and regulatory stability. Standard Chartered Bank does have a record of setting up

in high-risk environments: it was among the first international banks to open branches in

post-conflict Sierra Leone and Afghanistan. That is, in part, because an important part of

its client base comes from diplomats and development specialists. At least in the early

stages of post-conflict development, retail banks typically hesitate to build up their local

client base too rapidly.

Hotels follow a somewhat similar pattern: Hyatt set up an operation in Kabul soon after

the fall of the Taliban in the hope of serving the diplomatic and aid official market.

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Mass tourism—which is notoriously susceptible to security concerns—tends to

develop much later.

Speed and sequencing

It follows from the above that there is a natural sequencing pattern, both in the

quantity of foreign investment and in the form that it takes. Immediately after a

ceasefire, there tends to be a substantial increase in aid, but this tails off over the

following decade as the memory of the conflict recedes and ‘aid fatigue’ sets in.26

The pattern of foreign direct investment (FDI) is somewhat different: there may be a

slight increase in investment flows immediately after the conflict, chiefly from those

seeking a first-mover advantage and those engaged with physical reconstruction.

The first steps will most likely be taken by smaller and less risk-averse companies in

sectors such as mobile phone sellers that have a realistic chance of making rapid

returns. However, the major increase is likely to come some years after the conflict has

ended once the infrastructure has been repaired, the necessary institutions are in place

and it is clear that the conflict is not likely to resume. At this stage, retail banks and

companies in sectors that require substantial initial investments are more likely to take

the plunge. If all goes well, private investment will replace aid as the economy

‘graduates’ from conflict.

Figure 2 illustrates that Bosnia-Herzegovina has followed roughly this pattern after a

particularly slow start: a study of Bosnia’s economic reconstruction by Tzifakis and

Tsardanidis refers to the first 10 years after the Bosnian war as a ‘lost decade.’27 Bosnia’s

prospects have always been limited by the fact that, with a total population of some four

million, it constitutes a relatively small market. The factors that further delayed economic

expansion in the post-war era included: the divisive political framework emerging from

the 1995 Dayton Agreement; a complex and poorly structured regulatory system; the slow

pace of privatisation; high levels of corruption; and the country’s post-socialist legacy as

exemplified by the continuation of the socialist-era Payment Bureaux until 2001.28

The country’s reform programme began to pick up only in the early 2000s and eventually

brought important results. For example, the abolition of the Payment Bureaux paved the

way for the expansion of the retail banking industry, notably including substantial

investments from foreign banks.

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Despite its many problems, Bosnia-Herzegovina may be one of the more fortunate

post-conflict countries, benefiting from—among other advantages—its proximity to the

European Union (EU). Many African countries—even the more successful ones—are less

fortunate. Mozambique, whose civil war came to an end in the early 1990s, is regarded as

one of the more successful post-conflict countries but its recent ODA flows (US$1,611

million in 2006, according to the OECD) far outmatch FDI (US$154 million in 2006

according to UNCTAD).29 The figures for Uganda, another comparatively successful

post-conflict country, are similar: US$1,551 million in ODA in 2006, compared with only

US$307 million in FDI.30

The recent aid/investment figures for the DRC, whose civil war came to an end in 2003,

point to a dramatic influx of aid in the immediate aftermath of its peace agreement.

In 2003, it received US$5.4 billion in ODA, followed by US$1.82 billion in 2004 and

2005.31 By contrast, FDI flows have been much slower. According to revised estimates by

UNCTAD, FDI stocks actually contracted in 2005, although there was an inflow of an

estimated US$180 million in 2006.32 As elsewhere in Africa, mobile phone companies

(including Vodacom and MTN from South Africa and Celtel from the Netherlands) have

been well represented.33 There is no doubt of the DRC’s mineral potential, so FDI in the

mining industry is likely to be especially important. However, would-be investors face

Figure 2. Bosnia and Herzegovina: ODA flows compared with FDI (US$m). Source: Dataon aid receipts from Tzifakis and Tsardanidis, ‘Economic Reconstruction for Bosnia andHerzegovina’, 22; and OECD Journal on Development: Development Co-operation—2007Report, 193. Data on FDI from European Bank for Reconstruction and Development

(EBRD) country statistics, http://www.ebrd.com/country/sector/econo/stats/mptfdi.xls(accessed 10 December 2008).

