Memorandum submitted by the International
Institute for Sustainable Development (IISD)
Aiding, Trading or Abetting?
The future of Trade, Aid and Security
Introduction
1. Security is an essential precondition for
sustainable development. Under the threat of widespread violence,
social institutions cannot function and people cannot plan for
the future. While security - by which we mean the prevention of
violent conflict - is a goal to which both trade and aid are intended
to contribute, the reality is that trade and aid can instead undermine
security and lead to violence.
2. Trade, aid and peace are mutually supportive
in theory. Growth in economic and social exchange between groups,
combined with the adoption of international social and governance
standards and balanced by transfer payments from winners to losers,
should lead to more harmonious and equitable societies.
3. The reality is too often the converse. The
globalisation of weakly-governed markets for natural resources,
coupled with the decline and occasional misuse of development
assistance, and with the aggressive promotion of unbalanced trade
and macroeconomic management rules, can lead to conflict in a
number of ways. This volatile mix can drive economic degradation,
fuel tensions within and between countries, create a space for
sub-state actors to enrich themselves through the perpetuation
of conflict, and strain international and national mechanisms
for keeping the peace.
4. Trade and aid are two of the principal ways
the developed world interacts with the developing world. The direction
and priorities of trade and aid policies, largely decided in the
North, have profound impacts on the societies, economies and stability
of countries in the South. It is increasingly clear that the rising
tide of international trade in natural resources does not automatically
reinforce stability or security. Nor is aid as currently constructed
successfully achieving its aim of poverty alleviation. Our contention
here is that a lack of progress on both fronts reflects an inadequate
appreciation of the links between these policy spheres.
The Trade, Aid and Security Initiative
5. To date, there is no comprehensive strategy
for tackling interactions between these policy spheres. In order
to address what we saw as a significant policy gap, the World
Conservation Union (IUCN) and the International Institute for
Sustainable Development (IISD) launched a research project in
2000 with funding from the governments of Norway and Italy. This
research initiative has attempted: to define the relationships
between trade, aid and security; to assess the range of options
open to policy makers; and to make recommendations for how trade
and aid policy could be formulated in a way that contributes to
peacebuilding rather than undermining it.
6. IISD and IUCN gathered a group of international
experts in trade issues, aid policy and security issues to help
advise and direct the research programme. Led by Dr. Lloyd Axworthy,
President of the University of Winnipeg and former Canadian Minister
of Foreign Affairs, the advisory committee contains three Nobel
Prize nominees or their representatives: Dr Axworthy, Partnership
Africa Canada, and Global Witness.
7. Over a dozen detailed papers have been commissioned
from leading experts, and those papers have been peer reviewed
and their findings put out for consultation. The initiative is
now reaching its conclusion. The following written evidence is
an attempt to summarise its key findings and recommendations.
This evidence will first summarise some of the links between trade,
aid and security before outlining the six policy objectives we
think policymakers should be striving towards.
8. Trade and aid policies are rarely, if ever,
the sole source of conflict: identity, ideology and history are
all important factors. Similarly, peacebuilding is not just about
soldiers in blue helmets - it's also about setting in place the
conditions that help to tackle the underlying causes of conflict.
The extent to which the UK is supporting a larger peacebuilding
effort and the avoidance of armed conflict is crucially dependant
on the structural conditions established by its (and the EU's)
trade and aid policies. If the UK is serious about promoting peacebuilding
and avoiding conflict around the world, it must first, and at
the very least, ensure that its own policies 'do no harm'.
Some linkages between trade in natural resources,
aid and security
9. Trade and security
Trade can establish incentives
for peace by building a sense of interdependence and community.
Countries that trade tend not to fight.
Trade rules and institutions
can provide non-military ways to resolve disputes.
Trade sanctions can be
used as a non-military signal of opposition to foreign activity.
Trade rules can lead to
improved governance and stronger institutions through the adoption
of international norms.
10. Trade in natural resources and insecurity
Resource scarcity and environmental
degradation can contribute to the outbreak or aggravation of conflict.
