BOX 4.1 ENABLING THE PRIVATE SECTOR IN POST-CONFLICT ECONOMIES Considerations to foster private sector involvement in post-conflict settings include: • Initiate reforms as early as possible. There is a relatively narrow window of opportunity to establish a new status quo that is conflict-sensitive, more inclusive and which promotes economic transformation. It is critical to embark on such reforms in the period immediately following the end of a conflict, before the possible entrenchment of opposing political interests. • Prioritize governance and security reforms. Ensuring physical security, property rights protection and transparency in the justice system are central to improving the business climate and attracting private investment anywhere, but particularly so in the high-risk environments of post-conflict economies. Laying the basis for these immediately sends a powerful signal that may raise the confidence of domestic and foreign investors alike in the future of the economy. • Empower local entrepreneurs. Supporting local business development is essential to economic recovery as the revitalization of domestic enterprise signals the return of ‘normalcy’, in addition to restoring local markets and providing employment. Key steps for engaging the local business community include improving its access to finance, through such mechanisms as microcredit and, even more importantly, encouraging its continuing participation in policy dialogue with the government and policy makers. • Promote foreign investment. Perceptions of risk delay entry of private enterprises into post-conflict environments. For example, extractives industries may be quick to pursue exploration contracts in resource-rich countries, but may delay long-term investments in production until they are better assured of a country’s stability. Incentives such as tax allowances and political risk insurance (PRI) may encourage foreign investors to enter the post-conflict market earlier. The World Bank’s Multilateral Investment Guarantee Agency (MIGA) could be an important mechanism to help reduce the hazards of investing in unstable markets. A donor-funded investment guarantee facility that extends PRI access to domestic investors has been proposed in the report of the Commission for Africa. Extending political risk coverage to domestic and regional investors may encourage them to invest earlier than they were previously considering; • Promote public–private partnerships (PPPs). PPPs allow the private sector to deliver services previously (or traditionally) provided by the public sector. In the post-conflict setting, the model could be used creatively, particularly in restoring essential infrastructure and rehabilitating schools and health facilities. In addition to the direct recovery dimension, PPPs could help grow domestic private enterprise if special efforts are made to link the main private leader to domestic suppliers and subcontractors. • Be realistic about investment opportunities. Individual company calculations for investing vary according to their size, sector and corporate strategies. While participation of larger, transnational corporations companies may represent a strong vote of confidence for local stability, investment from these entities may not be realistic in the short term. Policy makers may want to focus on smaller, local or regional actors who have greater familiarity with local conditions and who may have a greater stake in local economic recovery. The reasons for such additional interest from regional enterprises may well include strong cultural linkages. • Develop strategies to enhance risk sharing. Recovering economies need a robust risk-sharing facility to help bridge the gap between private and social returns that characterize post-conflict situations. While private returns to the investor may be low, the social returns are usually considerable. These include the signalling that peace has returned that may attract in additional investment, and the employment generated that may reduce conflict risk. This divergence between private and social returns suggests an important market failure correction role for a publicly funded financial facility. The scope of such a facility could include bearing the cost of doing project design and financial structuring in a fully consultative and conflict-sensitive manner. It could also bear some of the cost of borrowing as an incentive for early entry into highpriority sectors such as energy, construction or export industries.
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Post-Conflict Economic Recovery: Enabling Local Ingenuity