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considerable political risks, as exemplified by the government’s decision in 2007 to review

61 mining contracts that had been drawn up in the previous 10 years, and were considered

to have been unduly advantageous to investors.34

The DRC’s post-war political institutions are at best in a relatively early stage of

development: it remains a classic case of a post-conflict country that combines high

political risks with the potential for high commercial returns. Against a background of

renewed conflict in eastern DRC in late 2008, it is too early to predict with confidence how

far private investment flows will be able to provide the country with the financial resources

that it needs.

Managing the private sector ecosystem

The 2004 UNDP report on Unleashing Entrepreneurship: Making Business Work for the Poor

adopts a metaphor from the natural world when it refers in several places to the existence

of a private sector ‘ecosystem.’35 In a similar vein, economic analysts often refer to a

country’s ‘investment climate’, a term which the World Bank defines as the ‘location-

specific factors that shape the opportunities and incentives for firms to invest productively,

create jobs and expand.’36

Certain climates favour particular commercial ecosystems that, as in the natural world,

contain larger, smaller and micro-entities as well as predators, parasites and, no doubt, the

equivalents of dung-beetles. The challenge is to create a symbiotic private sector ecosystem

rather than a predatory one or, worse still, a commercial desert. In a post-conflict setting it

is particularly important to create job opportunities and improve livelihoods in rural

areas—and this as an area that is often neglected.37 The task of meeting these challenges

demands the collaboration of a variety of actors: business and civil society as well as

national and international policy-makers.

In defining appropriate policies, there may be a role for certain kinds of aid

conditionality, particularly if these are intended to avoid destructive economic patterns

that increase the risk of a resumption of conflict.38 However, particularly in

conflict-affected societies, the wide range of variables means that it is difficult to define

precise or predictable formulae. There is therefore no unique path to recovery based on the

IMF or any other model.39 Nevertheless, certain patterns have begun to emerge.

Private sector actors 13

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The central role of the state

The first is the key role of the state in creating an enabling environment for the private

sector. Few observers now favour the minute regulatory involvement characteristic of

old-style socialist administrations. There is also a near-consensus among business people

as well as ordinary citizens on the central role of the state in setting rules, particularly

where these govern the provision of physical security, the rule of law, property rights and

financial frameworks.

Where national governments are unable to provide physical security, the continued

presence of multinational security forces—such as those co-ordinated by UN

peacekeeping operations (UNPKO)—is a matter of economic as well as political

importance. However, investors understand as well as—or better than—politicians that

external intervention is at best a temporary solution pending the emergence of a viable

political settlement.

Similarly, the repair of physical infrastructure such as roads or electricity supplies is an

important first step to recovery. However, long-term economic as well as political recovery

demands the creation of effective national institutions and regulatory frameworks. As the

British economist Tony Addison puts it, it is a lot easier to ‘pour concrete’ than to establish

effective and accountable institutions.40 However, the latter is what is required to restore

economic confidence in post-conflict environments.

After the end of the Ugandan civil war in 1986, the Kampala Government took a series

of steps to restore and reinforce property rights. This included returning property owned

by Asians who had been expelled in 1972. At the time this was a painful measure because,

in the meantime, the properties concerned had been occupied by local people. However,

this approach brought results. By 1986 two thirds of Ugandan private wealth was held

abroad and by the mid-1990s Uganda was attracting substantial repatriation, and this

contributed to private sector investment in the country’s coffee boom.41

The key factors that make for a business-friendly ‘enabling environment’—notably

security, anti-corruption measures and the rule of law—are as important to local

entrepreneurs as they are to international companies. Indeed, World Bank research shows

that small and informal firms often suffer more than medium and large companies from a

poorly developed investment climate.42 Not surprisingly, small and informal firms find it

harder to obtain loans from a formal financial institution. They are also less likely than

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larger firms to be confident that courts will uphold property rights, or to believe that

regulations will be interpreted consistently.

Local entrepreneurs and SMES play a particularly important role in post-conflict

recovery because, if all goes well, they are likely to provide one of the main sources of

employment. Conversely, if they fail to benefit, the legitimacy of the post-conflict political

order will come into question. In both Iraq and Afghanistan, there have been complaints

that decisions on the award of reconstruction contracts tended to favour large

international companies at the expense of local competitors. In the DRC one of the most

sensitive—and potentially explosive—questions for the mining industry concerns the

future status of artisanal miners.

