How can governments and international actors work together to build public financial management capacity in post-conflict states? This paper from the Political Economy Research Institute (PERI) at the University of Massachusetts Amherst addresses key issues related to resource mobilisation and public finance expenditure in wartorn societies. Ultimately, the soundness of public finance must be assessed in terms of its effects on the dynamics of violent conflict.
Building state capacities in public finance is crucial to the success of peacebuilding efforts. Post-conflict governments must be able to ensure sustainable funding for new democratic institutions, social programmes and public investments to promote economic growth and development. Fiscal capacities are also needed to build a legitimate state given that legitimacy comes in large part from government delivery of services. In some cases, there is also a need to curtail extra-legal taxation by warlords and armed groups to enhance security.
A number of issues are pertinent to efforts to build financial management capacity in post-conflict states:
- Raising revenue is too often undertaken without due attention to the distributional effects of taxation.
- Monetary discipline must not be abandoned because of the political demands of a post-conflict situation. However, it can be re-calibrated carefully to fulfill important short-term goals.
- External aid has benefits and drawbacks in post-conflict contexts. While aid can provide immediate benefits without burdening citizens, it can also encourage some of the same rent-seeking activities as natural resource dependence.
- A conflict sensitive approach to financial management can contribute to more equitable decisions about the disbursement of aid expenditures.
- The doctrine of ‘odious debt’ opens up the possibility for nations to be released from burdens incurred by departed dictators or foreign powers.
These public-finance issues have far-reaching implications for policy making by governments and international agencies. There is a pressing need for reforms to align policies more effectively to the dynamics of war-to-peace transitions:
- Documentation of social conditions incorporated directly into revenue policy making should be widely disseminated, so as to make the process democratic and more likely to succeed.
- The donor community should help the recipient government mobilise domestic revenue and avoid aid-dependence. Effective methods for doing this include technical assistance, linking aid to mobilisation progress, helping to curb extra-legal taxation and reducing tax exemptions on post-war aid.
- Aid allocations can be better attuned to the requirements of postwar statebuilding by incorporating trends and levels into existing performance indicators, and by developing new indicators that assess progress in conflict resolution and peacebuilding.
- Donors can help develop fiscal capacity by channeling more resources through the state, while combating corruption and fiduciary irresponsibility.
- The long-term implications of fiscal decisions cannot be ignored. Funding projects that may have high ongoing costs or rely heavily on imports are an example of such a shortsighted approach.
- A more systematic effort at determining when the doctrine of odious debt should be invoked would be useful, starting with an international debt legitimacy adjudication body.
