Private Sector Development: Key Debates & Implementation Challenges

There are many critical debates that underlie thinking and practice around the role of the private sector and peacebuilding. We have chosen to highlight a few here, alongside various pertinent implementation challenges.

Perspectives on liberalization

In general, Albert Hirschman contends that economists can be split into roughly three camps, depending on whether they believe in "monoeconomics" (the idea that all economies have essentially the same components, and that those components work together in essentially similar ways), and in trade's "mutual benefit" (i.e., that both parties gain from the act of trade. Economists who believe in both are in the liberal, or neoclassical, tradition, and tend to advocate for liberal trade as a prescription for growth. Those who believe the mutual benefit claim but not the monoeconomics claim, Hirschman deems to be development economists, while those who reject both claims are in the Neo-Marxist camp.1 Today's New Institutional economists, such as Dani Rodrik, may have aspects of the latter two, but generally emphasize the need to tailor economic policy to specific problems or goals according to the context.

Principles of liberal economics

Liberal economists and scholars draw inspiration from the main principles articulated in Immanuel Kant's Perpetual Peace (1795) to argue that greater economic integration directly contributes to promoting peace. Kant argued that economic interdependence "reinforces constitutional constraints and liberal norms by creating transnational ties that encourage accommodation rather than conflict."2 In addition, according to Kantian liberal economic theory open markets inherently decrease the risk of conflict by ensuring that transactions will be determined by prices rather than coercion.3

These Kantian principles underlie arguments made by many development organizations and IFIs to support policies that decrease the role of the state in favor of enhancing the freedom of private sector actors to interact and compete in international markets. During the 1980s and early 1990s the IMF lent money to developing countries conditional on liberal reforms including decreased trade barriers. In addition, "emerging markets" gained popularity among investors leading to increased levels of private capital inflows.4 Thus developing countries rapidly and simultaneously became more integrated into international trade and capital markets.

However, following the financial crisis in Asia and Latin America in the 1990s, the IMF began to qualify its support for free market reforms by recognizing the importance of "good governance" and appropriate institutions, especially financial institutions, to the success of liberalization. In addition, the IMF began to focus more attention on efforts to support domestic private sector development through helping governments create an enabling environment for private actors.5 Thus several international economic institutions have adapted their arguments from a question of whether countries should liberalize, to when and how quickly they should do so.6

Critiques of market liberalization

In contrast to liberal economic theorists, several critics argue that market liberalization is not the best option for the growth of domestic private sectors in developing countries and may actually aggravate the potential for conflicts. Prominent economist such as Joseph Stiglitz and Jose Antonio Ocampo criticize the 'one-size-fits-all' market liberalization approach typically promoted by the IMF in developing countries. They argue, "developing countries need a wide range of reforms before they can risk market liberalization. And small countries in particular may never be able to adequately protect themselves from the volatility associated with international capital flows - without some form of capital account management."7

Several critics push this objection even further by arguing that it is not a matter of timing and development of domestic financial institutions, but the continued impact of colonial legacies and unbalanced structures of power in the international system that ultimately exclude private actors in developing countries from being able to compete freely and fairly in global markets. For example, Giovanni Arrighi argues that historical heritage positions a country or region favorably or unfavorably in their power and influence to make the world market work to their advantage.8 Arrighi points out the fact that despite the rhetoric of global-orientation of MNCs, most of the MNCs are based in the West and spread mainly western-cultural traditions. On the other hand, many developing countries have been pushed to specialize in primary production of commodities that are particularly vulnerable to volatile market demand.9

Writing specifically about the impact of trade on the promotion of peaceful international relations, Katherine Barbieri also finds the liberal model not to accurately depict reality. The common liberal argument of trade liberalization rests on two pillars: (1) the salience (or magnitude relative to GNP) and (2) the symmetry of the trade relationship between countries. In the model, the greater each of these attributes, the greater the likelihood that peace will prevail between countries. Barbieri finds that, at the dyadic level, salience actually increases the propensity to war, while symmetry does exhibit the predicted negative relation, but only at low levels of salience. She also stresses that salient trade partners are more likely to negotiate a peace settlement, but that negotiated settlements are in turn more likely to erupt into violence again. In monadic terms, open countries are less likely to go to war, possibly because there is less chance of having a preponderantly salient partnership with any one dyadic partner. Thus, close contact is double-edged, and can produce either increased mutual reliance or more opportunities for hostilities to erupt.10

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Foreign direct investment (FDI) in the peacebuilding process

Attracting FDI is often incorporated into economic recovery strategies in order to increase employment opportunities, strengthen infrastructure, and stimulate technological and other spill-over effects. Responsibly directed FDI, advocates argue, has tremendous potential to greatly influence economic growth post-conflict by reviving industries or sectors that supply sustainable employment, particularly important for integrating marginalized groups that may have been affected by or involved in the conflict (war-affected populations, refugees/IDPs, war widows, former combatants). FDI is also capable of being a stop-gap for frequently deficient funding of certain public services (i.e. private mobile phone networks created in place of a functioning telecom industry).11 Investment in post conflict settings can also serve the consolidation of peace, building public confidence in the process as recovery aims are met.