International advisors may be able to play a constructive role by advising on the most

important reform measures. For example, the World Bank’s Foreign Investment Advisory

Service (FIAS) conducted diagnostic reviews of the investment climate in Sierra Leone and

Liberia.43 Both reports emphasised the need for reforms to the local legal frameworks.

External advisors have no mandate to engage in partisan political debate. What they can

do is to help prepare the analysis and lay out the options on which national leaders must

decide.

The timing of reforms

Collier argues that there is an unparalleled opportunity for reform in the relatively fluid

period in the immediate aftermath of conflict: it is important to seize it, and the Ugandan

case study cited above is a positive example.44 In a similar vein, Mendelson-Forman and

Mashatt refer to the ‘golden hour’, a term borrowed from the medical literature

representing ‘a crucial moment that could mean the difference between life and death for a

critically ill patient’.45 They argue that there is also a ‘golden hour’ in the world of

post-conflict transformation when—early on in the reconstruction process—the

international community has the opportunity to ‘lay a foundation for a full economic

recovery from conflict or to set the path for a recurrence of fighting’.46

Whether, or not, one accepts the ‘golden hour’ analogy, there is growing agreement on

the need to embark on legal and regulatory reform sooner rather than later. Stating that

this is desirable is not to underestimate the difficulties. In interviews in Bosnia in 2003, this

author encountered the view that earlier reform would have been difficult or impossible

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in the fraught political conditions of the mid- to late 1990s.47 A counter-argument is that it

is harder to implement reforms later on because delays make it easier for those with

post-conflict vested interests to entrench their positions.

With both local and international investors in mind, Schwartz and Halkyard therefore

argue for the need to ‘eliminate as many regulatory risk barriers to entry as possible; and

avoid complex bidding arrangements meant to maximize the revenues from licenses,

concessions or asset sales.’48 The priority is to create a regulatory environment that

promotes private investment, competition and consumer benefits.

Promoting FDI

As discussed above, the pace of FDI is likely to be relatively slow in the immediate

aftermath of conflict, and this raises the question what can be done to accelerate it.

The most important measures are the same as for domestic investors: legal institutional

and regulatory reform to improve the security of property rights. At the same time there is

a continuing debate on the extent to which special incentives may play a role in attracting

foreign investment.

In a discussion on the role of tax incentives in attracting FDI, Morisset argues that tax

incentives are less important than such factors as ‘basic infrastructure, political stability

and the cost and availability of labour’.49 This is not to say that they are irrelevant: ‘tax

incentives affect the decisions of some investors some of the time’.50 They may be among

the instruments that host governments can include in their portfolio, but are by no means

the only tool that they have to attract FDI, much less the most important one. This general

truism will apply all the more in post-conflict environments.

A similar point applies to political risk insurance (PRI). In a 2004 study on Bosnia,

I argued that PRI was most useful in cases where the post-conflict environment had

improved, and investors had already identified attractive opportunities.51 In those

circumstances, PRI could help tip the balance between risk and opportunity in favour of

going ahead with investment. It therefore made the greatest difference in the early 2000s,

by which time this tipping point was in sight, rather than in the mid- to late 1990s when

the overall environment was too risky, or the mid-2000s by which time many of the worst

problems had already been solved.

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In the Bosnian case PRI provided by MIGA was particularly useful in facilitating

investment by Austrian retail banks, whose local branches were then able to serve as a

source of credit to emerging local companies. MIGA has sought to play a similar role in

Afghanistan through the Afghanistan Investment Guarantee Facility (AIGF). The facility

includes features that are designed to facilitate the development of the local private sector.

For example, a portion of AIGF can be used to insure transactions that involve loans by

a foreign financial institution or the local branch of a foreign bank to local Afghan

businesses.52 The objective is to foster a commercial ecosystem in which international and

local enterprises complement each other.

