Public Finance & Economic Governance: Public Finance & Peacebuilding Processes
Center for International Cooperation outlines several challenges to building capacity in post-conflict states: "states tend to be weak, illegitimate, and unaccountable, societies tend to be polarized with competing informal systems of "taxation," and much immediate public expenditure is undertaken by international donor agencies rather than the national government."1 Post-conflict environments frequently have an extremely low percentage of gross domestic product (GDP) raised from tax collection (revenue/GDP). The percentage of tax collection as a proportion of GDP is often used as an indicator of state strength, as it demonstrates the government's capacity to exert sovereign control over the state, shows a growing formalization of the economy, and also emphasizes a move away from dependence on overseas development assistance (ODA).2 This low percentage reflects the limitations of the post-conflict state. Exacerbating these challenges, in the peacebuilding phase, reconstruction expenditures are high and revenues are low. As a result, in many cases countries are severely indebted, imposing fiscal burdens and raising inflation rates.3
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[Back to Top] 4 And yet, often there is lack of understanding between fields: economists may not be schooled in addressing peace and security issues, whilst peacebuilders may know little about economics. Public finance policies should be designed with consideration of post-conflict political and security challenges. Simultaneously, peacebuilding efforts should address the financial dimensions of statebuilding.5
[Back to Top] 6 As highlighted by Carlo Lopes of the United Nations Institute for Training and Research and Thomas Theisohn of the United Nations Development Programme Capacity Development Group, "Corruption costs the developing world billions of dollars every year, debasing human rights, siphoning off resources, degrading the environment and derailing development, including capacity development" - all of which disproportionately affect the poor.7 On a broader scale, "...Corruption, together with war-profiteering, replaces long-term planning in the national interest. Corruption is a greater disincentive to community and private investment than equivalent taxation since its application is more random."8 Corruption also entrenches a culture of bribery that may distort markets and discourage incentives for private savings and investment.9
Though corruption is a broad term, encompassing a range of activities, it generally may be understood as "the misuse of public power, office or authority for private benefit - through bribery, extortion, influence peddling, nepotism, fraud, speed money or embezzlement."10 Corruption exists for a wide variety of reasons, which are dependent on economic and political institutions, incentives and opportunities.11
Anti-corruption strategies must be implemented at multiple levels to involve all relevant perpetrators and stakeholders, including the public sector and the private sector, and simultaneously institute market-oriented and administrative reforms and increase accountability through the use of audits and watchdog agencies.12 In the context of peacebuilding, anti-corruption measures should be implemented consideration of the current situation and the conflict environment."It is essential to evaluate historical and cultural sensitivities, understand existing vulnerabilities, and build supportive state structures that promote good governance and reduce poverty as a fundamental basis for change."13
Lopes and Theisohn argue that anti-corruption reforms should be implemented with full participation from a broad swath of society14 and be owned, designed and driven by the domestic government and its citizens; although, the international community can help to support the process. At times, it may also be appropriate for the private sector to initiate anti-corruption measures, given its increasing role in post-conflict economic recovery.15 However, third parties should monitor these initiatives to ensure accountability, as well as provide capacity development support when needed.16
Additionally, scholar Tony Addison recommends that anti-bribery measures be toughened, as "not a single prosecution for bribery overseas has yet been brought in a UK (or continental European) court...The widespread practice in Europe of granting tax relief for bribe payments overseas, as a 'necessary' business expense is a practice that must end."17 At the same time, the human rights discourse has prompted growing support for the use of positive conditionality - as opposed to punitive measures - in promoting reforms in the public sector.18
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Go to Economic Recovery: Economic Recovery Strategies - Strategies and Models: Context sensitivity