FDI however, does require a certain level of functioning infrastructure in most cases. Unfortunately, the lowest income states most prone to conflict carry an estimated 39% of the world's population but only 13% of global value in infrastructure. (This becomes evident for any visitor to sub-Saharan conflict-affected countries where roads, buildings, bridges and public works are often severely deficient.) In striking contrast with developed nations, the average person living in a low-income country has access to public works rarely worth more than US$800. One World Bank paper notes, "While low income countries represent only 30% of the countries in the world, they represent 61% of recent post-conflict countries and three-fourths of those which can be described as having had non-functioning national structures over the last decade as a result of conflict."12 Some donors note that the role of FDI exceeds provision of financial resources in hard times, and it offers real opportunities for synergies and innovations in technology as well as creating different kinds of export markets. 13

On the other hand, some scholars argue that FDI may increase risks of renewed violence and undermine economic recovery. The vigorous investments by some multi-national corporations (MNCs), again, particularly in the extractive industries, can easily exacerbate joints of tension for resumption of conflict.14 The danger of creating a parallel economy where national markets lack maturity or in operating without the oversight of functioning institutions can tip a fragile environment in the wrong direction.15 Other concerns relate to the crowding out or manipulating domestic markets to the point where the state is less capable of regulation.16 Research suggests that FDI can act to dislocate domestic investment or dissuade the state to replenish national savings to shore longer-term economic stability.17 Driving out local competition is often done through "transfer pricing" (internal firm transfers to control commodity prices), artificial inflation of essential goods, non-competitive pricing made possible by corporate support, or insider dealings with government for favorable terms of regulation.18 Weak institutional, regulatory and audit capacity often permit such actions to continue, and other checks such as trade or labor unions are often ill-equipped for action without state backing.

Some studies point out other potential detrimental impacts of premature FDI in recovering economies. Most acute in the extractive industries, robust private financial flows into fragile states have created dependency by states and in some cases, exacerbated local tensions.19 In the 1990s in Africa, 65% of all FDI was in this sector. Yet still today, minerals in Eastern Congo and Sudan, oil in Iraq and the Nigerian delta, diamonds in Angola and Sierra Leone; no shortage of resource-related conflict has bedeviled poor and fragile nations. Where access rights to those resources belong to poorly educated indigenous minorities, exploitation can be severe. Poorly prepared or experienced in complex user rights and extraction arrangements, these groups are susceptible to "stakeholder consultations" actually masking poorly articulated representation for "consent," which can often result in their losing vital access to resources needed for their survival.20

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Strategies for attracting FDI in high-risk post-conflict countries

Establishing the conditions conducive to foreign direct investment post-conflict is a fundamental economic priority for states striving to achieve economic growth. Below five strategies outline priorities in this process as advocated by a range of policy experts and practitioners. They deal with establishing right authority, cooperation with multi-lateral institutions, stakeholder consultation, openness to trade and finally managing the transition from aid to trade. In no particular order, together they form a kind of menu of options for states to consider when developing post-conflict interventions.

Establishing authority

Host countries attempting to attract FDI are advised by some policy advisors to be cautious to retain authority to regulate the businesses within their borders, negotiating a balance between courting entrants to newly open markets while also demonstrating authority as a regulatory body with capacity and will for enforcement. One tool for exercising this control in a still changing regulatory environment is bilateral investment treaties (BITs). BITs essentially grant investors legal recourse by allowing them to sue states if they can demonstrate the state has undermined corporate interests. Similar such treaties have proliferated in recent years (An estimated 2,181 were signed in 2002). Their purpose is reducing the risk that bodes caution to potential investors, but studies indicate they have to date made little difference in FDI flows. Some fear that they constrain states to reconsider legislation that may be in the public interest for fear of lawsuits as allowed under BITs. While tools such as these may be useful in some respects, their potential value to states as authoritative regulators remains debatable.21

Cooperating with multi-lateral institutions

Foreign investors are advised by many to mitigate the risk of post-country conflicts, and thus increase the value of their own investments, by cooperating with international organizations such as the World Bank. While the private sector cannot avoid risk altogether, it can make strategic decision to abate it through tools made available by these institutions. Two popular such tools are political risk insurance or project finance guarantees, offered by the World Bank's Multilateral Investment Guarantee Agency (MIGA) or donor groups such as the sub-sovereign Northern European guarantee mechanism, called Guarantco. This latter facility focuses on local infrastructure investments into municipalities rather than states, by creating access to local currency guarantees and by guaranteed local banks.22 In this regard cooperation with institutions opens new avenues for mitigating risk and securing investment.

