International Network for Economics and Conflict

The great conflicts of the 20th century involved attacks across borders, inter-state aggression.  The 21st century, so far, has seen mercifully few such attacks but it has been plagued by conflicts within borders, intra-state aggression.  These conflicts have been a product of governance failures and some have become breeding grounds for international terrorism.  Looking forward, it seems likely that the prevalence of intra-state conflict will grow in low-income countries as they experience rapid urbanization, relatively high fertility rates, and rising prices for food and energy.

While it is better of course to emphasize conflict prevention, the world has yet to find effective ways of doing it.  Therefore global institutions can expect to be more preoccupied in the coming years with conflict resolution/peacebuilding.

The circumstances in each conflict country are different but the peacebuilding goal is the same and perfectly clear: a well-governed country with a rising standard of living and diminishing dependence on foreign aid.

We know how to stop bad governance before conflict breaks out: invade and replace the regime.  This solution will not be feasible, however, as long as the invading force is perceived as being inspired by the United States and other “old powers”.  Some day the “rising powers” of China, India, Brazil, etc., may decide that forceful intervention—possibly evolving from the current notion of “responsibility to protect”—is better than the alternatives.  But that day seems far off.

After conflict breaks out, we know how to restore a semblance of order: send in an international peacekeeping force.  Unfortunately, the costs of such forces are substantial, most of the old powers are facing severe budget constraints, most of the new powers are allergic to the process of intervention, and there is no consensus yet on a global tax regime for such purposes.  As a consequence, these peacekeeping operations tend to be under funded and less effective than desired.

What we do not know is how to establish good governance in a post-conflict country.  Specifically, we don’t know how to create an indigenous governing authority able both to assure public safety and to achieve sustainable economic progress without a large-scale external peacekeeping force and/or massive amounts of foreign aid. 

On a positive note, we now seem to understand that sustainable economic growth depends on job creation in the private sector.  Sadly, however, the indigenous governing authorities created in recent years in a number of conflict countries (not just Iraq and Afghanistan but also in Haiti and Ivory Coast among others) have failed abysmally in providing the infrastructure and the legal framework required for the private sector to create enough productive and sustainable jobs.

On a negative note, part of the problem seems to be the eagerness to establish democratic forms of governance in these post-conflict countries.  It is a problem because these countries tend to have deeply rooted social structures (cultures, institutions) that are not compatible with democracy. 

One obvious attraction of democratic systems is the principle of treating every man and woman as an equal (equality under the law).  Thus, much of the effectiveness of democratic systems comes from having government policies that are rules-based, not discretionary.  In a rules-based system, policies create a level playing field for all citizens.  In a discretionary system, the ruler (a king or a dictator) picks individual winners (family and friends) and losers (enemies).  Policymaking on a discretionary basis was the norm before the democracy blossomed in the 18th century.  The grim reality is that it remains the norm in much of today’s world.

From time immemorial, discretionary systems have derived much of their power from controlling access to natural resources.  It is not surprising, therefore, that most conflict countries are also “resource cursed”.  The abundance of natural resources impedes sustainable economic progress because competing groups are struggling to monopolize the “rents”—the money they can make without any effort—by awarding franchises to exploit the resources to business partners (cronies) or family members.  As these countries modernize, rent-seeking opportunities actually increase because the ruling elite (often the group with the most guns and greatest eagerness to use them) can award licenses in other sectors: international trade, domestic manufacturing, services from hotels to mobile telephones, etc.

The Oxford University economist Paul Collier focused on the difficulties of achieving economic progress in resource rich, badly governed countries in his best-selling book The Bottom Billion.  More recently, the Stanford University economist Paul Romer has advocated the creation of “charter cities” in countries that are falling behind.  These are territories administered by technocrats with minimal political participation but with rules-based economic policies that provide maximum incentives for the creation of sustainable private sector employment.

Why stop with charter cities?  Much of the world’s experience of the past 30-40 years suggests that “charter countries” may be the fastest way out of the poverty and bad governance trap that dozens of countries seem to be caught in.  In particular, look at East Asia’s experience.  The phenomenal economic progress achieved in this region has generally started with authoritarian leaders who were “enlightened” or were guided by technocrats.  Democratic rule in this region has generally come after economic growth (sustainable jobs) has become the norm. 

The charter country concept has a lot in common with the U.N. Trusteeship concept.  At the end of World War II, eleven territories became U.N. Trusteeships instead of reverting to colonial status.  All of them had been granted independence by 1994.  The reality, however, is that nationalism and the principle of non-intervention in domestic matters are still such strong forces in the world today that neither one looks feasible in the foreseeable future.

Where does this leave us? 

Perhaps the only real alternative to some form of external, technocratic, transitional governance is to seek out and support enlightened “warlords” in conflict countries.  These would be leaders with enough guns to maintain civil order in their defined territory.  Their governance would be heavily discretionary and rent-based, but they would see the advantages of policies that encourage savings, reward investment, move toward market pricing, and enforce contracts.  As they succeeded, they could extend their control over poorly governed adjacent territories, steadily reduce their discretionary policies, and gradually allow more political participation by the citizenry.* 

Is the international community ready to try such an approach?  Probably not.  The aid agencies probably have too much of a vested interest in continuing to deliver painkillers or placebos to conflict countries.

* A reviewer was reminded of the seminal work by University of Maryland economist Mansur Olson in which he explained why “stationary bandits” are better than “roving bandits”.

© Lex Rieffel
Nonresident Senior Fellow
The Brookings Institution
Washington, DC
Tel: 202-309-2478
21 December 2010