Private Sector Development in Fragile and Conflict Affected Situations

Private Sector Development in Fragile and Conflict Affected Situations

Some of the most difficult countries to work in are classified as fragile and conflict-affected.

In this article, I focus on some of the challenges to supporting private sector development in these countries. This is based on a recent report I wrote on Business Environment Reforms in Fragile and Conflict-Affected Situations.

Poverty, fragility and conflict

By 2022, more than half of the world’s people living in extreme poverty will be living in fragile states, according to projections by World Data Lab.

Currently, there are 39 fragile states the World Bank defines as “countries with high levels of institutional and social fragility” and “affected by violent conflict.”

Almost one billion people live in these countries, while around 335 million live in extreme poverty.

A new way of working in conflict and fragile situations

The World Development Report 2011: Conflict, Security and Development describes humanitarian assistance as ‘the main tool the global system has for rapid relief.’ This life-saving and stabilising assistance reduces the cost of conflict and is, in part, ‘testament to the increasing effectiveness of humanitarian aid.’

Protracted, humanitarian assistance typically is not delivered through national institutions. Instead, international agencies and non-government organisations with both humanitarian and development mandates ‘can build bridges from relief to early results and institutional transformation.’ Similarly, the private sector can contribute to relief and development efforts.

The Humanitarian-Development-Peace Nexus

The concept of a ‘humanitarian-development-peace nexus’ focuses on the interventions required to address people’s vulnerability before, during and after crises. It describes the transition from an urgent, immediate relief towards a medium-and-long-term response.

More than this, it describes the interconnections between peace and development.

In its report, Transforming our World: The 2030 agenda for sustainable development, the United Nations says there ‘can be no sustainable development without peace and no peace without sustainable development.’

At the World Humanitarian Summit in 2016, the United Nations and World Bank committed to what they called, a ‘new way of working’, designed to transcend the humanitarian-development divide.  This New Way of Working can be described as working over multiple years, based on the comparative advantage of a diverse range of actors, including those outside the UN system, towards collective outcomes.

Good in theory, but challenging in practice

The OECD States of Fragility report describes the role official development assistance plays in fragile contexts. Aid, says the OECD ‘is the only financial flow that directly invests in the foundations for peaceful and stable societies, an investment that invites more inclusive growth and sustainable development.’

However, Oxfam argues the nexus challenges the status quo of the aid system. This ‘overstretched’ system ‘operates with little coordination between project-based development and humanitarian interventions, resulting in it not effectively meeting the needs of the most vulnerable people.’

Thus, donor and development agencies need to invest more time, energy and organisational capacity into ensuring the joined-up programming demanded by the humanitarian-development-peace nexus are achieved.

A nexus approach requires the development of joint tools, analysis and language while ensuring the views of people affected by crises are integrated at every step, and local leadership comes to the fore.

The humanitarian-development-peace nexus raises many challenges to the ways donor and development agencies support private sector development in fragile and conflict-affected situations.

The role of private sector development

The private sector, and private investment more broadly, has the potential to foster stability, peace and social cohesion.

However, the private sector also has the capacity to ignite social unrest and increase competition for scarce resources. Indeed, the roots of fragility and conflict are often found in the competition for economic resources, including jobs. The private sector can apply exclusionary and exploitative practices that contribute to instability and conflict.

The World Bank Group’s Strategy for Fragility, Conflict, and Violence 2020–2025 describes how the lack of economic opportunities and high unemployment exacerbates other fragility, conflict and violence drivers. To address this, a ‘vibrant and inclusive private sector can ignite economic growth, provide jobs and services, and help stabilise societies.’

However, the domestic private sector in most of these settings is underdeveloped. Only one per cent of global foreign direct investment goes to fragile and conflict-affected countries, creating fewer prospects for the kind of private sector-led growth needed to lift people out of poverty.

Understand what drives fragility and conflict

Urs Schrade and his colleagues in GIZ suggest that private sector development interventions need to create employment opportunities and support local economic recovery. In the long term, a dynamic private sector and conducive business environment have the potential to reduce disparities and tensions.

Because economic dimensions are one of the key drivers for conflict and influence the duration and intensity of conflicts, it is crucial to regularly assess and respond to the political economy. Programme interventions need to be conflict-sensitive and pursue a do-no-harm approach. They also need to contribute to peacebuilding beyond economic impact.

In my research, I found that PSD programming is generally evaluated from an economic perspective, without attention to stabilisation and, when stabilisation objectives do feature, the causal inferences are weak. Thus, development programme indicators should be used to measure reform impacts in terms of economic benefits as well as the stabilising and peacebuilding effects.

Supporting business environment reforms

While private sector development is an important contributor to development and can address some of the root causes of fragility, violence and conflict, there are particular challenges for business environment reform in these contexts. What follows is a brief overview of the key issues and recommendations contained in my report.

Focus on common business environment themes. When considering the role of business environment reform, it is important to prioritise reforms that build trust amongst conflicting parties. Humanitarian assistance and reform practitioners both need to make sure all relevant public and private stakeholders are represented in the dialogue schemes they initiate. They should also be prepared to work with various political formations, including, where necessary, warlords and armed groups.

Consider the whole investment system. Donor-supported reforms should consider the whole investment system, including micro, small and medium-sized enterprises and the role of large national and multi-national companies.

Sequence reforms. Macro level interventions to promote a conducive regulatory and administrative environment should be avoided as long as violence is open and ongoing. Instead, it is better to focus on those reforms that reflect the needs of the private sector and are aligned with the political will of the government. Simultaneously promote the introduction of new private investment opportunities while supporting better investment and business environment conditions.

Align reforms with other humanitarian and development programmes. Agencies must understand how their programmes influence fragility, violence and conflict. Programming decisions should explicitly express this understanding. Regular programme monitoring should assess the extent to which reform programmes achieves these outcomes.

Choose when to focus on subnational reforms. Business environment assessments and reforms need to go deeper than the country level, recognising local trends and opportunities for reform. Look for opportunities to engage local actors in order to mobilise their buy-in to reform measures. Maintain flexibility in reform programming to ensure local, sub-national reform dimensions are accommodated.

Support key themes in subnational reforms. Donor and development agencies should deepen their engagement with stakeholders and agents of change beyond the representatives of the national state, including opposition groups, customary, religious and subnational leaders, social groups, and elites. They should invest in the development of suitable assessment tools and the collection of sub-national data on the experiences of private investors. Recognise and respond to the sub-national variations in the demand and opportunity for reform.

Respond to the concerns of vulnerable groups. Donor and development agencies should recognise the potential impact of reforms on vulnerable and marginalised groups and take steps to mitigate the negative effects reforms may have on these groups. More attention should be given to reforms that promote inclusive economic growth and specifically focus on the experiences of vulnerable and marginalised groups.

Apply conflict and risk assessments. While time-consuming and sometimes costly, it is important to invest in regular conflict assessments and to understand how proposed reforms will contribute to peace and stability or ignite further conflict. Understand and analyse the specific conflict context and how proposed reforms affect this. Design reforms that minimise potential negative impacts and maximise positive impacts.

Coordinate reform programmes. While it takes time and money–and can be particularly difficult in environments characterised by fragility, conflict and violence–the longer-term benefits of donor coordination and alignment are significant. All partners in development, including government and the private sector, should see that donor and development agencies are aligned, coordinated and sharing resources wherever possible.