At the core of conflict sensitivity is an understanding of context. As scholars Boyce and O'Donnell note: "Postwar countries often share important features in common - notably a mismatch between fiscal capacities and needs as well as ongoing societal tensions that could precipitate the renewal of violent conflict. Yet there is also a great deal of diversity in postwar environments, and it is important to consider the differences among them in formulating public finance policies."19 The authors identify eight "key axes of differences in postwar environments," which should be considered in policymaking and strategy design.20
Of these context differences, several directly relate to public finance:21
In achieving this balance, a variety of factors come into play. If either of the goals can be met with fewer resources (i.e., efficiency improves), or more revenue is found (e.g., from taxing a growing private sector or from external assistance), then this no longer becomes a zero-sum game, where trade-offs for economic stabilization impact peacebuilding, and vice-versa.24 Moreover, in the long and even medium term, the two goals are mutually reinforcing, meaning that investments in one will have spillover effects for the other. For example, public investment in securing peace will imply more robust private sector development and, consequently, improve the government's revenue generation capacity. Public investment in private sector development may in turn make conflict less likely.25
[Back to Top] James K. Boyce and Madalene O'Donnell write, "Answers to the process of how, as well as the outcome question of what, can strongly affect public attitudes toward the state and the depth and breadth of public support for peace. They also have a strong effect on the willingness of the public to pay taxes: revenue is needed to fund expenditure, but at the same time effective expenditure that responds to the needs of the people legitimizes revenue collection."26
There are different views however, on priorities that serve these objectives. Expert Tony Addison argues that following conflict, the structure of public spending must be "comprehensively reviewed and altered for communities and the private-sector to obtain the services and infrastructure they most need."27 In his view, economic recovery works best if it is broad-based. Scholar Paul Collier also emphasizes an infrastructure-first approach, but stresses jumpstarting the economy first, through prioritized investments in key areas. Specifically, he notes that, "[t]he most evident infrastructure needs are power, ports, and roads. Without reliable power the formal sector cannot develop."28 Anand Prathivadi Bhayankaram, however, makes the distinction between "hard" (i.e., physical) and "soft" (i.e., institutional) infrastructure, and argues that the former does little good without the management and principal-agent monitoring systems required for their operation and maintenance.29 Boyce and O'Donnell similarly point to the large shortfalls in institutional infrastructure, and the substantial investments needed in what they call the social infrastructure of peace: - i.e., the expenditures that redress the horizontal and vertical inequalities that are implicated in violent conflict.30 The Australian Government Overseas Aid Program (AusAid) emphasizes measures to redress historic disparities as well as assistance to demobilized ex-combatants and to the communities that will support their reintegration into civilian life.31
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2. Stephen Spratt, External Debt and the Millennium Development Goals: A New Sustainable Framework, (Washington, DC: The World Bank, 2007), 8.
3. Tony Addison, From Conflict to Recovery in Africa (Oxford: Oxford University Press, 2003), 256.
4. Peacebuilding Commission, "Buttressing the State's Fiscal Capacities: Comparative Lessons from Budget Support," United Nations Peacebuilding Commission, November 8, 2007, 1. And Addison, From Conflict to Recovery in Africa, 256.
5. James K. Boyce and Madalene O'Donnell, "Peace and the Public Purse: An Introduction," in Peace and the Public Purse: Economic Policies for Postwar Statebuilding," ed. James K. Boyce and Madalene O'Donnell (Boulder: Lynne Rienner Publishers, Inc., 2007), 2.
6. Boyce and O'Donnell, "Peace and the Public Purse," 9-10.
7. Carlos Lopes and Thomas Theisohn, Ownership, Leadership and Transformation: Can We Do Better for Capacity Development? (New York: United Nations Development Programme and Earthscan Publishers Ltd., 2003), 116.
8. Addison, From Conflict to Recovery in Africa, 6.
9. Lopes and Theisohn, Ownership, Leadership and Transformation, 116 and Kenneth M. Dye and Rick Stapenhurst, "Pillars of Integrity: The Importance of Supreme Audit Institutions in Curbing Corruption," The Economic Development Institute of the World Bank, 1998, 2.