The private sector and peacebuilding

Overall, the most important contribution that companies can make to peacebuilding is to

concentrate on the responsible fulfilment of their core commercial activities—whether

these concern telecoms, financial services or mineral development—thus increasing wealth

and creating the economic conditions for post-conflict recovery. However, wealth creation

is not in itself sufficient to resolve conflict: indeed it may actually help create the

conditions for conflict if the benefits of short-term economic recovery are unevenly

distributed. The question therefore arises whether companies can do more to contribute to

peacebuilding.

In recent years, there has been increased emphasis on the need for Corporate Social

Responsibility (CSR) or, to use the term favoured by the OECD, Responsible Business

Conduct (RBC). Whatever term is used, it should be clear that the responsible business

agenda must cover companies’ mainstream commercial activities—for example their

treatment of employees and the consequences of their engagement with government

agencies—and not just well-meaning but peripheral philanthropic sponsorships.

Business responsibility in weak governance zones

The challenges of conducting business responsibly are all the greater in countries and

regions where governance standards are poor: these obviously include countries that have

been—or still are—affected by conflict. The OECD has drawn up a Risk Awareness Tool for

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Multinational Enterprises in Weak Governance Zones, and this emphasises the need for

‘heightened managerial care’ including, for example, extra measures to ensure that

companies are fully briefed on the backgrounds and connections of their business

partners.53

Both the Risk Awareness Tool and the OECD’s Guidelines for Multinational Enterprises

are voluntary for companies, as are the UN Global Compact’s ten principles.54 In recent

years, NGOs in particular have called for binding international regulation to govern the

activities of international companies.55 Significant progress has in fact been made in the

field of anti-bribery legislation: all OECD member states now have laws establishing extra-

territorial jurisdiction over companies from their countries that pay bribes to foreign

officials, whether the bribe is paid at home or abroad.56 The 2003 UN Anti-Corruption

Convention has established the foundations of a truly global anti-corruption regime.

By contrast, progress in other fields—notably human rights—remains slow.

In June 2008 John Ruggie, the UN Secretary General’s Special Representative on

Business and Human Rights, presented a report entitled Protect, Respect and Remedy to the

UN Human Rights Council.57 Ruggie emphasises the need both for business to respect

human rights and for states to protect potential victims. However, he has stopped short of

calling for an international treaty on business and human rights, partly because of the

difficulties in enforcing it.58 In practice, voluntary initiatives and international regulation

can—and should—complement each other rather than being seen as opposites.59

The need for ‘conflict sensitivity’

In any case, regardless of the state of the international legal regime, companies—like

public-sector agencies—have an enlightened self-interest in ensuring that their projects

and policy interventions reduce the risk of conflict rather than exacerbating it.

The oil, gas and mining industries have come under particular scrutiny both in relation to

the possibility that they could—directly or indirectly—help finance conflict and because of

their wider developmental impacts. Extractive industry companies typically spend millions

of dollars on exploration, with uncertain returns, but once projects come into production

the profits are enormous. However, there are limited employment opportunities for local

people, particularly in regions with low educational standards. The main beneficiaries all too

often turn out to be national governments and companies rather than the local communities

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that suffer most from environmental impacts. The local conflicts associated with the

petroleum industry in Nigeria’s Niger Delta are now regarded as a classic illustration of

negative social impacts: the challenge for petroleum and mining companies is to learn from

painful past experiences and to avoid similar scenarios in future.

By contrast, the business model—and the social impacts—of the mobile phone industry

are completely different. As noted above, initial investments are lower, financial returns are

faster and, of course, the local customer base is much wider. Mobile phones assist

micro-entrepreneurs, for example, by making it easier to check market prices. In doing so,

they make a contribution to broad-based economic development which may genuinely

alleviate the risks of conflict.

Many of the most important lessons for business derive from the experience of

development agencies. In her groundbreaking book Do No Harm, Mary B. Anderson

focussed on the role of aid organisations. Since then, she and her colleagues have adapted

many of the principles that she developed for aid agencies to the private sector.60 She

points out that in conflict situations, companies can hardly expect to be neutral. There are

always ‘winners and losers’. Almost everything that companies do will have an impact on

the underlying conflict one way or another. It is therefore important to identify

‘connectors’—actions and projects that will bring people together rather than dividing

them. Employment is often a particularly sensitive issue in terms of who benefits most

from job opportunities and where they come from. Both aid agencies and companies need

to design their recruitment policies accordingly.