Stakeholder consultation

Local stakeholder consultation is perhaps one of the most effective strategies for FDI to engage more cautiously and responsibly in post-conflict countries, while providing an opportunity to take a lead role in contributing to peacebuilding efforts. This concept is discussed in greater detail in other sections but it is important to reiterate the value of community engagement for foreign companies wishing to (re)establish operations in conflict-prone areas. Without it, and again this is especially true where natural resources endowments attract much foreign interest, corporate activities can reignite old grievances or cause new ones if resource extraction benefits are not shared. Some multinational firms keen to take on local development projects to serve communities, but are hesitant to play a greater role in social development, which they argue belongs to the state. "Trisectoral" alliances are becoming a popular compromise linking civil society to foreign investors and state agencies.23

Trade openness

Trade openness represents a major macro-strategy for attracting post-conflict FDI. Access to markets represents the greatest draw for potential investors, as local supply chains can be easily fortified and manufactured goods can be easily exported to global markets.24 Research has found that high tariffs can attract investors typically only interested in small production for domestic markets and may not contribute greatly to the state's greater economic vitality. Lower tariffs have proven more effective in enticing FDI suitable for export production.25 At the same time, there are critics of unbridled FDI without attention66

Transitioning from aid to trade

The final strategy entails a careful consideration of the transition from aid to trade. In many instances, the large influx of aid following conflict inadvertently "crowds out" private sector development, which impedes economic recovery in the long run. Aid and private sector growth are essentially on opposing timelines; aid flows are highest in the five years immediately post-conflict while private sector is relatively inactive.26 Following the end of violence, international donors frequently provide a huge influx of aid into post-conflict countries for reconstruction and recovery. This inflow can create economic growth in the short-term but long-term growth fundamentally relies on private foreign investment to take its place.27 Aid can, in effect, stall this transition process and "crowd out" private sector development.28 However, this process may be curtailed by policies that define national market structures, as well as "protect investor rights (such as tax, property and contract laws), and establish viable regulatory arrangements."29 Others such as Paul Collier recommend the use of what he calls "Independent Service Authorities (ISAs), which are public agencies modeled after those used by the Palestinian Authorities to contract a range of suppliers to provide public services.30

As highlighted above however, there remain numerous potential adverse impacts of FDI, particularly in fragile post-conflict settings, which demand attention to issues of conflict sensitivity and corporate social responsibility, for FDI to contribute to economic recovery and peacebuilding.

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Balancing private and public provision of essential services

The debate over who serves the public interests more fairly and effectively in the vulnerable post-conflict periods is a constant one. The public sale or commissioning of certain essential public services to the private sector inadvertently raises a host of contentious issues over accountability and responsibility. While privatization of the military and security is an issue of much discussion and debate, this section will focus on the privatization of social services.

Given a deteriorated post-conflict environment, service delivery is often outsourced to international non-governmental organizations (INGOs) and the private sector where capacity or pro-poor policy orientation is deficient. In critical sectors of public health, education, water/sanitation and infrastructure, international organizations and firms, and at times local businesses often step in to fill these gaps where state capacity does not exist. But there are consequences.31

Studies have indicated three critical consequences of outsourcing essential services to the private sector: 1) service delivery is severely fragmented; 2) unsustainable operational standards and facilities are often implemented; 3) lines of accountability to beneficiaries of service users are poor.32 As in the security sector, outsourcing arrangements to foreign actors create accountability problems, such as unarticulated lines of authority and oversights, which may lead to inconsistent quality controls and duplication issues. Perhaps more importantly, such arrangements create accountability gaps between public citizens as service users and the state whose responsibility it is to provide them. Sustainability by association becomes another concern as temporary contracts, operational standards and implementation arrangements compromise the long-term integrity of service delivery. Additionally, technical and information systems in recovering states are rarely adequate to ensure proper planning or systems integrity.33

An instructive illustration can be found in specific problems emerging from the privatization of health service delivery. Health care privatization can lead to the decline of quality, and increased disparities in access to services, as costs are raised, and locations outside of centers are rare. Individual households must bare a greater burden for paying for privatized health services (especially when laden with rising security costs), doubly difficult is decline in quality of care that often accompanies such a shift. Absent of outside donor subsidization for such services, access to critical health care in very poor, conflict-prone states (e.g. DR Congo, Somalia) becomes a luxury available only for the wealthy, leaving the majority of poorer households reliant on substandard, unlicensed informal care which can be unsafe to users.34

Privatization of healthcare can also distort prices and employment in the economy. Despite the short-term challenges for health care users on a micro-level, the long-term implications in terms of economic recovery can be far graver, especially as they may not become apparent until an economic crisis has fully taken shape.35 However, some would note that in cases where a particular system has an established history of privatized service provision, attempts to nationalize the system may entail new challenges. In so much as the structural impacts of war can be irreversible under worst cases, experts advise caution in guiding any profound changes to functioning pre-war conditions. Rather experts advise amending, not overhauling, institutions as a less disruptive option to minimize negative attributes and emphasize positive elements, as appropriate to new realities.36

Infrastructure projects entail other challenges. Notably, lack of responsibility for projects, and the influx of migrant workers cause concern for states with limited oversight and regulatory capacity. At issue is the extent of responsibility assumed by private contractors on state construction projects. With a narrow project delivery objective, they argue that their client, the state, is ultimately responsibility for the assessing the impact of their work in local communities. Although this may be technically correct, increasing public and industry pressure may be influencing these actors to take greater care in alleviate potential negative consequences of their work.37 In certain industries (e.g. Mining and construction), the corresponding issue of rapid migrant labor influx exerts additional pressure on local communities to cope with local economic and social distortions, worsening their own recovery process.

