Generating A 'Peace Dividend' in Conflict-Affected Countries

June 2, 2003—The private sector's role in rebuilding conflict-affected countries is crucial not only in attracting foreign direct investment back into a country after the war's end, but also in generating a "peace dividend," an incentive for sustaining peace, as it can reintegrate ex-fighters and refugees socially and economically, and bring a sense of hope to those who have experienced so much fear and desperation.

Foreign investment also has a powerful "demonstration effect," encouraging private investors who have taken flight to return, and sending a signal to international investors that the country is suitable as an investment destination, which is key for economic recovery and long-term development, explains MIGA's Executive Vice President, Motomichi Ikawa. It also serves to  reestablish valuable links to international markets and provides an impetus for improving the rules, regulations, and procedures to help improve investment climates in post-conflict countries.

With few exceptions, conflict-affected countries are among the least developed. Of the 39 countries that are currently considered to be conflict-affected, 30 are among the world's poorest. In Africa, Southeastern Europe and elsewhere, conflict has become a major constraint to poverty reduction, halting social progress and preventing economic growth.

And the needs of post-conflict countries are many. Basic infrastructure—such as homes, schools, factories, communications networks, roads and trade links—has been destroyed. Currency is weakened. Death, displacement, and lack of training result in seriously diminished human resources. And institutions are weak, with dysfunctional financial, governmental, and legal structures further complicating the recovery effort.

"Foreign direct investment (FDI) can have a strong, positive impact on rebuilding conflict-affected countries, bringing much-needed private capital, technology, and new skills, and stimulating local spin-off industries," explains Ikawa. "The presence of new foreign investment is also a visible manifestation of hope for a better tomorrow for local citizens."

But years of conflict color investors' perceptions of risks, particularly those of a noncommercial nature. MIGA was created in 1988 as a member of the World Bank Group to mitigate some of these risks and encourage FDI through its investment guarantee and technical assistance programs.

MIGA at work in conflict-affected countries

MIGA can play a critical role in encouraging FDI back into a country after the war's end, as shown in several countries, including Bosnia-Herzegovina and Mozambique. Since its inception, MIGA has supported 56 projects with guarantees worth nearly $1.5 billion in 16 conflict-affected countries—representing 13 percent of the agency's overall portfolio.

"The development benefits have been far-reaching, helping to restore cash flows, getting financial sectors back on their feet, allowing governments to allocate precious funds to critical social programs, and perhaps more importantly, restoring private sector confidence to invest in the reconstruction," explains Ikawa.

MIGA is able to increase its capacity to guarantee projects in conflict-affected countries by partnering with public and private counterparts on co- and reinsurance, as it did with the Slovene Export Corporation in Bosnia in 2002. The agency is also able to leverage its assistance by offsetting risks through special trust funds, such as the European Union (EU)-sponsored  Investment Guarantee Trust Fund for Bosnia-Herzegovina.

Since becoming a member of MIGA in 1993, Bosnia-Herzegovina has hosted nine agency-backed projects, concentrated mostly in the banking and manufacturing sectors. In an effort to encourage even more FDI into the country, Bosnian Prime Minister Adnan Terzic recently met with Ikawa to ask MIGA to further increase its presence in the country. The request comes in light of 10 planned privatization projects, including in tourism and services.

Ikawa recently took part in a Tokyo-based conference on the reconstruction and development of Sri Lanka, another conflict-affected country supported by MIGA. "Stable economic growth through private sector development is one of the central pillars of the country assistance strategy," Ikawa noted during discussions with Sri Lankan Prime Minister Ranil Wickremesinghe. Since the signing of a permanent cease-fire agreement in February 2002, investors from Canada, the UK, Australia, Malaysia, India, France, and Japan have shown interest in exploring investment opportunities in Sri Lanka, attracted by high-growth prospects and a qualified labor force.

Through its technical assistance program, MIGA works with investment promotion agencies to build their capacity to share information on investment opportunities with foreign investors. This assistance typically involves customized training ranging from market research to online information dissemination. The agency has so far provided services to 23 conflict-affected countries.

"Helping war-torn countries begin and sustain recovery is an important development goal for MIGA, and the agency looks forward to continuing its work to mobilize investment into these countries," says Ikawa. "For reconstruction to be effective, it requires a careful and concerted approach that draws on domestic resources, international donor assistance, and private sector resources, so countries can mend their post-conflict wounds and move towards a path of long-term sustainable development."

For more on MIGA's work in conflict-affected countries, visit the post-conflict brochure.

MIGA's Conflict Work at a Glance

• MIGA provides insurance coverage in countries where other insurers are often not willing to go.

• Insurance is particularly important for large, capital-intensive projects in the energy, mining, heavy industry, and infrastructure sectors.

• MIGA offers guarantees against the risks of war and civil disturbance (including terrorism and sabotage), transfer restriction, expropriation, and breach of contract.

• Trust funds play an important role in enabling MIGA to underwrite projects in conflict-affected countries.

• MIGA provides technical assistance to promote foreign investment, working with a country's investment promotion agency to help develop a national investment strategy.