Specifically with regard to the private sector, the United Kingdom-based NGO

International Alert likewise has been promoting the principles of conflict sensitivity,

initially with a particular focus on the extractive sectors. Publications include a

Conflict-Sensitive Business Practice Toolbox for Extractive Industries, and a follow-up

publication for engineering contractors.61

The principles of conflict-sensitive business practices and development are becoming

better and better understood: the major challenge is how to implement them most

effectively. Within companies, one of the biggest challenges is to ensure that they are

understood and fully applied by operations managers and not just by CSR specialists.

More broadly, there is an obvious need to ensure that the principles of conflict sensitivity

are applied not just by larger Western companies but also by smaller and niche companies

from all parts of the world, as well as by local entrepreneurs. This dissemination process is

only just beginning.

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Collective business initiatives

Collective business initiatives play an important role in helping to raise standards

and promote best practice, both internationally and locally. Examples with a bearing on

post-conflict development include the banks that have adopted the Equator Principles, a

set of guidelines for making project financing decisions.62 These include a commitment to

adopt the International Finance Corporation’s (IFC) social and environmental

performance standards when making project financing decisions. Meanwhile, the UN’s

Global Compact initiative has played an important role both in giving advice on the

principles of conflict risk assessment, and in promoting public-private policy engagement

on how to promote responsible business in conflict-affected areas.63 At the same time,

industry associations—such as the International Petroleum Industry Environmental

Conservation Association (IPIECA)—are producing their own guidance documents for

companies operating in conflict zones.64

Collective business initiatives can also play a valuable advocacy role at the local level.

Individual business people—such as those in the former Yugoslav successor states—

frequently complain of a lack of understanding by local and national administrations. In the

former Yugoslav states, this is the legacy not so much of conflict as of the socialist era that

preceded the conflict. Rather than taking the measures needed to stimulate business in the

first place, overstaffed local administrations have placed more emphasis on raising taxes to

ensure that they have sufficient income to avoid town-hall redundancies. Part of the answer

may come from the development of genuinely representative business associations that are

better placed to articulate private sector concerns and propose solutions.65

SMEs are often under-represented in political dialogues on governance and economic

reforms, in part because the associations that represent them are poorly organised and

have limited political clout. In its 2006 assessment of Liberia’s post-war investment

prospects, the FIAS pointed to the need for a ‘transparent and institutionalised process’ to

establish dialogue between the government and the private sector.66 Existing Liberian

business associations tended to be aligned on both ethnic and sectoral lines and many

appeared to face internal governance problems.

In research visits to Montenegro and Georgia (both of which are transitional and—at

least to some extent—conflict-affected economies) conducted on behalf of the US

development agency CHF International in 2006, this author was struck by the comparative

neglect of the agricultural sector.67 The reasons in part seemed to stem from the priorities

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of the metropolitan elites leading the two countries’ national administrations. Both there

and in many other countries the agricultural sector is poorly represented in national policy

discussions, and this is all the more damaging for the obvious reason that it provides one

of the main sources of livelihoods in rural areas.

Business and conflict resolution

While the prime role of companies is to concentrate on their core businesses, there may be

questions concerning their ability to play a more explicit part in conflict resolution. These

questions are sensitive ones. It is understood that business associations are entitled to

lobby governments concerning, for example, tax regimes. However, neither individual

companies nor business associations can make a plausible claim to a democratic mandate,

and it is therefore questionable whether they can claim the popular legitimacy needed to

justify a wider political involvement. In the worst case, they run the risk of being accused of

attempting ‘regime capture’—distorting the political process in order to advance the

personal interests of elites who hold narrow views of their political and economic

responsibilities. In this sense, ‘regime capture’ was, for example, a feature of Slobodan

Milosevic’s Serbia.

However, while such warnings need to be taken seriously, there are positive examples of

business playing a constructive peacebuilding role. One case comes from Northern Ireland,

where the local branch of the Confederation of British Industry (CBI) made an important

contribution by spelling out the economic consequences of conflict to rival leaders, and

introducing the notion of a ‘piece dividend’ into the local political vocabulary. 68 Similarly,

in the early 1990s South African business helped facilitate the transition from the apartheid

regime to democracy by fostering communications between rival political parties.69

In Colombia business-led peace initiatives have made an important contribution at the

local level: for example, by changing to a co-operative business model, promoting public

policy dialogue and championing sustainable development in deprived areas in an attempt

to address the economic sources of conflict.70

Business is most effective when it avoids the appearance of partisanship in the sense of

supporting one particular actor or political party, but instead points to the economic costs

of failing to end conflict—and to the dividends that accrue from achieving peace.