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Debates and challenges on public private partnerships (PPPs)

Effective public private partnerships (PPP) leverage the strengths of businesses, governments, and civil society to respond to challenges in post-conflict contexts in ways that are mutually beneficial to the interests of all actors involved. This collaboration yields potentially valuable benefits in the leveraging comparative resources and sharing risk offering a comparative advantage to all parties.38 In conflict areas, these partnerships promise even greater potential value as a conciliatory body that can rebuild public trust and confidence among various groups and inspire the kind of collective action that serves the interests of all parties.39

Many challenges require negotiation for the effective implementation and sustainability of PPPs. Some of these include: bridging contrasting participants' objectives, outlining operating guidelines and sequencing, addressing power imbalances, determining the cost/benefit value of partnerships and dealing with questions of legitimacy and accountability.40 Additional concerns arise from mobilizing sufficient will of all parties to engage in such partnerships (which necessitates an openness to compromise and flexibility), tacitly identifying the value-add of each partner and effectively embedding the partnerships in lasting institutions.41

Some are concerned that PPPs are driven by the private sector as a way to influence public policy rather than their eagerness to shoulder a more responsible role in contributing value to public processes.42 One study comments, it is "...Extremely difficult to strike an appropriate balance between legitimate advocacy and product or brand advertising."43

Indeed, the partnerships face a similar critique of development aid; a risk of being resource, rather than demand-driven in a top-down manner may prioritize interests of the powerful over the public, especially when corporate objectives for business growth are more transparent.44 For example, MNCs may be most interested in exploiting local markets which require infiltrating complex legal or regulatory codes controlled by the state. In countries like India, the protection of intellectual property rights has become a volatile issue for states engaged in PPP for research and development in the health sector.45 Some studies suggest that to mitigate detrimental side effects of PPPs, companies may wish to invest in their human capital, developing the capacity to indentify sensible synergies based on a sound knowledge of other sectors and train in the kind of stakeholder participation and negotiation skills necessary to lead the process forward.46

Go to Economic Recovery: Public Finance

Go to Economic Recovery: Natural Resources

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Transforming the informal economy

The vast and growing reality of the informal economy globally presents particular dilemmas in post-conflict settings. On the one hand there is great demand to consolidate law and order and formalize all sectors - but especially the business sector given that many aspects of the economy may have been, and may continue to be, serving war, rather than peacebuilding aims. On the other hand, economic recovery is a vital pillar of peacebuilding that affects the entire population, many of whom may be reliant on the informal sector when employment and other livelihood opportunities are not available.

To date, there is lacking consensus on the meaning of the informal economy. Although it generally encompasses all forms of unofficial economic activity - legal or illegal - it can also be used to describe grey or parallel economies, which can be viewed inherently exploitative. Others suggest that it allows commerce to operate outside of taxation, and others that "grey or parallel activities often involve the control, coercion or expropriation of populations and their assets."47 This debate however is more than a bandied legal definition. Implicit in a broad understanding of informal economies is that they include illicit and illegal activities (e.g. prostitution, contraband, arms or drug trading)48 or sections of the economy that may have thrived during conflict.

But this generalization fails to distinguish the legal activities that often comprise the bulk of informal economies, often trade in legal goods or services acquired through illegal channels, in some cases smuggling.49 For example the vast network of illegal tunnels running between the Gaza Strip and Egypt may bring in some illegal goods as the Israeli government attests, but reports indicate they are mostly used by smugglers to supply ordinary citizens with everyday essential goods not available in Gaza due to the closed border crossings - cooking oil, fuel, staple goods and food items. Many Palestinians argue that they rely on them to access basic commodities unavailable in their political quarantine.

The rise of the informal economy in the global south has been significant since the 1970s. One UN study cites that a staggering one quarter of the global population now live on incomes lower than a decade or two ago. But what this figure, and conventional accounting, fails to capture is the vibrant informal economies in which these families depend for their livelihoods.50

Some contend in immediate post-war period, economic objectives should encourage growth, whether formal or informal, for non-illegal activity. In fact, the informal market offers tangible short-term economic opportunities where formal markets remain immature or over-regulated, excluding small businesses or entrepreneurs from livelihoods. As well, they can respond more rapidly to local needs, sometimes emerging overnight, with the provision of highly sought after products or services (e.g., mobile phones or manufactured apparel) or may indicate emerging trends for sector growth. Unfortunately, the blessings are mixed, as criminals or warlords thrive from such activities.51