Natural resources can be
used to fund government oppression, finance armed opposition or
motivate secessionist states.
Reliance on the export
of natural resources tends to lead to weak institutions, economic
and political instability, as well as causing 'Dutch disease'
effects - the so-called 'resource curse'.
Control of valuable resources
can be a motive for corruption, a prize of power, or can encourage
third party involvement in conflict.
Abrupt opening to international
markets can increase economic inequality, dislocation and migration
with particularly hard adjustment costs born by previously protected
sectors.
Trade liberalisation can
increase vulnerability to global commodity price swings.
Trade rules can diminish
government revenues and place constraints on domestic policy,
weakening state legitimacy.
11. Aid and security
Aid can help to remove
the underlying causes of conflict by reducing inequalities and
promoting sustainable livelihoods.
Aid can help to improve
governance and build a state's capacity to benefit from trade
and cushion the effects of future deregulatory shocks.
Aid can promote economic
diversification, and fund post-conflict recovery.
12. Aid and insecurity
Aid can be misused by donors:
for trade and geo-strategic goals.
Aid can be misused by recipients:
appropriated by armed groups, diverted in corruption, used to
perpetuate repressive regimes.
Aid projects can create
winner and losers, increasing inequality and spurring competition.
Political and economic
conditionality on aid can undermine government capacity and legitimacy.
Aid can be a substitute
for concerted political (or military) intervention to promote
peace and peacebuilding.
Uneven aid flows can increase
macro-economic volatility.
Aid, allocated according
to priorities defined by donor agencies without consultation with
local authorities and communities, can deepen inequities.
The policy objective approach
13. The focus of our most recent phase of research
has been to assess carefully the range of options open to policy
makers. Rather than look at individual policy measures in isolation,
such as certification or sanctions, we decided to group the policy
options in line with their ultimate objective - concentrating
on the ends as well as the means. Conceptually, we feel that this
helps to analyse where different mechanisms are mutually supportive,
whether they are to be implemented at a national or an international
level.
14. Consequently, we believe that policy makers
should focus their attention on 6 key overall objectives if trade
and aid policy is to support peacebuilding rather than increase
the likelihood and longevity of violent conflict. Those 6 key
objectives are: designing conflict-sensitive trade policy; developing
conflict-sensitive aid policy; restricting the trade in conflict
resources; promoting conflict-sensitive business policy; improving
the quality of domestic governance; and improving the management
of revenues from natural resources and aid.
15. Our research analyses the policy options
open to decision makers and presents new ideas for how the international
community could achieve these objectives. These policy briefs
are available on-line (http://www.iisd.org/security/tas)
and hard copies have also been submitted to the inquiry as background
evidence. However, truncated versions of their key points and
recommendations are included below.
Policy Objective 1: Designing conflict-sensitive
trade policy
16. In theory, trade can be a powerful driver
of economic growth and stability: reducing poverty, providing
non-military means to resolve disputes and creating strong economic
incentives for peace. However, in practice, the current system
of rules that governs international trade is fundamentally inequitable;
biased towards rich countries and their corporations.
17. Limited market access, complex regulations
and perverse domestic subsidies in the developed world inhibit
the efforts of developing countries to diversify their economies.
At the same time, developing countries are being pushed to adopt
uncompromising market liberalization, which can reduce government
revenues and undermine livelihoods, serving to increase the prospects
for political instability and competition over scarce resources.
This is especially the case in the absence of effective domestic
institutions capable of mitigating economic shocks and satisfying
competing demands for resources.
18. In effect these policies are locking developing
countries into reliance on the export of primary commodities subject
to volatile and declining prices over which they have little or
no control. Economic shocks, stagnation or decline in fragile
states have caused civil conflict by amplifying social inequalities,
undermining governments, producing corrupt elites and placing
the heaviest burden of trade liberalization on the poorest and
most vulnerable.