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Policy implications: changing paradigms

War is the ultimate zero-sum game: winners take all, often including the lives as well as the

livelihoods of their opponents. By contrast, the paradigm for a sustainable business is a

series of repeatable transactions from which both sides benefit.

The winner-takes-all paradigm does not disappear when a peace treaty is signed. War

is politics by other means: all too often politics is war by other means. In this sense

economics also may be a form of war: the political control of economic resources to

favour particular communities or individual rent-seekers at the expense of the wider

community. The Afghan warlords’ dominance of local trading networks is one example.

The ethnic-political-commercial nexus that controlled parts of Bosnia long after the

fighting ended is another; and the continued influence of Kosovo’s underground

networks supported by political interests is a third example. The ultimate objective of

economic policy-makers must be to change the war paradigm in favour of a model of

business engagement that is based on co-operation rather than conflict, and that is

therefore truly sustainable.

In order to achieve this shift, government policy-makers and development specialists

need to factor private sector concerns into their calculations at every stage. This requires

a nuanced view of the many different kinds of private sector actors, including their

approaches to risk, the ways that they interact and their various contributions to

economic recovery. Perhaps the most important single requirement is to focus on the rule

of law and the development of an equitable regulatory environment at the earliest

possible moment, and not as an afterthought once the reconstruction of physical

infrastructure is under way. Meanwhile, companies themselves need to take a more

sophisticated view of their own contributions to peacebuilding, learning from the

development agencies’ soul-searching on the need for conflict sensitivity in all aspects of

economic development.

Finally, all parties require a hard sense of realism. Private sector actors are neither the

source of all ills nor the solution to all dilemmas. Private sector development can alleviate

some post-conflict problems, and no lasting economic recovery is possible without it.

At the same time, it needs to be remembered that peace processes are inherently and

inevitably political. Skilful economic initiatives can support—but not replace—the

political process.

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AcknowledgementsThis article is based on a background paper commissioned by the United Nations DevelopmentProgramme in connection with its report, Post-Conflict Economic Recovery: Engaging Local Ingenuity,Crisis Prevention and Recovery Report 2008, UNDP Bureau for Crisis Prevention and Recovery,New York. I am particularly grateful Karen Ballentine, who commissioned the original paper, and toan anonymous Conflict Security and Development reviewer for their advice and suggestions. I retainresponsibility for all errors of fact or judgement.

Endnotes1. On the potential complexities of aid impacts see

Anderson, Do No Harm.

2. Barbara, ‘Nation Building and the Role of the Private

Sector’, 591.

3. Pugh, ‘Post-war Economies’.

4. Bray, Public-private Partnership, 2.

5. Banfield, Gunduz and Killick, Local Business, Local

Peace, 2.

6. Nenova and Harford, ‘Anarchy and Invention’, 2.

7. See, for example, Berdal and Malone, Greed and

Grievance; Collier and Hoeffler, Greed and Grievance in

Civil War; Ballentine and Sherman, The Political

Economy of Armed Conflict; Berdal, ‘Beyond Greed and

Grievance’; and Banfield, Gunduz and Killick, Local

Business, Local Peace. Collier, Economic Causes of Civil

Conflict.

8. UN Panel of Experts, Letter Dated 15 October 2003.

9. For a review of DDR policy issues, see UNDP, Post-

Conflict Economic Recovery, 65–73.

10. Ohiorhenuan, Challenge of Economic Reform, 17.

11. Lister and Pain, Trading in Power, 1–2.

12. See Large, Corruption in Post-war Reconstruction; Le

Billon, ‘Buying Peace or Fuelling War’; Galtung and

Tisne, ‘Integrity after War’.

13. See, for example, Banfield, Gunduz and Killick, Local

Business, Local Peace, 16–35.

14. Pugh and Cooper, War Economies in a Regional Context.

15. Interview conducted in Vitez, Central Bosnia, November

2003.