10. Lopes and Theisohn, Ownership, Leadership and Transformation, 115.
12. Dye and Stapenhurst, "Pillars of Integrity," 3.
13. Lopes and Theisohn, Ownership, Leadership, 117.
15. Ibid, 119.
16. Tony Addison, From Conflict to Recovery in Africa, 282.
18. Peter Uvin, Human Rights and Development (Bloomfield: Kumarian Press, Inc, 2004), 83.
19. Boyce and O'Donnell, "Peace and the Public Purse,"2.
20. Ibid, 3-4.
22. Though Boyce and O'Donnell do not add this last caveat, it is discussed in James K. Boyce, "Post-Conflict Recovery: Resource Mobilization and Peacebuilding," Working Paper 159, Political Economy Research Institute, UMASS-Amherst, February 2008, 8.
23. Gilles Carbonnier, Conflict, Postwar Rebuilding and the Economy: A Critical Review of the Literature (New York: WSP International, 1998).
24. Boyce and O'Donnell, "Peace and the Public Purse."
25. Paul Collier et al, Breaking the Conflict Trap: Civil War and Development Policy, (World Bank and Oxford University Press, 2003), 124-5.
26. Ibid., 9.
27. Addison, From Conflict to Recovery in Africa, 256.
28. Paul Collier, Post-Conflict Recovery: how should policies be distinctive? (Oxford: Centre for the Study of African Economies, 2007).
29. P.B. Anand, Getting infrastructure priorities right in post conflict reconstruction, Presented at the Making Peace Work conference, (Helsinki: UNU-WIDER, 2005).
30. Boyce and O'Donnell, "Peace and the Public Purse,"9.
31. Ibid., 9.
32. Alice Amsden, Escape from Empire: The Developing World's Journey Through Heaven and Hell (Cambridge: MIT Press, 2007) and David Kennedy, "The 'Rule of Law,' Political Choices, and Development Common Sense," in David M. Trubek and Alvaro Santos (eds.), The New Law and Economic Development: A Critical Appraisal (Cambridge: Cambridge University Press, 2006), 95-173.
33. Ibid., and Werner Baer, "Import Substitution and Industrialization in Latin America: Experiences and Interpretations," Latin American Review,vol. 7 no. 1 (1972): 95-122.
34. Kennedy, "The 'Rule of Law,'" 110.
36. Adapted from a presentation by Barry Ireton, as published in: Mick Foster, "New Approaches to Development Co-operation: What Can We Learn From Experience with Implementing Sector Wide Approaches?" (London: Overseas Development Institute, October 2000), 7.
37. Kennedy, "The 'Rule of Law,'" 114-7.
38. Ibid., 117.
39. Ibid., and John Williamson, "What Should the World Bank Think about the Washington Consensus?" The World Bank Research Observer vol. 15 no. 2 (2000): 252-3.
40. Joseph Stiglitz, Globalization and Its Discontents, (New York: W.W. Norton and Company, Inc., 2003), 13.
41. Adapted from a presentation by Barry Ireton, as published in: Mick Foster, "New Approaches to Development Co-operation: What Can We Learn From Experience with Implementing Sector Wide Approaches?" (London: Overseas Development Institute, October 2000), 7.
42. Adapted from a presentation by Barry Ireton, as published in: Mick Foster, "New Approaches to Development Co-operation: What Can We Learn From Experience with Implementing Sector Wide Approaches?" (London: Overseas Development Institute, October 2000), 7.
43. "OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions," Organisation for Economic Co-operation and Development.
44. Robert R. Talierco, Jr., "Administrative Reform as Credible Commitment: The Impact of Autonomy on Revenue Authority Performance in Latin America," World Development vol. 32 no. 2 (2003): 213-232.
45. BBC News, "Cautious Welcome for G8 Debt Deal," BBC News, June 12, 2005.