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Post-Conflict Reconstruction: Financing From Below

Written by Prudence Manirakiza, PharmD

After an armed conflict ends, a broad range of damages are likely to be observed in a given country. Not only are public institutions not fully functioning, but infrastructures may also be destroyed as the economy is at its lowest level of activity. Indeed, the financial capability of the government in postwar era is very low when compared to countries with a same “per capita income” while its expenditures are higher (Boyce, 2008; p.17). The country may be in the hardship of either accommodating people who fled to the cities without the financial means to afford the cost of living or reinforcing the means of people who stayed in rural areas as well as all those returning as was the case in Angola (Cain, 2007). Another case may be the process of rebuilding the economy while strengthening the reconciliation and reintegration of minorities who were marginalized by their ethnicity and those who were demobilized, as was the case of Bosnia and Herzegovina (BiH) (Ohanyan, 2002). Gorlorwulu (2011) asserts that the “major issue which requires significant and effective attention in post-conflict economies is how to promote sustainable recovery through job creation in a context of generally weak capacities and market failures” (p.296). However, the struggle to achieve a sustainable financial situation may take years. After almost ten years, Guinea Bissau was still trying to find a solution to financing the private sector affected by the late 90s war. Sane (2008) highlighted that in post-conflict economic struggle, the reconstruction should “[give] priority to the entrepreneurs because war kills business, it does not kill the enterprising spirit!” (p.5). The World Bank (2011) argues that small and medium enterprises (SMEs) can create jobs quickly and influence the economic growth.

As there is hope and willingness in the people to get involved, create jobs and contribute to the country’s economy, the need for a financial source and reliable financial redistribution methods are crucial in the reconstruction process. Lessons learned prove that international aid for the government may handicap the country’s opportunity to increase its own population’s participation in financing reconstruction. In fact, when a government receives international aid, it is less likely to collect taxes from its own people which “‘crowds out’ domestic revenue mobilization” (Boyce, 2008, p.18). From this approach, again, it becomes crucial to promote domestic income generation. The United Nations (UN) policy in this domain suggests a framework with three tracks focused on “[stabilization] of income generation and emergency employment”, “local economic recovery for employment opportunity and reintegration” and “sustainable employment creation and decent work” (UN, 2009; p.11). Since the attention is given to job creation on a local level while emphasizing the need to strengthen national regulations to support the effort, a broad range of actors can participate in different levels of the reconstruction financing process. Humanitarian organizations are the first to arrive in most post-conflict areas. By offering emergency jobs, these organizations are the first sources that bring financial capabilities to the people living in the post-conflict situations. However, these jobs help a handful of people who participate in distributing and delivering humanitarian services and they tend not to last very long. Sooner or later, there has to be a shift from “ratio from humanitarian donors with income from trading or laboring in informal market places” (Cain, 2007; p.375). To broaden the impact and make it long lasting, international aid to governments should help “to ‘crowd in’ domestic revenue” in supporting the government by the provision of “technical assistance”, by allocating “some of its aid to progress in domestic revenue performance”, by putting constraints to warlords and their illegal exploitation of the country’s resources and by “reducing tax exemption on postwar aid flows” (Boyce, 2008, p.19-20).

As a large number of people need financial means to make a living, some models emphasize adapting the microloans approach, which has proven successful in numerous post-conflict areas. Among the key paths to providing employment and generating income among entrepreneurs, the microloan approach is recognized and “supported by an ensemble of international governmental and nongovernmental organizations” (NGOs) (Ohanyan, 2002; p.400). It has been proven successful as a strategy to fight poverty in both urban and rural areas in Angola (Cain, 2007). In Sri Lank, the World Bank emphasizes that SMEs are “engines of growth in post conflict” (The World Bank, 2011). In BiH, microcredit was found to be a tool that helped to make financial means penetrate the economic pyramid, reach the poor and SMEs in a system that was dominated by a socialist economy concentrating wealth to “larger enterprises” (Ohanyan, 2001, p.401). In terms of sources of financing, a large number of organizations that contribute are known. While some of them aim to implement the “credit” delivery program, others, called supporting organizations, provide the credit. As an example of supporting organizations, the case of BiH knew “the World Bank, UNHCR, U.S. Bureau of Population and Refugee Migration, U.S. Department of Agriculture, Grameen Bank, Oxfam” among others (Ohanyan, 2002; p.401). Implementing organization varies from international NGOs to local NGOs and Banks (Cain, 2007). Not only are non-profit organizations involved in the microcredit system, but profitable private organizations can be leaders in this matter as well. For example, the Liberia Enterprise Development Finance Corporation (LEDFC) is a private corporation that participated in reconstruction by providing credits to SMEs in Liberia. To get to its mission, it partnered with the foreign organization like “ the US Overseas Private Investment Corporation (OPIC) and RLJ Group of Companies (RLJ)” (Gorlorwulu, 2011; p.7-8).