19. Policy makers in the UK should work to: reduce
the market access barriers that block poor country exports to
developed country markets; increase support for developing country
efforts to diversify their economies by removing trade distorting
subsidies as well as clarifying health and safety requirements
for imports from the developing world and helping exporters meet
those requirements; improve and cohere approaches to failed and
fragile states; engage in better research to design appropriate
trade policies and ensure this is incorporated into the design
of overall development cooperation packages; provide more capacity
building support to fragile states to enable them to reinvigorate
their trading opportunities; refrain from negotiating overly complex
trading agreements or ones that seek to deepen trade liberalization
commitments on the part of developing countries going beyond those
agreed multilaterally.
Policy Objective 2: Developing conflict-sensitive
aid
20. 'Aid' has not met the ambitions that were
set for it when the project was first articulated in the 1950s
and 1960s. That is not to say 'aid does not work'. Revolutionary
achievements in education, health, agriculture and poverty reduction
- patchy and isolated as some have been - demonstrate that aid
can be hugely effective. The problem is that aid has been used
by donors and recipients for purposes that were either not intended,
or not explained to their citizens.
21. Critics of development assistance have long
argued that aid can make things worse, that it can ignore signs
of trouble, and that in supporting bad governments, it can skew
resource allocation and help set the stage for conflict. Economic
agendas are not a new factor in conflict. Managing revenues from
natural resources and reducing the trade in 'conflict resources'
are the subjects of other policy briefs in this series. From an
aid perspective however, there are important lessons to be learned
from the 'resource wars' of the past 15 years.
22. Some of these lessons may seem at first glance
to lie beyond the normal remit of 'aid' policy, but for aid to
be effective, other trade policies must be a part of the equation.
The promotion of good governance; reducing the exposure of poor
countries to price shocks; increasing the transparency of natural
resource revenues; and attracting reputable resource extraction
companies to fragile and recovering economies are essential parts
of the mix.
23. If aid policy is to support peace and security
in fragile states then both donors and recipients need to deal
much more urgently with problems of inequality, racism, structural
violence and exclusion. In particular donors need to; recognise
the links between aid and conflict, mainstreaming conflict prevention
into development aid; pay closer attention to the 'resource curse',
and work to improve governance and protect countries from price
shocks; build the capacity for conflict-prone countries to benefit
from greater trade openness; develop funding and programming mechanisms
to secure stable and predictable funding for the most needy countries;
and break the link between the strategic interests of donor countries
and their aid programmes. An important step would be to devolve
aid ministries from the control of the ministries of trade or
foreign affairs (as in the case of DFID). Northern security concerns
should not diminish efforts to promote security and poverty reduction
in the South. For their part, recipient countries have a responsibility
to put in place checks and balances to ensure that aid is well
spent. In particular, recipient countries could publicise the
quantity and origin of the aid they receive as well as creating
mechanisms for the independent monitoring of aid projects.
Policy Objective 3: Promoting 'Good' Governance
- Aid and trade policies to spread 'good' governance
24. Autocratic and unaccountable regimes, corruption,
environmental degradation, poor provision of basic services, and
lax enforcement of regulations have contributed to a downward
spiral leading to violence in fragile developing states across
the world. These elements of political and economic (mis)management
have been grouped under the catch-all title of 'good governance'.
The concept is contested but it is essentially about building
effective institutions and rules imbued with predictability, accountability,
and transparency.
25. Trade and aid are two of the main ways in
which countries interact. They may present tremendous potential
to increase transparency and accountability, promote the rule
of law and build domestic governing capacity. In recent years,
good governance has become both an objective and a condition for
many aid and trade policies.
26. Trade and aid policies can offer either 'carrots'
- inducements for positive behaviour such as preferential trade
access or aid packages, or 'sticks' - reactive punishments for
poor performance such as trade sanctions or the suspension of
aid. In addition, capacity-building and technical assistance attempt
to transfer supposedly more advanced skills, policies and institutions
from the developed to the developing world.
27. However, trade and aid policies can equally
reduce stability if they are misdirected or perceived as heavy-handed.
In the past, aggressively promoted 'Western' concepts of good
governance, market liberalization, and democratic reform have
proved highly controversial and often dangerously destabilising.