States and multilateral institutions may not always agree on the value on informal markets, but both acknowledge some benefits. Many economic growth programs supported by international organizations purport a realist approach in removing growth boundaries, ostensibly beginning with fundamental structural issues in the economy, followed by lowering barriers to informal trade in order to create the conditions for more equitable distribution of opportunities for new markets.52 However, power struggles can occur between these institutions who advocate for freer markets even when they are informal, and the state, who may wish to exercise control in the fragile post-conflict period, especially in restricting informal activities that compete with state enterprises. Yet even these states often realize the value of informal sectors serving consumer demand when it is unable to do so, allowing by tacit consent, their movements as long as it is not illegal and can prove to serve an expressed public need.53

Informal opportunities for small entrepreneurs can create new sources of employment for women otherwise excluded from the formal sector. Poorly skilled, trained or experienced women, including many war widows and other thrust into head of household obligations post-conflict, rely on informal trade as their only source of livelihood. While the informal nature of this commerce may make women vulnerable to exploitative work (e.g., prostitution or smuggling), even traditionally gender-defined domestic work can provide the initial capital and confidence needed to direct their ingenuity and ambition into new roles as entrepreneurs.54

Conversely though, some note that regions that have robust informal economies are experiencing increased volatility and levels of poverty. Observers point to many of the poorest countries in Africa, as well as some in Eastern Europe as suffering the worst effects of informal economies where criminal activity thrives on large amounts of unmonitored wealth and in turn, offset potential opportunities for local livelihoods with an increase in organized violence.55 This trend is especially true in geographically or economically isolated countries with histories of corrupt rule and violence.

In these cases, options to encourage formalization include: revenue redistribution programs and microcredit can help encourage formalization of informal businesses. Although these two economic strategies are covered in greater detail elsewhere in this section, it is worth noting that economic diversification, deregulation, and entrepreneur-oriented policy initiatives have had favorable results in encouraging businesses to transition into the formal economy.56 However, until these measures can be implemented across recovering economies, it may benefit policy makers and others to recognize the value of informal sector.

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Private sector development and "brain drain"

Human resources, and the intellectual capital they represent, comprise the most valuable assets in a recovering economy.57 The well-known phenomenon of "brain drain" poses a significant challenge for countries emerging from conflict. As a "major determinant of economic growth and development,"58 many highly skilled workers, particularly in the engineering, medical and legal professions from poorer (and more often conflict-prone) countries often find work in North American and Europe in professions unavailable or at substantially lower salaries back home.59 This emigration of expertise from under-developed to developed countries offering greater professional opportunity.60

Without these intellectual assets driving forward key sectors in the economy, growth needed for reconstruction and recovery is severely hindered. Highly skilled citizens who flee during conflict are less likely to return to their home countries than poorly skilled workers;61 development agencies uniformly note the challenge of attracting them back is a daunting one,62 involving a wider web of socio-economic factors to reverse the trend. Without their technical and managerial skills, domestic private sector recovery is significantly handicapped.63 In Africa, only evidence of long-term stability and growth are found to incite repatriation, usually many years after the cessation of violence. In some Asian economies (E.g. South Korea or Taiwan), policies that encourage domestic investment and generous public investment in scientific and R&D sectors have encouraged the kind of open markets ripe for entrepreneurship that often inspires return.64 Here educational institutions play a key role in building the capacity of its national citizens to be ready for the challenges which face the country, through training, research and knowledge management.65

Brain drain is found to be more prevalent in countries afflicted by civil war, worsened by violence, disability, or deplorable socioeconomic conditions.66 This attributes to both "push" and "pull" factors. The threat of political persecution in the form of human rights abuses, violence, politically motivated arrests, restricted freedoms, lagging judicial system and oppressive governance can all push these citizens out of their home countries.67 Economic factors can be just as compelling. High unemployment, low wages, difficult working conditions, limited research funds and professional opportunity collectively form a potent rationale.68 In the post-conflict period aid inflows mean a reliance on foreign experts, frequently fueling resentment among trained nationals.69

Pull factors are essentially the opposite of push factors, except that most post-conflict countries will have little control over these motivations. North America and Europe offer more lucrative and rewarding opportunities for professional growth70 with strong economic health with competitive wages and generally more political stability.71 Many of these gaining states offer incentive visas such as the U.S. Diversity Immigrant Visa Program to facilitate this immigration.72 In attempt to fill this void, African states collectively spend $4 billion per year to hire 100,000 highly trained (non-African) foreign workers.73

Some strategies for ameliorating the impacts of brain drain advocate the careful formulation of policies that address the various social, political and social factors that contribute to its cause by offering the right kind of incentives for return, and stimulating economic opportunities to start the process.74 Some experts, such as Anthony Barclay of the African Capacity Building Foundation, argue that the complex linkages between conflict and brain drain require a political economy perspective.75 Others suggest a basic recipe of economic and governance reforms attached to greater political freedoms. 76 Others suggest tax penalties expatriates may remit to home countries. 77 For example, "all Eritreans in the diaspora are asked to pay 2 per cent of their monthly income directly to the Eritrean government...Although the payment is not compulsory, most respondents considered it a 'duty' as Eritreans to meet the payments."78 An unlikely scenario that carries its own moral hazard offers receiving countries can also choose not to recruit these workers. 79 The private sector in the post-conflict country can play a role in reversing brain drain. In South Africa, one initiative lead by a coalition of CEOs created "Leaders Unlimited" partnering with corporations and state agencies to incite the return of African managers.80

