One of the key challenges for governments in post-conflict countries is to provide employment opportunities to establish stability and lift people out of poverty. As the private sector is the key engine of job creation, accounting for 90 percent of all jobs in the developing world, it is critical for policymakers in these countries to encourage entrepreneurship. The best way to do this is through a regulatory environment conducive to the growth of businesses and employment creation—an environment that promotes the rule of law, competition, predictability, and transparency.
The urgent needs and competing priorities of a post-conflict period present major challenges to governments. But this phase also offers unique opportunities for broad, fundamental reform because the threat of relapse into conflict creates a sense of urgency requiring critical economic decisions. Typically there is also broad consensus in society that “things are broken.”
This creates a political environment favorable to change—allowing governments a window of opportunity for implementing important investment climate reforms. Such reforms—if accompanied by broader policies that promote good governance and security—can bring large pay-offs in terms of economic growth and stability. They can encourage businesses to transition from the informal to the formal sector, generating additional tax revenues and reducing opportunities for corruption.
Supporting reconstruction of infrastructure
The physical destruction of infrastructure is one of the most visible effects of conflict. But to grow, the private sector needs a minimum level of infrastructure. Access to power is the number one obstacle for firms in most post-conflict countries, according to Enterprise Surveys conducted by the World Bank Group. Without reliable sources of energy, along with essential trade-related infrastructure such as roads and ports, economic growth potential will be stifled.
The private sector also fills in the gap by suppling basic infrastructure such as power generation capacity or operating a port terminal. To facilitate this, governments should create a conducive legal and regulatory framework for private participation in provision of infrastructure and help eliminate constraints to the development of private service providers. These can play a key role in the absence of fully functioning states, established public utilities, and major private investments.
Economy-wide investment climate reforms
Following a period of conflict, the legal and regulatory framework for business operation typically becomes outdated, requiring a complete overhaul. The needs range from creating or improving investment laws, re-establishing or improving business registration process, addressing excessive licensing requirements, and simplifying tax codes and tax collection, to reducing access to finance constraints through the creation of property and collateral registries and credit bureaus, restoring commercial justice, and improving trade logistics. Because the ways of the pre-conflict regime have become obsolete and a new framework must be articulated, there is potential for a less corrupt and more private sector-friendly regime.
For each country the priorities will be different, and governments need to face tradeoffs between what is desirable and what is absolutely necessary. To judge what is most critical, governments should examine the constraints on restoring investments and production, rather than attempt to replicate institutions from the past or from best practice economies. In addition, an early emphasis on simplification of business regulation has proved effective in post-conflict environments (characterized by weak government capacity) and can help create investor confidence. Finally, some areas—such as commercial justice—will inevitably require longer-term, comprehensive reforms, but alternative methods of dispute resolution, such as arbitration or mediation, can play an important role in the interim.
Doing Business indicators
For many post-conflict states, the Doing Business (DB) indicators have proven a particularly powerful reform tool. The DB indicators provide a broad overview of business regulations and help governments identify reform opportunities, some of which can be implemented quickly. The report is updated annually, allowing progress to be monitored. Successful early reforms can set the stage for longer-term, broader reforms.
Enabling investment in key sectors
Governments in post-conflict countries need to find the right balance between economy-wide and sector-specific reforms. They need to focus on enabling the sectors that tend to attract early investment in post-conflict countries, such as telecommunications, construction (including the cement industry and business hotels), banking, and agribusiness. To attract investments in these sectors, the government may need to adopt conducive sectoral policies, laws, and regulations, and an interim framework may be the best way to combine legal security with speed of reform. This was the experience of the telecommunications sector in Afghanistan.
Foreign investors typically value stable policies and clarity of laws and regulations—and their consistent implementation—over tax incentives or special privileges.
Generating reform ownership
Business owners are typically best suited to identify what investment climate reforms are most needed. Public-private dialogue helps these voices translate into policies. This dialogue is also particularly relevant in post-conflict states, where it can help to rebuild trust between government and the private sector. Bringing the issues for discussion in a public forum also increases transparency, limits the potential of back room deals that benefit a select few and erode public confidence, and helps identify constraints to private investment.
Attracting reputable investors
Post-conflict countries often have a poor image with investors. It is therefore essential to signal to them—through business-friendly and transparent regulation—that the country is open for business. Foreign investors typically value stable policies and clarity of laws and regulations—and their consistent implementation—over tax incentives or special privileges.
Attracting one reputable investor sends a signal to the broader investor community, increasing business confidence and generating further investment, ultimately creating a virtuous cycle of new private sector investment and activity. The presence of new investors also can enhance confidence in regulatory institutions and processes, resulting in greater legitimacy, confidence, and trust.