9.6 Necessary Condition: Control Over the Illicit Economy and Economic-Based Threats to Peace

9.6.1 What is control over the illicit economy and economic-based threats to peace? Why is it a necessary condition?
Control over the illicit economy and economic-based threats to peace is a condition in which predatory economic actors are prevented from perpetuating conflict or hindering good governance and economic development, while the formal economy is strengthened to boost the legitimacy of the host nation government. One of the biggest economic threats to peace arises from the political-economic nexus, where resources acquired from illegal traffcking, smuggling, extortion, and hijacking of state and private enterprises are used to acquire and maintain both formal and informal power. The actors involved this economy may use coercion, terror, intelligence activities, and paramilitary operations to threaten the peace process. Allowing them to operate can hamper prospects for good governance and peace by promoting violence against civilians when acquiring control over assets, or exploiting and capturing trade networks and remittances.536

9.6.2 Guidance for Control Over the Illicit Economy and Economic-Based Threats to Peace

9.6.3 Approach: Control Over Illicit Economic Activity
During and after violent conflict, illicit economic activity will likely be pervasive and diverse and may include both benign and predatory actors. Gaining control over these activities requires addressing the problem on many different levels, including severing the nexus between political power and ill-gotten wealth, eliminating economic incentives for continued conflict, and cracking down on criminal trades that violate human rights and contribute to instability. There is also an illegal informal economy that ordinary citizens may resort to as a means of survival during violent conflict. While it may not present a threat to peace, it may be so broad that it threatens government legitimacy and badly needed sources of revenue.

9.6.4 Understand the different economic channels that emerge from violent conflict. Prolonged violent conflict can fragment economic markets into several channels. While market fragmentation is broken down in many different ways, it is addressed in this manual to include four main elements:  (1) the offcial or formal economy that is controlled or supervised by the government and the three following elements of the illicit economy, (2) the informal economy that citizens resort to as a means of survival during violent conflict, (3) the war economy that directly fuels conflict, and (4) the black economy, involving serious crimes and criminal networks that violate human rights and may directly or indirectly prolong the conflict. The lines between these groups are not always distinct—actors may operate across them, making it a complex challenge to address. The illicit elements of the economy are addressed in further detail below.

See Gap/Challenge: Section 9.10.3, Managing the informal sector without hurting ordinary citizens.

9.6.5 Understand the legacy of the war economy and its effects on stabilization and reconstruction. War economies finance conflict in many ways, primarily through violent control over assets and resources. Warring factions often gain control over certain industries or networks and use them to transport military supplies or to generate funding that directly fuels violence. This control can also threaten peace, undermine the legal economy, and enable predatory relationships.537 Key characteristics of a war economy are the following:538

  • A criminalized political economy where political power is derived from access to illicit sources of revenue
  • The destruction of the formal economy and the growth of black markets
  • Extortion and violence against civilians to seize control over high-value assets (such as oil, diamonds, and timber), trade networks, remittances, and labor
  • Presence of networks linking transnational organized crime, corrupt government offcials, extralegal intelligence entities, spoilers, and external and internal terrorist organizations.

9.6.6 Prioritize the identification and disruption of finance networks of local power brokers, insurgent groups, transnational organized crime, and terrorist organizations.539 During violent conflict, many sophisticated crime networks often emerge for the traffcking of narcotics, humans, weapons, or lootable natural resources. These serious crimes make up what is broadly referred to in this manual as the black economy and often result in violence and serious violations of human rights. While many of these hostile economic activities may have existed in some form prior to the conflict, the actors who initiate them often exploit the security vacuum that follows violent conflict and expand their trades into the formal economy that are diffcult to dismantle. These networks are also often linked to corrupt political leaders, who use the illicit revenue to sustain political power.540 This political-economic nexus constitutes a pervasive incentive and a driving mechanism for violent conflict. These networks should be broken up through aggressive law enforcement. States that are captured by a political-criminal elite can create an environment in which peace settlements seldom prosper. Predatory economic activities can corrupt governance and cripple the economic environment, making it impossible for legitimate business and foreign investors to operate. The integrity of the revenue stream that allows essential state services to be provided must also be protected for the political economy to be sustainable. These and other spoilers are also addressed in Section 6.5.10.

See Gap/Challenge: Section 9.10.1, Political-economic nexus.