Due to the difficulty of convincing large swaths of emigrants to return to post-conflict countries the diaspora is being recruited to facilitate economic recovery. Some African states are reported to resigned permanent return efforts as "futile" and have moved instead to draw upon the wealth of expertise of these Diasporas, a popular shift that trades relocation for mobility.81 For example, the South African Network of Skills Abroad (SANSA) recruits its Diaspora to conduct training, research or establish business relationships with their domestic counterparts.82

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Challenges to implementing revenue sharing schemes

Revenue sharing systems detail strategies for allocating corporate revenue from local resources towards social investment, as well as taxes and royalties from the company to the host government and including compensation for resettlement or loss of land. Revenue sharing can promote local peace and stability by limiting opportunities for grievances related to inequalities or perceived corporate greed.83 Revenue sharing programs require a high level of state legitimacy and political will in centralized government, as well as in regionalized government. Where there is significant corruption in chains of decentralization, this can, and has lead to the siphoning of revenue.

Revenue sharing can also be perceived as inequitable, especially where government has not regained public confidence. While it is difficult to ascertain what constitutes equitable redistribution, where one region is producing most of the resources, but see few windfalls, this may lead to tensions between decentralized regions. For instance, Southern Iraq produces the majority of national oil revenues, a major point of contention in debates over national separation where Basra would ostensibly retain oil profits. This can be compounded by corruption, where benefits of revenue are unlikely to be evident. This is the case in Nigeria, where tensions are high in the Niger Delta over oil extraction revenue.

For revenue sharing to work, states must actually be able to exercise control (security) over revenue-producing territory. While this may seem obvious, a state's capacity to do so is not a given. For instance, the President of Rwanda, Paul Kagame, has argued that the Democratic Republic of Congo (DRC) is the most resource-rich country in Africa, yet its people are among its poorest. Yet non-state actors at times backed by corporate interests and neighboring states like Rwanda, control much of the resource base there. Where governments retain total control of resource revenue, equitable distribution of those resources are less likely. Finally, revenue sharing may offer distribution of profit, but not the longer-term assets of employment or skill.

Four prevailing strategies in revenue sharing as a means of conflict prevention and resolution are considered decisive. Outlined below, they focus on engaging the right range of stakeholders, creating legitimate mechanisms for the management of revenues, enforcing effective transparency provisions, and finally developing effective dispute settlement mechanisms.84

Engaging the right range of stakeholders is perhaps the most important strategy in conflict prevention and resolution. It demands inclusion of the broadest constituency at potential risk to deter grievances and maximize participation. Again here, the extractive industries are vital in utilizing this strategy to proactively consult with a range of state and non-state actors including those in the private sector.85

Creating legitimate mechanisms for the management of revenues is critical to initiative success, as well as gaining consensus on clear guidelines on implementation, reporting, financial management, monitoring/evaluation and espousing core principles against bribery and corruption. In the case of local revenue collection (via CBO or local authority), accountability mechanisms become a useful tool. If the national finance agency is unable to ensure such accountability, sometimes a third-party trusteeship (trust fund, foundation, CBO) can be arranged, of particular relevance in where revenue-generating activities bare immediate impact on local communities.86

Enforcing effective transparency provisions in line with newly reinforced norms is a fundamental criterion for gaining legitimacy in the public view. It offers stakeholders in the process the ability to authenticate fair and consistent distribution through payment disclosures and social investment levels. However, some alliances are seldom offer full disclosure in reporting, especially in state contracts to mining or extractive corporations.87

Finally, developing effective dispute settlement mechanisms are indispensable where state institutions lack maturity or capacity to settle conflicting claims, especially if made by vulnerable or marginalized groups. Extractive industries tend toward longer time horizons based on projected returns, freeing them to offer alternative dispute mechanisms (Examples: Arbitration, declarations of ownership, local charters) in client contracts. 88

By no means exhaustive, collectively these four strategies have been proposed as essential for successful program delivery and reaching intended results. Other measures do exist although primarily fall in the public education and advocacy domain that aim to create public, dialogue or establish mediation and partnership-building training.89