16. Collier, Post-conflict Recovery, 7.

17. Bray, International Companies and Post-Conflict Recon-

struction, 14–15.

18. Ibid.

19. ‘MIGA Supports Critical Telecommunications Invest-

ment in Afghanistan’. Press release, 3 July 2007.

Multilateral Investment Guarantee Agency, Washington.

www.miga.org.

20. World Bank, Investment Climate in Afghanistan, 8.

21. Ibid., 9

22. For an extended discussion of these variations see Bray,

International Companies and Post-Conflict Reconstruction.

23. MIGA, Benchmarking FDI Opportunities, 30.

24. Bannon and Collier,NaturalResources andViolentConflict.

25. For an authoritative review of the ‘resource curse’ debate

see Stevens, ‘Resource Impact’.

26. Collier, Aid Policy and Growth; Collier et al., Breaking the

Conflict Trap, 167–170; Schwartz, Hahn and Bannon,

The Private Sector’s Role.

27. Tzifakis and Tsardanidis, ‘Economic Reconstruction for

Bosnia and Herzegovina’.

28. Bray, MIGA’s Experience in Conflict-Affected Countries,

13–20.

29. OECD Journal on Development: Development

Co-operation—2007. Report, 190; UNCTAD, World

Investment Report 2007, 252.

30. Ibid.

31. OECD Journal on Development: Development

Co-operation—2007 Report, 190.

32. UNCTAD, World Investment Report 2007, 252.

33. O’Reilly, Finbarr, 2002. ‘Mobile Phone Networks Battle

for Congo’s market’. News24.com. Available at:

www.news24.com (accessed 3 February 2008).

34. Bream, Rebecca, 2008. ‘Congo Asks for Bigger Mining

Share’. Financial Times, 20 March 2008.

35. UNDP, Unleashing Entrepreneurship.

36. World Bank, Better Investment Climate, 1.

37. For a discussion of this point in relation to Timor–Leste

see Kusago, ‘Post-Conflict Pro-poor Private Sector

Development’.

38. Boyce, Investing in Peace.

39. See the chapter on ‘Macroeconomic Policy Consider-

ations in Post-Conflict Recovery’ in UNDP, Post-Conflict

Economic Recovery.

40. Addison, ‘Understanding Investment in Post-Conflict

Settings’.

41. Collier, Post-conflict Recovery.

42. World Bank. Better Investment Climate, 8

43. FIAS, Sierra Leone; FIAS, Liberia.

Private sector actors 23

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44. Collier, Post-conflict Recovery, 6–7.

45. Mendelson-Forman and Mashatt, Employment Gener-

ation and Economic Development, 3.

46. Ibid., 3.

47. Bray, MIGA’s Experience in Conflict-Affected Countries, 40.

48. Schwartz and Halkyard. ‘Rebuilding Infrastructure’, 2.

49. Morisset, Tax Incentives, 1.

50. Ibid.

51. Bray, MIGA’s Experience in Conflict-Affected Countries,

41–42.

52. MIGA, Afghanistan Investment Guarantee Facility.

53. OECD, Risk Awareness Tool.

54. OECD, Guidelines for Multinational Enterprises; UN,

Global Compact Business Guide.

55. See Turner, ‘Taming Mammon’.

56. Bray, Facing up to Corruption.

57. Ruggie, Protect, Respect and Remedy.

58. Ruggie, ‘Business and Human Rights’.

59. Gordon, Rules for the Global Economy.

60. For more information, see: www.cdainc.com.

61. International Alert, Conflict-Sensitive Business Practice

Toolbox; Banfield and Tripathi, Conflict Sensitive Business

Practices.

62. For more information, see www.equator-principles.com

63. UN Global Compact, Global Compact Business Guide;

UN Global Compact, Enabling Economies of Peace.

64. IPIECA, Operating in Areas of Conflict.

65. Bray, ‘CHF’s Municipal and Economic Development

Initiative (MEDI) Project’.

66. FIAS, Liberia.

67. USAID, Economic Civil Society Organizations in Democ-

racy-Building, 61–63.

68. International Alert, ‘The Confederation of British

Industry’.

69. Charney, ‘Civil Society, Political Violence, and Demo-

cratic Transitions’.

70. Rettberg, Business-led Peacebuilding in Colombia.

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