What policies have proven to be most effective for steering economic governance in war-torn economies? This report prepared for the United States Agency for International Development (USAID) argues for the early delivery of technical assistance in economic governance. This will lead to strong institutions, sound policies, and more sustainable capacity-building in the economic sphere.
‘Economic governance’ consists of the policies, laws, regulations, institutions, practices, and individuals that determine the context for a country’s economic activity. While immediate and consistent attention to economic governance is a necessary condition for success, it is not sufficient. Economic governance programmes must be part of the initial sequence of reconstruction and should represent an investment by the main donors. Additionally, specific economic governance tasks need to be accomplished. In the absence of this, the reconstruction effort can more easily falter, making more likely the re-emergence of poverty, civil war or both.
The following findings and recommendations are based on USAID’s experiences since World War II in post-reconstruction efforts in Germany, Japan, Bosnia, Kosovo, East Timor, Sierra Leone, Afghanistan and Iraq:
- Preparing for the post-conflict period should begin early and include the participation of a range of stakeholders. New, post-conflict governments and donor presence should be well integrated and structured to address specific tasks.
- Growth and job creation should be expected to come from private-sector-led growth, not government/donor spending.
- Security is essential for reconstruction and for economic development. Post-reconstruction efforts need to prevent crime from monopolising economic sectors and from creating a lawless environment that threatens legitimate business.
- The economic reform agenda predating the conflict needs to be addressed early. Lack of resolution of final political status impedes reconstruction and economic growth.
- Early programmes in reconstruction need to focus on key political and social constituencies. Building new institutions for economic governance and training individuals takes time and should also begin early in the reconstruction process.
- A modern policymaking process needs sound economic data, which requires considerable investments by donors.
- High priority and time-consuming activities should begin towards the start of the reconstruction effort. This period is also an important window of opportunity to undertake politically difficult reforms and institutional changes.
Donors should consider the following six pillars of sound economic governance when planning reconstruction efforts:
- Macroeconomic and financial stability must be ensured by creating appropriate markets and instruments, balancing the need for stability with competitiveness and maintaining low, flexible levels of inflation.
- Balanced and efficient fiscal policy requires creating or improving systems of budget execution and gradually building the capacity for tax administration. Capital expenditures and investment projects must be integrated into a comprehensive public investment programme and the state’s capital budget.
- Open trade relations must include provision for a country’s specific economic needs and create foreign demand for domestic production.
- Robust legal and regulatory frameworks, such as basic commercial laws and institutions, are needed to spur private sector growth and foreign direct investment.
- Equitable social policy should include efficient programmes for those most in need, for modern, balanced pension systems, and for specific provision for the needs of women.
- Appropriate sectoral policies, in areas such as infrastructure, must provide crucial public goods without leading to market distortions or favouritism.