1. Hirschman, A. O. 1981. The Rise and Decline of Development Economics. In Essays in Trespassing: Economics to Politics and Beyond. Cambridge: Cambridge University Press.
2. Min Ye, "Comparative Kantian Peace Theory: Economic Interdependence and International Conflict at a Group Level of Analysis," (Boston: American Political Science Association, 2002).
3. Immanuel Kant, Pauline Kleingeld, et. al., Toward Perpetual Peace and Other Writings on Politics, Peace, and History, (New Haven, Connecticut: Yale University Press, 2006), p. 229.
4. Independent Evaluation Office (IEO), "The IMF's Approach to Capital Account Liberalization," September 15, 2004.
5. Scott Brown, "Fragile States: Institution Building and the Private Sector," Notes for Presentation at the Conference on Improving Governance and Fighting Corruption: New Frontiers in Public-Private Partnerships, March 15, 2007.
6. Joseph E. Stiglitz, Jose Antonio Ocampo, et. al., Stability with Growth: Macroeconomics, Liberalization and Development, (Oxford: Oxford University Press, 2006), p. 221.
7. Ibid.
8. Giovanni Arrighi, "The African Crisis" World Systemic and Regional Aspects," New Left Review 15 (2002), 34,
9. Mark Duffield. "Post-modern conflict: Warlords, Post-adjustment States and Private Protection." Civil Wars 1, No 1, (1998), 71.
10. Barbieri, Katherine. 2005. The Liberal Illusion: Does Trade Promote Peace?. Ann Arbor: University of Michigan Press.
11. Rob Mills and Qimiao Fan, "The Investment Climate in Post-conflict Situations" (Washington, D.C.: The International Bank for Reconstruction and Development, The World Bank, 2006).
12. Jordan Schwartz et al., "The Private Sector's Role in the Provision of Infrastructure in Post-conflict Countries: Patterns and Policy Options," paper no. 16, (Washington, D.C.: The World Bank, Conflict Prevention and Reconstruction, August 2004), 3.
13. Roy Culper, "Private Foreign Investment: Part of the Problem or Part of the Solution?" in the Canadian Development Report (Canada: North South Institute, 2004), 2.
14. Ashley Campbell, "The Private Sector and Conflict Prevention Mainstreaming: Risk Analysis and Conflict Impact Assessment Tools for Multinational Corporations," (Carleton University: The Norman Paterson School of International Affairs, Country Indicators for Foreign Policy (CIFP) Project, May 2002), 1.
15. Mac Sweeney, "Private Sector Development in Post-Conflict Countries."
16. WTO, "Trade and Foreign Direct Investment," October 9, 1996.
17. Maxwell J. Fry, "Foreign Direct Investment in a Macroeconomic Framework: Finance, Efficiency, Incentives, and Distortions" World Bank Policy Research Working Papers, 1993, WPS 1141.
18. Culper, "Private Foreign Investment," 2.
19. Ibid., 9.
20. Ibid., 11.
21. Roy Culper, "Private Foreign Investment: Part of the Problem or Part of the Solution?" in the Canadian Development Report (Canada: North South Institute, 2004), 12.
22. Jordan Schwartz et al., "The Private Sector's Role in the Provision of Infrastructure in Post-conflict Countries: Patterns and Policy Options," paper no. 16, (Washington, D.C.: The World Bank, Conflict Prevention and Reconstruction, August 2004), 18.
23. John Bray, "International Companies and Post-Conflict Reconstruction: Cross-Sectoral Comparisons," World Bank Social Development Papers: Conflict and Reconstruction, No. 22, February 2005.
24. DTI, "Liberalisation and Globalisation: Maximising the Benefits of International Trade and Investment," DTI Economic Papers No. 10 (July 2004), 30.
25. WTO, "Trade and Foreign Direct Investment," 9 October 1996.
26. Jordan Schwartz et al., "The Private Sector's Role in the Provision of Infrastructure in Post-conflict Countries: Patterns and Policy Options," paper no. 16, (Washington, D.C.: The World Bank, Conflict Prevention and Reconstruction, August 2004), 13.
27. United Nations Development Programme, "Development and Transition" (Kosovo: UNDP, 2007), 1.
28. Lourdes Trujillo et al., "Macroeconomic Effects of Private Sector Participation in Latin America's Infrastructure," WPS 2906 (Washington, D.C.: World Bank Institute, Policy Research Working Paper, October 2002).
29. Schwartz et al., "The Private Sector's Role in the Provision of Infrastructure in Post-conflict Countries: Patterns and Policy Options."
30. Paul Collier, "Post-conflict Recovery: How Should Policies Be Distinctive?" (Oxford: Centre for the Study of African Economies, Oxford University, May 2007), 19.
31. Cindy Carlson et al, Improving the delivery of health and education services in difficult environments: lessons from case studies, (London: United Kingdom Department for International Development (DfID) Health Systems Resource Centre, 2005), 3.
32. Carlson et al, Improving the Delivery of Health and Education Services in Difficult Environments, 3.
33. Ibid.
34. HLF on Health MDGs. "Health Service Delivery in Post-Conflict States." (Paris: High Level Forum on Health MDGs, 14-15 November 2005), 5.
35. Ibid.
36. Ibid., 14.
37. John Bray, "International Companies and Post-Conflict Reconstruction: Cross-Sectoral Comparisons."
