9.7 Necessary Condition: Market Economy Sustainability

9.7.1 What is market economy sustainability? Why is it a necessary condition?
A sustainable market-based economy leverages the power of markets to stimulate economic growth and reverse the negative effects of violent conflict.569 The revitalization of a market economy involves restoring the flow of goods and services within the country and across the border, through infrastructure, private sector, human capital, and financial sector development. In most cases, violent conflict will have caused production, consumption, and wealth to plummet. This slows goods and capital to a halt, keeping people from accessing much-needed food and basic necessities and developing their business. A sustainable market-based economy (1) facilitates equitable movement of goods and services, (2) creates a rewards-based meritocracy, and (3) focuses on effciency and ultimately connections to global markets.
9.7.2 Guidance for Market Economy Sustainability
9.7.3 Approach: Infrastructure Development
This section refers primarily to economic infrastructure: transportation (roads, bridges, rail lines), water works, electric power, telecommunications, oil and gas pipelines, government/public administration buildings, and other facilities required for an industrial economy to function. Infrastructure is vital for social, economic, physical and political cohesion.570 During violent conflict or through looting in its aftermath, infrastructure is often severely damaged or destroyed. Without physical infrastructure, access remains restricted among suppliers, service providers, and consumers, which poses a major constraint on economic development.571
9.7.4 Establish infrastructure priorities according to broader strategic imperatives.572 In prioritizing infrastructure investments, remember that all investment projects are part of a larger reform package that should support the national strategic approach to development. Limited resources require that all investment decisions be made with this broader context in mind. Consider social, economic, and political factors in prioritizing investments, including group-based economic disparities that may have been integral to the conflict. The sequencing of investments should also make sense—reconstructing ports, for example, should not be done until the transportation systems leading to those ports are repaired. Refrain from building too many schools before there is a plan for trained teachers, materials, curriculum, and building maintenance that are required for a school to function.
9.7.5 Consider social, political, and environmental impacts in designing infrastructure projects. As in all economic recovery initiatives, the designers of infrastructure projects must always consider first and foremost the impact of their work on political stability and the potential to exacerbate conflict between different ethnic or religious groups. Infrastructure projects can have immense implications for migration and resettlement, the use of land, the environment, and perceptions of inequity.573 Infrastructure projects can often be used to promote peaceful relations by cultivating mutual interests among different groups in society and encouraging intercommunal cooperation. Divided communities that have made a commitment to support the peace process should be considered priorities for investment in infrastructure. Consider collateral issues presented with schools, including gender discrimination, inability to pay school fees, or decisions to send children to work rather than school. Other aspects of community-based development and reconciliation are discussed in Section 10.8.
9.7.6 Prioritize power, roads, ports, and telecommunications. Power is a precondition for formal economic development. Roads and waterways are essential for linking the rural economy to the urban market. City streets are vital when the private sector grows and begins to invest more heavily in vehicles, resulting in traffc congestion.574 Seaports and airports are critical for the movement of goods and people. Telecommunications is also a priority because social, economic, and political recovery depends on communications.575
9.7.7 Protect infrastructure to ensure peace and economic growth. Critical infrastructure is often a strategic target during or after conflict for people who seek to disrupt the peace process or instill fear. Police or military are often deployed to protect the infrastructure. Since transportation is the artery of the economy, it should receive priority protection. This includes roads, bridges, ports, and airports that have immense strategic value for enabling the flow of goods and people. See Section 6.8.9 for more on the protection of infrastructure.

9.7.8 Focus on infrastructure management, not just infrastructure itself.
Much attention has been paid to the physical rehabilitation or construction of infrastructure, but it is just as important to strengthen the institutions responsible for managing and maintaining the infrastructure once it is established. These institutions include those that manage electricity companies; the road networks; the rail system, if it exists; and air, land, and seaports. Building institutional capacity is typically achieved by training staff and establishing mechanisms for corporate governance, management, and basic administration capabilities.576 The host nation population will be responsible for maintaining the systems, so their capacity will be the one that matters.
9.7.9 Rebuild only what should be rebuilt. Refrain from simply reconstructing the services that were destroyed during the conflict. Many practices before and during the conflict were designed for a few people to exploit wealth for their own gain, rather than for the benefit of the country. There may be pressures from certain groups or individuals to preserve these models, but careful assessments should identify which services will actually enhance economic growth. The equitable distribution of goods and services should guide careful consideration for longer-term structural changes.577 See also Section 8.5.11 for a discussion on equitable service delivery.
9.7.10 Recognize the wider benefits of infrastructure repair beyond its physical value.578 These benefits include demonstrating visible benefits of peace and quantifiable progress relatively quickly. Infrastructure development is also a key source of employment. Better roads reduce travel time and costs, which encourages farmers to travel to the market and produce more. Improved water supplies promote hygiene and reduce health problems, while improved irrigation increases agricultural productivity. Always think about these catalytic impacts when deciding what investments to make. Use infrastructure projects to strengthen administrative capacity and promote reconciliation by having former adversaries work side by side toward mutual community goals. See Section 10.8.12 for more on using infrastructure projects to benefit reconciliation.

