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Money makes the war go round - finance, war and peace

Does the humanitarian community understand the relationship between finance, war and peace? How does the financial sector reinforce poverty and inequality and fuel conflict?

A study by the World Institute for Development Economics Research (WIDER) of the United Nations University examines how domestic and foreign finance influences the humanitarian costs of war. A strong case is made that reconstruction programmes which do not include measures to rebuild financial systems are bound to fail.

‘Narrow’ development exacerbates inequalities on grounds of class, region and ethnicity and lays the foundations for potential conflict. The financial sector bolsters narrow development in several ways: elites are able to leverage their existing wealth though control of financial systems; use of the state banking system to finance private accumulation increases propensity to conflict; and weakness in financial regulation allows fraud to destroy savings and living standards, thereby increasing the risk of conflict.

Once conflict erupts, external inflows of cash to keep it going take many forms:

Remittances from diaspora communities (estimated to be at least US$1 billion in 2000) helped to finance recent conflicts in Sri Lanka, Kosovo and Eritrea.
Commercial borrowing by belligerents is extensive - Angola’s heavy borrowing to buy arms has left the country with large debts that take over half its oil revenues in debt service.
Rebels with resources can borrow - private financiers keen to stake a claim to the country’s mineral resources funded Kabila’s insurrection against Mobutu in Zaire.

Cutting financial flows to belligerents is problematic. The international financial system lacks the capacity to monitor the huge transactions involved in trading diamonds, drugs, ivory, timber and other valuable war-sustaining commodities. Indeed, globalisation of finance has helped UNITA evade attempted controls on its sophisticated diamond operations. Banks in post-conflict states with lax restrictions on capital movement are attractive for belligerents.

Other findings include:

Economic reconstruction must be supported by careful economic reform, so that the two agendas are mutually supportive
In contrast to the reconstruction of Japan and Western Europe after World War Two, contemporary post-conflict reconstruction has involved more financial liberalization.
Bank failure and financial distress causes macro-economic instability which can impede post-conflict reconstruction

Policymakers building reconstruction strategies must recognise that:

Financial liberalisation will not succeed unless complemented by prudent regulation and supervision by monetary authorities.
But regulatory capture is common in post-conflict societies. Cambodia and Liberia are but two instances of states where lack of democratic institutions allows banks (linked to political actors) to act as they please
Therefore prudential regulation and supervision is promoted by democratisation, which builds institutions to oversee the conduct of public policy, including bank supervision.

Source(s):
‘Finance in conflict and reconstruction’ Finance and Development Research Programme, Working Paper #20, Institute for Development Policy and Management, University of Manchester by Tony Addison, Philippe Le Billon and S Mansoob Murshed (2000) Full document.
‘Financial Reconstruction in Conflict and 'Post-Conflict Economies', paper presented at the conference, 'Development and Business Finance: Policy and Experience in Developing Countries', University of Manchester, 5-6 April 2001, by T. Addison, A. Geda, P. Le Billon and S. Mansoob Murshed

Funded by: UK Department for International Development (DFID); ESRC Development Economics Study Group (DESG)

id21 Research Highlight: 2 May 2001

Further Information:
Tony Addison/S. Mansoob Murshed
World Institute for Development Economics Research (WIDER)
United Nations University
Katajanokanlaituri 6B
Helsinki 00160
Finland

Tel: +358 9 615 9911 / +358 9 615 99 214
Fax: + 358 9 615 99 333
Contact the contributor: addison@wider.unu.edu

Contact the contributor: murshed@wider.unu.edu

World Institute for Development Economics Research (WIDER)

Institute for Development Policy and Management
University of Manchester
Crawford House
Precinct Centre
Oxford Road
Manchester M13 9GH
UK

Contact the contributor: idpm@man.ac.uk

Institute for Development Policy and Management, University of Manchester, UK

Views expressed on these pages are not necessarily those of DFID, IDS, id21 or other contributing institutions. Unless stated otherwise articles may be copied or quoted without restriction, provided id21 and originating author(s) and institution(s) are acknowledged.

Week beginning Monday 17th November 2008

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