International Network for Economics and Conflict

Friction between extractive industry firms and local communities over actual or assumed grievances is a major conflict trigger in resource-rich fragile states.  Examples would include displacement for the construction of natural gas pipelines in Bolivia, environmental pollution in Nigeria’s Delta region, human rights violations in Congo’s tin mines and the destruction of cultural artifacts in the vicinity of Afghanistan’s copper mines.  In addition to these issues, a virtually universal complaint relates to the enclave nature of most extractive sector activities in these countries.  While investing entities are rewarded with handsome profits for assuming significant risks in these environments, relatively few benefits accrue to the local economies.  By focusing on maximizing profits while limiting local engagement to the extent possible, extractive industry firms generally insulate themselves from local communities.  This raises some problems for the firms.  Communities view them as taking out and not giving back.  They also point out that extractive industry activity deprives them of their livelihood without providing alternatives.  Others see the firms as being complicit in perpetuating bad governance by providing direct and indirect support to odious regimes.  Unsurprisingly, many communities and advocacy groups see extractive industry firms as part of the problem and often target their assets: disrupting operations, destroying facilities and kidnapping staff.

The motivations for violent conflict in resource-rich states are complex and cannot be solely attributed to the extractive industry.  However, the visibility and economic dominance of extractive companies in these countries makes them important players in defining the parameters for economic prosperity, security and stability.  It is clear that friction between communities and the companies would significantly decrease if the former felt less aggrieved and the latter did not feel besieged.  Improving economic prospects for host communities through more productive and sustainable engagement would go a long way in this regard.  But any viable approach must also make business sense for extractive industry firms.  Since the 1990s, firms have been encouraged to invest in local economies via a range of corporate social responsibility initiatives.  These have included donations to local community projects, direct donations to community leaders, investments in infrastructure and social services, employment creation programs, investments in income generation projects and training and education schemes.  These initiatives have generally had mixed results (at best) and have not proved to be sustainable.  Communities remain fragile and lasting peace is elusive.

Sustainable peace in resource-rich countries affected by violent conflict requires (inter alia) consistent progress in the local economy, direct involvement of all stakeholders and shared prosperity.  This would lay the foundation for a stable enterprising class who will become a constituency for peace.  Recent experience suggests that humanitarianism and philanthropy could not accomplish this.  Extractive industries could be used as core building blocks.  They already exist in these countries, have connections with local actors/institutions and are generally sustained by robust global demand.  Even though most of the value is added outside the countries of extraction, operations in conflict-affected states could be leveraged to benefit the local economy and enhance prospects for peace.  Expanding economic opportunity, improving employment prospects and reducing inequality have all been identified as key determinants of peaceful societies.  Economic transformation or reconstruction in these states is usually pursued on multiple tracks.  Efforts are made to resuscitate core economic activity like mining, other programs are introduced to diversify economic activity by focusing on traditional activities like agriculture, while other initiatives seek to identify new opportunities like tourism.   Each track has its own human capacity, infrastructure, marketing, regulatory and technology needs.  This fragmented approach often means that the pace is slow, near-term benefits are unlikely and inequality could worsen.  This is partly why over half of post-conflict countries relapse within five years.  The economic peace dividend is often tardy and unpredictable. 

A value chain approach could offer a viable alternative by building an economic recovery strategy around already existing core economic activities.  By examining the full range of activities and services involved in bringing a product from a raw material to the finished commodity, it could be possible to identify potential entry points for the local economy.  These could include small-scale manufacturing, transportation, catering services and industry-related services.  In the 1980s and 1990s, the natural gas industry in Trinidad and Tobago invested in skills acquisition that eventually led to the development of a home-grown technical services industry along the value chain.  By the same token, an analysis of the in-country stages of transformation for mineral ores (digging, washing, grading, smelting and export) in many of today’s conflict-affected regions could lead to the development of service industries that could more fully integrate local economies into the value chain of existing extractive industries.  This would make local economic actors viable partners and stakeholders, rather than potentially-adversarial recipients of corporate largess. 

Such an approach is not without its challenges.  Ongoing security risks, a war-economy overhang, a range of market distortions and institutional weaknesses are obstacles to developing and sustaining small-scale enterprises in fragile environments.  However, these risks could be mitigated by creatively grafting these activities within the value chain as well as redirecting foreign aid and resources that would have otherwise been spent on corporate philanthropy to support and sustain micro-, small- and medium-scale business development along the value chain of larger multinational investments.