9.6.7 Consider the consequences of aggressively curbing the informal economy. Violent conflict can severely weaken the offcial economy through corruption, ineffciencies, and falling revenue, which can increase the cost of doing business in this sector.541 This reality often drives entrepreneurs to establish informal or parallel channels of commerce that may be illegal but represent the de facto economy during conflict. Because other normal distribution systems will have been disrupted, many ordinary citizens will rely on the informal economy for goods and services.542 Any strategy to curb the informal economy, therefore, should avoid harm to ordinary entrepreneurs and should seek to leverage the economic activities that have emerged as the people’s innovative and spontaneous response to diffcult times.543 But encouraging people to participate in the formal economy is still essential to promote a base of taxpayers who have a stake in the country’s future and enjoy benefits of good governance.544 Encourage integration of the informal market structures by making formal channels more accessible, affordable, and nurturing for entrepreneurs. Transform financial instruments to better accommodate the informal sector, through microfinance programs, trade credits, and extension services.545

9.6.8 Understand the consequences of predatory local actors in managing economic recovery programs. Safeguards against this should include real-time oversight, audits, and payroll mechanisms that limit infiltration and corruption.546 An important decision is whether to retain existing civil servants who have engaged in corruption in the past. Retention may be attractive because the individuals have the skills to run the programs, but doing so may also pose great risks of destabilizing corruption.

9.6.9 Recognize that the public sector can be a major source of corruption.547 Corruption is the misuse of entrusted power for private gain and is a major challenge in these environments. Spoilers often develop ties to the government during conflict and entrench their power by putting supporters on government payrolls.548 This is distinct from low-level offcials, who partake in petty corruption by looking the other way in enforcing business regulations in exchange for payments. Bribes are often attractive for civil servants because their salaries are low. Corruption undermines public confidence in the political system, impedes the development of strong political leadership and hampers economic growth by distorting competition and market conditions. Mitigating the harmful effects of corruption can involve developing and implementing anti-corruption laws, public education campaigns, and civil society watchdog organizations to pressure the state for good economic governance. Regular and adequate payment of civil service workers is a priority.

9.6.10 Deal with the harmful use of remittances. During violent conflict, remittances serve multiple purposes, making them diffcult to address. Remittances often constitute a major source of livelihood security for many conflict-affected countries; provide a safety net for communities; and have been invested in social infrastructure, services, and income. At the same time, remittances are also often used to provide weapons and material support to violent groups. These dual purposes make remittances very diffcult to address. Tracking and control of these flows is also very diffcult because they flow into the country through informal channels. Improving the channeling of remittances to competitive industries that can help economically marginalized parts of population is an unmet challenge.549

See Gap/Challenge: Section 9.10.2, Monitoring diaspora remittances.

9.6.11 Approach: Management of Natural Resource Wealth
Natural resources include renewable and nonrenewable assets such as minerals, oil and gas, land, forestry, marine resources, and water. They can also include illegal commodities such as poppy and coca. Often, the battle for control over natural resources is a cause of violent conflict to begin with. Effectively managing the wealth derived from these resources involves equitably distributing the money to benefit the population, rather than corrupt individuals who are able to siphon the money into their own pockets. Doing so requires establishing the laws, institutions, and capacity to manage wealth in a transparent and accountable manner. Efforts must be made to avoid “resource curses,” which include corruption, economic instability, inequitable distribution, and control of resource wealth and areas. These curses undermine the sustainability of peace and long-term economic growth. But when natural resource wealth is used effectively, it can jumpstart revenue generation and have a positive effect on economic recovery. Natural resource wealth  management is also discussed in Section 8.6.25.

9.6.12 Understand the context before designing a strategy to manage natural resources.550 These investigations should center on issues that are unique to the case.551 The assessment should include the following:552

  • An examination of the conditions of resources. What resources exist? How is resource wealth monetized and controlled?
  • An assessment of the role of resource wealth in the war economy and the connections with government officials and violent spoilers.
  • An assessment of how much control the government has over natural resource wealth and areas, including facilities (pipelines, oilfields, mines, airstrips for exporting minerals, etc.).
  • A gap analysis of good resource revenue management systems (e.g., transparency, accountability, budget controls to handle volatility).
  • Requirements for a stable, transparent, and accountable system for letting concessions.
  • Identification of actual or potential subnational conflicts over revenue allocation.
  • Identification of relevant work already being undertaken by international economic institutions.