9.7.11 Approach: Private Sector Development

The private sector is very diverse and can include everyone from farmers and micro-entrepreneurs to domestic manufacturing companies and multinational enterprises.579 A thriving private sector can provide numerous jobs for the population, serve as the main source of tax revenue, and enable the country to reduce its dependency on international assistance. Nurturing a healthy private sector requires that the enterprising class of individuals and firms have a means for saving money, have access to credit and financial services, have access to infrastructure, and have confidence in property rights. Perhaps most importantly, entrepreneurs need a predictable regulatory environment that enables them to pursue rational business plans.
9.7.12 Look to local investment and resources; don’t wait for foreign investment.580 There is no question that foreign direct investment (FDI) brings much-needed assets into the country, including entrepreneurship, management, skills, and top-notch technology. But in the immediate aftermath of violent conflict, it is neither practical nor realistic to rely on this source of investment. Generally, FDI may not begin to flow until political, economic, and social risks are reduced and a level of predictability and stability restored. In the meantime, the host nation population should focus on domestic investments, including remittances from the diaspora.581 Remittances sometimes make up a large bulk of domestic resources in the emergency phase, which can be invested in critical projects. The host nation government will also rely on international credit and technical assistance in these phases.
9.7.13 Provide access to immediate credit and financial services for micro, small, and medium enterprises. Providing people with access to loans for their small and medium enterprises is critical to jumpstarting economic activity and creating jobs. While loans are often available for large government reconstruction projects, they are less readily available for grassroots projects led by self-employed entrepreneurs or those working as part of small or medium enterprises. Many informal lending arrangements at the microlevel begin in refugee camps or on the streets as informal contracts between two parties.582 But developing microcredit programs and institutions can get people together to exchange experiences, build capacity, and repair social capital.583 Microfinance is also key to promoting private sector activities by providing access to savings, insurance money transfers, and other banking needs of the population. Microfinance programs should target groups most affected by the conflict, including displaced persons, returning refugees, ex-combatants, and women.584 Strategies should go beyond the provision of credit to include systems for accrediting microfinance suppliers and monitoring and measuring impact.585

See Gap/Challenge: Section 9.10.4, Microfinance and effective intermediation.

9.7.14 Create an enabling environment that lowers risks, promotes business activity, and attracts FDI.586 There are two great hindrances to doing business in these environments: uncertainty about the rules of the game (laws and regulations) and the government’s inability to enforce these rules fairly and impartially. Any increase in business activity will depend on an increase in the stability and predictability of the business environment in these regards. Before investing in a project, business owners and managers want to know that their properties will not be seized and that their contracts will be upheld. Other deterrent factors for investment include corruption, insecurity, and poor infrastructure.587 Mitigating these concerns will require undertaking difficult economic reforms, setting up a foreign investment code, and demonstrating that disputes over property rights can be resolved effciently through dispute resolution mechanisms. A legal framework of economic laws and regulations is needed to evenly enforce business and trade regulations to ensure equitable compliance with taxes, licensing restrictions, and customs duties, etc.588
9.7.15 Leverage key markets as economic opportunities. The jobs available in relief operations can begin to create skills and services that could be useful for more sustainable industries. For example, a program that teaches women to make grass mats for refugee shelters could also train women in basket weaving to cater to handicrafts markets.589 Other examples include training local blacksmiths to craft fuel-efficient stoves used in refugee camps as well as agricultural tools, supporting local carpenters to supply school benches and desks, and supporting local tailors to supply school uniforms. These opportunities are often identified through a value chain analysis that helps focus attention on what markets to leverage.

9.7.16 Maximize the peacebuilding benefits of private sector activity.
The marketing of some products may emphasize the experience of conflict and current living conditions of the producers. The success of Rwandan coffee in the past decade illustrates this phenomenon. The Rwandan coffee industry’s offcial Web site prominently features a section on “Rebuilding and Reconciliation,” refers to the country’s recent genocide, and indicates that the development of the coffee industry is bringing “hope for a better future.”590 Such marketing has helped Rwandan coffee producers to benefit even as global coffee markets have constricted over the last few years.591 Additionally, the industry has become a force for economic integration between Hutus and Tutsis through cross-employment and collaboration in joint coffee, contributing to social cohesion and minimizing risks of a return to conflict.