In adopting the financing of SMEs in a post conflict era, there are two major issues that actors have to take into consideration along with their impact on reconstruction policies. First, as the war went on and resulted in insecurity, its aftermath is characterized by the “flight” of entrepreneur and managers (Gorlorwulu, 2011). In this regard, actors in reconstruction have to focus on providing training not only to those delivering services but also to those who are receiving the small credit, as they are likely to be new entrepreneurs. This training during reconstruction helps to solidify the effective use of the available funds by ensuring that the borrower will be able to pay it back and therefore have it recycled with new borrowers. The second issue is the fragile country’s policy framework within which the credit is being used. When the microfinance project was working in Angola, along the process, with an increasing number of people taking a microcredit, the number of lending actors could enlarge itself to local Banks. However, a national legal framework was missing for local Banks to make sure that the money will be reimbursed. In fact there was no “clear land legislation that would allow property to be used as a guarantee”, “long loan periods for recouping investments” was not legally defined, there was no “tittle document” to prove who owns what, etc. (Cain, 2007; p.379). While this may be seen as weakness to the microcredit system on the one hand, on the other hand, it can be seen as an opportunity that the microcredit system gave to developing the national regulation. The Angolan case is not the only one where local Banks were less likely to provide credits to a large range of SMEs. In Liberia, Gorlorwulu (2011) shows how the LEDFC performed better in providing loans to SMEs than local Commercial Banks did. In general, it has been highlighted that in prost conflict zones “Banks and lending facilities may have unrealistic expectations for the types of clients they hope to serve” and therefore contribute to the SMEs’ low access to finance (Lemmon, 2012; p.3).

Financing from below has various issues that influence how successful it can be. One of them is related to the fluctuations of the financial market worldwide and its impact on credit borrowing eligibility and reimbursements. During the 2007-8 global financial crisis, the availability of credit went down. More concerning, the borrower’s capability to provide valuable guarantees went down dramatically as properties lost their value while there was uncertainties in the marketplace. This situation worsened the confidence that microfinance institutions (MFIs) had in borrowers; local banks dived into a culture of mistrusting microloan borrowers. However, as each country or region fought to recover from the crisis, there has been an adaptation of the financial market worldwide. In fact, when the International Monetary Fund (IMF, 2011) studied the impact of the financial crisis on microloans, it was found that every change was linked to domestic economies. To mean that, for MFIs operating in a given country, the overall market stability of the country was the most important thing in their successes or failures. Other studies confirm that the impact of the financial crisis on MFIs was regional/local rather than global. Overall, bigger MFIs were not affected; rather they grew (Constantinou&Ashta, 2010). When it comes to microloans reimbursements, Constantinou and Ashta further argue that ‘high reimbursement rates’ by borrowers depend on whether the loan was given to; one person or a group, the reimbursement period and frequency, ‘non-traditional collaterals’, whether women are the primary borrowers, etc. Still, during the global financial crisis, credits reimbursements depended upon financial performance of a country or region within which MFIs work.

Another important issue in the reconstruction process, in building economy with a bottom-up approach, is the process of moving from informality to formality. In post-conflict era, many SMEs are likely to be running on an informal market basis (Cain, 2007, and Gorlorwulu, 2011) in both rural and urban areas. As the country’s economy progresses, policies evolve by formalizing the informal market. However, this process has to be smooth as not to push back to poverty and unemployment the large number of illiterate people surviving by these means. In Angola, it was hard for people to leave the informal market in Luanda and go back to the rural areas as the system evolved (Cain, 2007). To solve this issue and to keep a large number of people empowered financially, the UN framework suggests to “[remove] obstacles to forming and doing business including clarifying property rights, simplifying tax and licence systems and making tax systems at every level more transparent and uniform” (UN, 2009; p.35).

The economic reconstruction in the aftermath of a conflict is a long process and yet very complex. It involves a large number of actors and its complexity goes beyond what is seen physically. As Cain asserts, it is not “just replacing the schools, bridges and factories that were destroyed” (2007; p.389). Financing from below by empowering SMEs is one way of creating jobs and providing income to people while building a country as a whole by strengthening social cohesion and food security.

About the Author: Prudence Manirakiza has a doctorate in pharmacy and a certificate in pharmacy and humanitarian aid. Currently, at Arcadia University, he is a candidate for a dual degree Masters program in International peace and conflict resolution (MA-IPCR) and public health (MPH). His passion in postwar reconstruction and public health comes from the experience he lived in the 1990s both in Rwanda and later in the Democratic Republic of the Congo, the then Zaïre

Insightful Quotient is a website that encourages debates on how to achieve sustainable development in developing countries using an intercultural cooperation. Therefore, we welcome your insightful arguments that provide scrutiny and ideas that can elaborate further the analysis and suggestions detailed in this article.

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