Meanwhile, revenues from aid and natural resources have often
proved inherently problematic for governance. By reducing a government's
reliance on revenues from collected taxes, aid and natural resource
revenues tend to weaken the relationship between government and
the governed.
28. Good governance is elusive. The core challenge
for developed countries is to generate constructive influence
in countries that are at risk of instability or conflict. Unfortunately,
in the past, many of the mechanisms used by the international
community have proven neither constructive nor influential. Too
often, policy-makers in developed countries attempt to use trade
and aid policies to pursue subjective, changing concepts of good
governance without a realistic appreciation of the local context.
29. If trade and aid policies are to support
'good' governance then policy makers need to: carefully assess
the likely political, economic and social impacts of governance
interventions before implementation - not in preparation to 'sell'
a predetermined governance agenda more convincingly but to understand
what that governance agenda should be; learn from past successes
and failures; build on existing reforms and align external interventions
with domestic priorities; be patient, consistent and realistic;
harmonise, coordinate and target aid at 'islands of change' within
state structures; and design trade agreements so that they provide
appropriate and substantial incentives for good governance.
Policy Objective 4: Restricting trade in 'conflict
resources' and creating markets for conflict-free goods
30. Natural resource exploitation has played
an increasingly prominent role in bankrolling conflict around
the world since the end of the Cold War. The presence of some
commodities, particularly oil, may make the initiation of conflict
more likely; the presence of others, for example gemstones and
narcotics, may lengthen the duration of conflicts. Revenues and
riches may alter the mindset of combatants, turning war and insurgency
from a purely political activity to an economic one; conflicts
become less about grievance and more about greed.
31. In all cases, however, the link between natural
resources and conflict depends critically on the ability of their
exploiters to access external markets. Take away the ability to
earn returns from resource extraction and their value to the promoters
of conflict falls away. The term 'conflict resources' is easy
to grasp, but harder to define. We would argue that a conflict
resource - one that deserves the attention of the international
community - is one that is bankrolling a war that is illegitimate,
or where the laws of war are broken.
32. One obvious, though problematic, way to exclude
natural resources associated with conflict from international
markets is through sanctions. However, blanket restrictions on
trade, such as UN sanctions on conflict resources, are clearly
inappropriate where conflict resources may be smuggled into neighbouring
countries, or where economic and social development may well depend
on the legitimate exploitation of the resources in question. A
more targeted solution is to develop systems to identify and license
resources produced legally or free of conflict. The counterpart
of excluding illegal products from consumer markets is building
markets for verified legal products. This can be achieved through
public procurement policy and private sector supply chain management.
33. Policy makers need to exclude conflict resources
from international trade but also generate demand and build markets
for goods produced in a 'conflict-free' way. In particular: develop
and strengthen licensing systems that build on current initiatives
like those for diamonds and timber; seek collaboration between
WTO rules, UNEP and key multilateral environmental agreements;
establish a permanent professional capacity in the Security Council
with demonstrable independence and transparent procedures to advise
on sanctions related to conflict resources; work towards a clear
and unambiguous definition of conflict resources at the Security
Council; ensure that improving natural resource governance is
a central task of UN Peacekeeping missions where natural resources
have contributed to conflict; ensure that public procurement policies
exclude illegal and conflict resources; and install time-limited
bans on access to government procurement for companies that trade
in illegal or conflict resources.
Policy objective 5: Fostering responsible business
practice in fragile states
34. At its best increased business investment
in fragile states has been positively correlated with reduced
conflict risk, raising economic growth and living standards. However,
investment has not always delivered on its promises.
35. Companies have helped violent factions raise
money through the sale of conflict resources, have helped to reinforce
the power of predatory states and have disproportionately benefited
narrow social or political groups. Poor corporate conduct in countries
with weak regulation and limited enforcement has generated grievances
over environmental damage or perceptions of foreign domination
whilst financial institutions have facilitated the flows of illegal
revenues from corrupt officials and conflict economies.
36. There can be little doubt that market actors
investing in fragile states routinely engage in self-regarding,
even predatory economic activities. But to focus only on the behaviour
of market actors is to mistake the symptom for the disease. Market
actors do not exist in a vacuum but in a web of incentives and
risks that define the market context.