9.6.13 Prevent control over natural resources, resource-rich areas, and relevant facilities by predatory actors. Ensuring that legitimate actors have full access to these areas is key to management of natural resources for the benefit of the population. International actors should help the host nation government to establish financial controls for ensuring that revenue is spent in proper budgetary channels. Setting up national funds for revenue deposits from natural resources have been somewhat successful, as well as certification schemes for natural resources. Setting these systems up rapidly is best to prevent political leaders from entrenching their power.553

9.6.14 Draw from past approaches for improving the management of resource wealth and cutting off financing for hostile actors. Solutions include a mix of carrots and sticks aimed at influencing state behavior and building civil society capacity to pressure its government for better management of natural resources.554 Sanctions are a means to drain support from states or violent groups that use natural resources to fuel conflict. Interdiction seeks to intercept illicit commodities in transit that drive conflict. The Extractive Industries Transparency Initiative is a voluntary measure that seeks to enhance transparency in natural resource management and collaboration among government, donors, and civil society. The Kimberley Diamond Certification Regime, which shuts out violent actors from the market, and the Publish What You Pay campaign are other well-known programs that have sought to encourage good management of resource wealth. Civil society can also help curtail corruption in natural resource management by collecting information on illegal resource exploitation and related government corruption.555

9.6.15 Strengthen governance practices to improve natural resource wealth management.556 The destabilizing effects of corruption related to natural resource wealth must be tackled at all levels of government. Proper natural resource wealth management depends on governance that is participatory and has a transparent and accountable system of revenue and spending. It also relies on solid corporate governance within an environment of government regulatory structures that promote good behavior. This requires confronting vested interests, involving civil society, and deploying specialized staff trained in following the path of illicit money.

9.6.16 Maximize participation from all players to ensure effective management. This includes participation of extractive industries, their bankers, the international financial institutions, regional organizations, international donors, and civil society. A problem in the past has been getting commercial banks and some states to cooperate in international efforts to restrict business with governments that are not transparent or accountable in their natural resource management. Coordination among financial institutions, governments, and international law enforcement agencies should address the linkages between money laundering, corruption, international crime, and sometimes terrorist financing.557 Successful management of resources also requires strong political leadership and a media sector and civil society willing to pressure the government for good governance.558 The natural resource issue should also be addressed in peace agreements, DDR programs, and peacekeeping mandates.559 Since World War II, resource management mechanisms have been addressed in fewer than 25 percent of peace agreements for conflicts involving natural resources.560

See Gap/Challenge: Section 9.10.5, Addressing economic factors in the peace agreement.

9.6.17 Approach: Reintegration of Ex-Combatants561
Reintegration is a social and economic process in which ex-combatants return to community life and engage in livelihood alternatives to violence.562 Ex-combatants can present an economic-based threat to peace if they are not successfully reintegrated into the social and economic fabric of society. Integrating ex-combatants into civilian life gives them a stake in the peace and reduces the likelihood that they will turn to insurgent or criminal activity to support themselves if they cannot find gainful employment. Reintegration activities include creating microenterprises, providing education and training, and preparing communities to receive ex-combatants.563 Reintegration is attached to the DDR process, but in reality it requires the attention, resources, and expertise of a very specific set of social and economic actors. It is a big gap for peacebuilders. See Section 6.7.14 for more on reintegration.

See Trade-off: Section 9.9.5, Employment opportunities for ex-combatants vs. women and minorities.

9.6.18 Assess the social and economic situation to identify the best options for reintegrating ex-combatants.564 To make sound economic decisions, it is imperative to answer: What are the development opportunities? What is the capacity for economic absorption and what does the labor market look like? What is the local demand for goods and services? What is the condition of key economic infrastructure, such as access to markets or the availability of communications? It is critical to ensure that education and training, microcredit services, and other business development services match the demands of the economy in question.565 Good employment options for ex-combatants will often engage them in strong, competitive, and profitable pursuits so they can contribute to economic growth.566 Additionally, it is important to understand the social services and institutions that are available, such as trauma and abuse support services and disability rehabilitation services.

9.6.19 Be sure to address the needs of communities receiving ex-combatants.567 It may be diffcult to get communities to accept ex-combatants, especially perpetrators of atrocities. Most will have little to offer by way of education, employment, or training. Most soldiers are traumatized by their experience and could resort to criminal activities, rather than making solid contributions to communities.568 To quell trepidation, address the needs of the communities that will receive ex-combatants and communicate the goals and importance of the process. Successful reintegration depends on the support of communities, families, local leaders, and women’s and youth groups. Encourage these groups to get involved in planning for the return of ex-combatants. Implement a strong public information campaign to spread awareness about the goals of reintegration. Consider funding a period of community service when ex-combatants settle in an area to promote their acceptance.