38. Organization for Economic Co-operation and Development (OECD), "Business Partners for Development: Tri-sector Results and Recommendations: 1998-2001," (Washington DC: World Bank, 2002), OECD.
39.Jane Nelson, "Business of Peace," 33.
40. Ibid., 123.
41. OECD, "Business Partners for Development: Tri-sector Results and Recommendations: 1998-2001,"
42. Ibid.
43. Martin Witte and Reinicke, "Business Unusual," 9.
44. Ibid., 24.
45. Ibid., 34.
46. Nelson, "Business of Peace," 33.
47. Mark Duffield. "Post-modern conflict: Warlords, Post-adjustment States and Private Protection." Civil Wars 1 no. 1 (1998), 73.
48. The Economist, "In the Shadows: The informal economy is neither small nor benign." The Economist, 18 June 2004.
49. Piet Goovaerts, et al., "Demand Driven Approaches to Livelihood Support in Post-war Contexts: A Joint ILO-World Bank Study," paper no. 29, (The World Bank and International Labour Office, October 2005), 7.
50. Mark Duffield. "Post-modern conflict: Warlords, Post-adjustment States and Private Protection." Civil Wars 1 no. 1 (1998), 73.
51. Piet Goovaerts, et al., "Demand Driven Approaches to Livelihood Support in Post-war Contexts: A Joint ILO-World Bank Study," paper no. 29, (The World Bank and International Labour Office, October 2005), 7.
52. USAID, A Guide to Economic Growth in Post-Conflict Countries. (Washington, DC: Economic Growth Office, Bureau for Economic Growth, Agriculture and Trade, USAID, 2007), 8,
53. Ibid., 26.
54. Goovaerts, et al., "Demand Driven Approaches to Livelihood Support in Post-war Contexts: A Joint ILO-World Bank Study."
55. Duffield, "Post-modern conflict: Warlords, Post-adjustment States and Private Protection."
56. Jason Switzer and Halina Ward, "Enabling Corporate Investment in Peace: An Assessment of Voluntary Initiatives Addressing Business and Violent Conflict, and a Framework for Policy Decision-Making," (Discussion paper prepared by the International Institute for Sustainable Development for the Canada Department of Foreign Affairs and International Trade, February 2004), 16.
57. Anthony Barclay, "The Political Economy of Brain Drain at Institutions of Higher Learning in Conflict Countries: Case of the University of Liberia," African Issues, Vol. 30, No. 1 (2002): 42.
58. Ibid.
59. William J. Carrington and Enrica Detragiache, "How Big is the Brain Drain?" WP/98/102, (Washington, D.C.: International Monetary Fund, July 1998), 4.
60. Gumisai Mutume, "Reversing Africa's 'Brain Drain:' New Initiatives Tap Skills of African Expatriates," Africa Recovery Vol 17, No. 2 (July 2003), 1.
61. Anthony Barclay, "The Political Economy of Brain Drain at Institutions of Higher Learning in Conflict Countries: Case of the University of Liberia," African Issues, Vol. 30, No. 1 (2002): 42.
62. Mutume, "Reversing Africa's 'Brain Drain:' New Initiatives Tap Skills of African Expatriates."
63. United Nations Development Programme, "Development and Transition" (Kosovo: UNDP, 2007).
64. David H. Shinn, "Reversing the Brain Drain in Ethiopia," (delivered to the Ethiopian North American Health Professionals Association, Alexandria, Virginia, November 23, 2002).
65. Ibid.
66. Barclay, "The Political Economy of Brain Drain at Institutions of Higher Learning in Conflict Countries: Case of the University of Liberia."
67. Shinn, "Reversing the Brain Drain in Ethiopia."
68. Ibid.
69. Mutume, "Reversing Africa's 'Brain Drain:' New Initiatives Tap Skills of African Expatriates."
70. Barclay, "The Political Economy of Brain Drain at Institutions of Higher Learning in Conflict Countries: Case of the University of Liberia."
71. Shinn, "Reversing the Brain Drain in Ethiopia."
72. Ibid.
73. Mutume, "Reversing Africa's 'Brain Drain:' New Initiatives Tap Skills of African Expatriates."
74. Barclay, "The Political Economy of Brain Drain at Institutions of Higher Learning in Conflict Countries: Case of the University of Liberia."
75. Ibid., 42.
76. Shinn, "Reversing the Brain Drain in Ethiopia."
77.Mutume, "Reversing Africa's 'Brain Drain:' New Initiatives Tap Skills of African Expatriates."
78. Khalid Koser, "African Diasporas and Reconstruction," in Diasporas in Conflict: Peace-makers or Peace-wreckers?, eds. Hazel Smith and Paul Stares (Tokyo: United Nations University Press, 2007), 245.
79. Mutume, "Reversing Africa's 'Brain Drain:' New Initiatives Tap Skills of African Expatriates."
80. Shinn, "Reversing the Brain Drain in Ethiopia."
81. Koser, "African Diasporas and Reconstruction."
82. Mutume, "Reversing Africa's 'Brain Drain:' New Initiatives Tap Skills of African Expatriates."
83. United Nations Global Compact, "Revenue-sharing Regimes," United Nations Global Compact,
84. Juliette Bennett, "Conflict Prevention and Revenue-Sharing Regimes" (prepared for the United Nations Global Compact Policy Dialogue: Business in Zones of Conflict, May 2002), 2.
85. Ibid., 3.
86. Ibid., 5.
87. Ibid., 7.
88. Ibid., 10.
89. Ibid., 10.

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