37. The current regulatory landscape is a diverse
and uneven patchwork of issue-driven initiatives. Given the competitive
nature of the global market place, it cannot be expected that
improved conduct will naturally trickle down from progressive
companies to poor performers. There is a need for new or improved
global frameworks that offer real sanctions or rewards, which
create level playing fields and overcome collective action problems.
38. In particular: work through the United Nations
and other international fora to develop international agreements
that establish clear and authoritative norms on the rights, responsibilities
and liabilities of companies in fragile states; develop robust
criminal and civil mechanisms to hold companies within home jurisdictions
accountable when found complicit in violations of international
humanitarian law and other conventions; increase the resources
available for the investigation of corruption under UN and OECD
conventions on corruption and bribery; implement complementary
public policies that increase the market rewards for companies
that voluntarily adopt conflict-sensitive business practices;
and strengthen the Specific Instances Process of the OECD's Guidelines
for Multinational Enterprises by increasing the technical and
fiscal resources of national contact points and by improving the
examination and resolution of disputes.
Policy Objective 6: Managing revenues from natural
resources and aid
39. Natural resources and foreign aid can play
a crucial role in improving the security of populations in poor
countries. However, somewhat paradoxically, many of the world's
most conflict-prone countries possess valuable mineral and agricultural
resources. These countries, often also highly dependent on foreign
aid, tend to rank lower on the UNDP's Human Development Index,
suffer higher levels of corruption and worse governance than countries
with more diverse sources of wealth. This pattern, commonly referred
to as the 'resource curse', links natural resource wealth to stagnation
and conflict rather than economic growth and development.
40. States that are highly dependent on natural
resources tend to be unaccountable to citizens' demands owing
to their reliance on resource rents over tax revenues. These rents
also prove attractive to outside groups, spurring and funding
conflict. Aid (another 'unearned rent') can also undermine accountability
if governments become more responsive to the requirements of donors
than those of their citizens. Likewise, aid projects create winners
and losers and so can widen inequalities and create grievances.
Those countries that have trouble managing natural resource revenues
also tend to experience difficulties making the most effective
use of aid.
41. One way to improve revenue management is
through the creation of formalised, legally-codified revenue management
procedures which can help stabilise the income a country receives
from its commodity exports and embed the structures necessary
for long-term, prudent management of revenues. Aid trust funds
can serve a similar purpose. A key element of improving the management
of natural resource and aid revenues is to make them more stable
and predictable. Another vital feature is transparency and accountability.
A lack of transparency not only increases the risks of corruption
but also of inequity, distrust and false expectations. By contrast,
transparency can consolidate democratic debate by providing accurate
figures upon which stakeholders can negotiate, plan and ensure
accountability.
42. In essence, for revenues to be handled effectively
and invested carefully, whether from natural resources or aid,
policymakers need to develop institutional mechanisms that increase
the transparency and accountability of natural resource and aid
revenues, that ensure they are prudently managed and do not become
a 'prize of power'.
43. In particular, policymakers should: strengthen
the Extractive Industries Transparency Initiative and the IMF
Guide on Resource Revenue Transparency, and develop them into
an International Extractive Sector Transparency Agreement; build
effective revenue management mechanisms that increase the accountability
and transparency of natural resource and aid revenues; increase
the focus on capacity building in extractive sector transparency
agreements; and reinvigorate the debate on measures for commodity
price stabilisation.
Postscript
The Trade, Aid and Security initiative is a research
project jointly coordinated by the International Institute for
Sustainable Development and IUCN - The World Conservation Union,
with funding from the governments of Norway and Italy.
Since 2000, the initiative has focused on the ways
in which trade in natural resources can contribute to violent
conflict at the sub-state and international level, and on the
role of foreign aid and trade liberalization - in tandem or in
isolation - in accelerating or alleviating this downward spiral.
On the basis of this understanding, current research focuses on
the options available to domestic and international policy makers.
For more information and full versions of all the
Initiative's research and policy briefs please visit www.iisd.org/security/tas/
January 2005
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