9.7.17 Approach: Human Capital Development

Human capital refers to the stock of skills and knowledge embodied in a population of an economy.592 Violent conflict depletes human capital through death, disability, trauma, displacement, and migration of skilled workers. Even prior to the conflict, many countries suffer from an endemic lack of education, training and opportunities. Restoring human capital will require diverse training programs to account for all kinds of groups, including demobilized combatants, disabled persons, women, and children, as well as for entire communities. See Section 10.6 for more on the development of education.
9.7.18 Give all a stake in the peace process, including the most vulnerable. Inclusiveness and equity should be the aim when designing training and vocational programs. Focus on key political and social constituencies that require the most assistance, such as the poor, women, veterans, and demobilized soldiers. Finding ways to empower youth through human capital development is also critical as some have primarily been involved in violent conflict and will not have had access to education or skills training. Training for youth should also be integrated with remedial education.593

See Gap/Challenge: Section 10.10.5, Youth in recovery efforts.
9.7.19 Establish a means for collecting labor market data as the basis for human capital development. Human capital development programs need to be dynamic to respond to changes in the market. Collection of labor market data is essential for planning and should also be continuous thereafter, in communities, among public and private employers, in training programs, and in demobilization camps.594 It should include past and present data on life and peace skills of the population, vocational training, small and microenterprise development, and labor-intensive infrastructure works. The information allows the government to identify broad trends in labor supply and demand and see shifts in employment opportunities and demand for skills across the country. It can also help with the evaluation of program effectiveness.
9.7.20 Do not neglect the need to impart “life skills.” Conflicts result in a dearth of skills for work and in “life skills” as well. Life skills include the personal capacity to adjust socially in society and the work place, reconcile tensions, and come to terms with the conflict. Life skills training should always be included in education programs595 and be delivered in schoolhouses, demobilization camps, career centers, and community settings. The programs should be inclusive, innovative, practical, personal, and flexible so they can be tailored for individuals. Life skills are key to improving sustainable employment.
9.7.21 Begin training and education on the job and look to long-term educational capacity. Training for operational skills in the immediate aftermath of conflict may be done on the job, such as processing business licenses or managing a road project. Longer-term educational investments will be necessary to sustain economic growth. Doing this will require developing a true professional class of macroeconomic analysts and policymakers trained in graduate-level programs in-country or abroad. Operational training in areas like treasury operations or tax administration has proven successful, but development of monetary and fiscal analysts has been more challenging because of the requirement for formal education in economics and policy analysis. Professional caliber will differ from case to case, which will impact the level of training needed.596
9.7.22 Approach: Financial Sector Development
The financial sector refers to the system of commercial banks and lending institutions supervised by an independent central bank that provide much-needed credit to businesses and individuals in the aftermath of conflict. Enabling access to microcredit and the ability to perform financial transactions beyond the simple cash and barter economy is critical for economic growth.597 Two major functions of banks are to provide a trusted institution for people to deposit financial savings and to provide a means to pay for goods and services to promote commerce.
9.7.23 Be prepared for a banking system that is severely debilitated. During violent conflict, the central bank and many commercial banks may have ceased to function. Politically directed loans at concessionary interest rates and insider loans to managers or relatives of managers may have occurred frequently. Operating systems, internal controls, and management information will also be degraded or outdated. Reforming the banking sector should begin with the development of a central bank. It will also involve transforming systems of insolvent and poorly managed banks into a structure capable of mobilizing resources and evaluating loans. Making the transition has posed many problems. The goal is to ensure that banks are able to provide effective intermediation between lenders and customers.
9.7.24 Seek to rebuild trust in the banking system. After violent conflict, most people have lost trust in the banking system and will be reluctant to convert their savings into the local currency. The majority of the population will likely rely on informal credit networks during the conflict. But without deposits, the banking system will have trouble playing a greater role in financing economic recovery. The central bank will have to regulate the banking system effectively to build confidence in the banking system once again.598
9.7.25 Understand that microfinance can contribute to growth, but alone it is not a substitute for reconstituting the core banking capacity of the country. Microfinance institutions usually form only a small part of the financial sector in relation to the commercial banking system, but they are valuable tools for creating jobs and promoting growth after violent conflict. While they are not substitutes for rebuilding the banking system, these institutions are useful socioeconomic development tools for poor populations without access to the formal banking sector. Microcredit programs are also positive ways to generate income for women and other marginalized groups and can build social capital by promoting interaction and exchange. These programs allow small groups, not individuals, to be collectively responsible for loan repayment.599 Microfinance projects should be undertaken within the context of a wider strategy for the broader financial sector.