Economic Governance in War Torn Economies: Lessons Learned from the Marshall Plan to the Reconstruction of Iraq
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Economic Governance in War Torn Economies: Lessons Learned from the Marshall Plan to the Reconstruction of Iraq Long Report Prepared for Office of Development Evaluation and Information Bureau for Policy and Program Coordination by Stephen Lewarne, Ph.D. Senior Vice President David Snelbecker, Ph.D. Vice President TSG The Services Group December 2, 2004 Prepared under Contract No. 2941-1729-0-P-01 Academy for Educational Development (AED) TABLE OF CONTENTS ACKNOWLEDGEMENTS.................................................................................................3 GLOSSARY OF ACRONYMS ..........................................................................................4 I. INTRODUCTION.......................................................................................................6 II. SUMMARY FINDINGS .............................................................................................8 III. WHY ECONOMIC GOVERNANCE MATTERS ...............................................11 IV. ECONOMIC RECONSTRUCTION IMMEDIATELY AFTER WORLD WAR II AND TODAY........................................................Error! Bookmark not defined. V. NOTEWORTHY EVALUATIONS OF POST-CONFLICT RECONSTRUCTION EFFORTS .....................................................................................22 VI. LESSONS 1-13: GENERAL LESSONS IN ECONOMIC GOVERNANCE .....26 Preparedness and planning beforehand .........................................................................26 Rational structuring of government and donor assistance.............................................26 Focus on private-sector-led growth...............................................................................29 The economic reform agenda predating the conflict .....................................................31 Resolution of final political status .................................................................................32 Programs for key political and social constituencies.....................................................33 Capacity building...........................................................................................................33 VII. LESSONS 14 - 26: SIX PILLARS OF SOUND ECONOMIC GOVERNANCE..38 Macroeconomic and financial stability..........................................................................38 Balanced and efficient fiscal policy...............................................................................40 Open trade relations .......................................................................................................42 Robust legal and regulatory regimes .............................................................................42 Equitable social policy...................................................................................................44 Appropriate sectoral policies .........................................................................................45 VIII. CASE STUDIES....................................................................................................47 ANNEX I .........................................................................................................................116 BIBLIOGRAPHY............................................................................................................118 2 ACKNOWLEDGEMENTS The authors are particularly grateful to Elaine Grigsby at USAID, who commissioned and motivated this study, and who shared insights and suggestions from her own extensive experience in managing assistance programs in several post-conflict economies. We also are indebted to Anne Beasley, who provided important substantive advice on many sections of the paper and who shepherded the writing process. Others who provided important feedback on various drafts, to whom we are indebted, include: Sutherland Miller, Tony Preston-Stanley, Professor Larry Black of Carleton University Canada Department of History, Michael Hogan of The Ohio State University Department of History, Alan Pearson, and Lena Zezulin. Technical help in preparing the report was provided by Amy Bailey, Jimmy Martin, and Rene Bernier. The views expressed are those of the authors and not necessarily those of USAID or The Services Group. The authors bear sole responsibility for any remaining errors or omissions. 3 GLOSSARY OF ACRONYMS ADB Asian Development Bank AED Academy for Educational Development BiH Bosnia and Herzegovina BPD Barrels per Day BPK Banking and Payments Authority of Kosovo CISU Central Intelligence and Security Unit CNRT National Council of Timorese Resistance CPA Coalitional Provisional Authority CPI Consumer Price Index DAB da Afghanistan Bank DDR Disarmament, Demobilization and Reintegration DFID Department for International Development DM Deutschmark DPKO Department of Peace Keeping Operations DSRSG Deputy Special Representative of the Secretary General EAR European Agency for Reconstructions EC European Community ECA Economic Cooperation Act ECOSOC United Nations Economic and Social Council ECSC European Coal and Steel Community EEC European Economic Community EIU European Intelligence Unit ERP Economic Recovery Program EU European Union EURATOM European Atomic Energy Community FDI Foreign Direct Investment FEC Far Eastern Commission FMIS Financial Management Information System FRUS Foreign Relations of the United States FY Fiscal Year GDP Gross Domestic Product GOA Government of Afghanistan HIPC Heavily Indebted Poor Countries IBRD International Bank for Reconstruction and Development IDP Internally Displaced Person IMF International Monetary Fund INTERFET International Force in East Timor I-PRSP Interim – Poverty Reduction Strategy Paper JAM Joint Assessment Mission KEK Kosovo Energy Corporation KFOR Kosovo Force KLA Kosovo Liberation Army MEB Micro Enterprise Bank MEF Ministry of Economy and Finance 4 MFI Micro Financial Institution MPP Mission Performance Plan NATO North Atlantic Treaty Organization NDF National Development Framework NGO Non-Governmental Organization NSC National Security Council OED Operations Evaluation Department OEEC Organization for European Economic Cooperation OFF Oil For Food OHR Office of the High Representative OSCE Organization for Security and Cooperation in Europe PCE Per Capita Expenditure PIC Peace Implementation Council PISG Provisional Institutions of Self-Government RFP Request for Proposal SCAP Supreme Commander for the Allied Powers SCR Security Council Resolution SME Small and Medium Enterprise SOE State-Owned Enterprises/Entities SRSG Special Representative of the Secretary General SWNCC State-War-Navy Coordination Committee TFHB Trust Fund for Bosnia and Herzegovina TSG The Services Group UN United Nations UNAMET United Nations Mission in East Timor UNAMSIL United Nations Mission in Sierra Leone UNDP United Nations Development Program UNECE United Nations Economic Commission for Europe UNHCR United Nations High Commissioner for Refugees UNITAR United Nations Institute for Training and Research UNMIK United Nations Mission in Kosovo UNMISET United Nations Mission of Support in East Timor UNOMSIL United Nations Observer Mission in Sierra Leone UNRRA United Nations Relief and Rehabilitation Administration UNSAS United Nations Standby Arrangement System UNTAET United Nations Transitional Administration in East Timor USAID United States Agency for International Development USDA United States Department of Agriculture VAT Value Added Tax WB World Bank WFP World Food Program WLSG Working Level Steering Group WTO World Trade Organization WWII World War II 5 I. INTRODUCTION This report addresses the issues of economic governance in war-torn economies. In particular it makes a case for the early delivery of technical assistance in economic governance for the reconstruction of economic institutions, for the establishment of sound economic policies, and for the creation of the capacity necessary for the sustainable functioning of a rebuilt state. Often, there is a sense that what matters first in a post-conflict situation (after a political compromise has been struck) are emergency shelter, rural reconstruction, and refugee returnee programs. These are of course important, but they provide only an immediate assistance package that is not itself sufficient for improving economic governance or resolving the underlying conditions fueling conflict. Only more significant steps, to create conditions for economic recovery, employment, and growth, will put a country back on the path of development and resolution of fundamental factors that provoked conflict in the first place. Our central thesis is that economic governance, too, needs to be addressed from the early stages of post-conflict assistance. This is not only because such assistance is essential for alleviating underlying conditions that fuel conflict but also because a brief window of opportunity often exists at the outset of post-conflict assistance to make fundamental changes—a window that soon closes as various interests regain political power. Our work covers economic development projects that have considerable US Government involvement (and in particular that of USAID after its creation in 1961). We have undertaken case studies on the following war-torn economies receiving assistance: 1. Germany after World War II 2. Japan and its reconstruction after World War II 3. Bosnia immediately after the Balkan Wars in 1995 4. Kosovo immediately following the NATO bombing campaign in 1998-1999 5. East Timor in 2000 6. Sierra Leone after its civil war. 7. Afghanistan