As investors in emerging markets can attest, a heightened sense of civil and political conflict can have direct implications on investment opportunities and portfolio returns, due to uncertainty and increased risk. Louise Arbour presents her views on conflict and crisis, why these types of conflicts are happening, and how the nature of these conflicts may change in the future.
Few doubt that violent conflict undermines growth, even if its impact varies from state to state and conflict to conflict. The economic costs of war are well documented. In 2009, a study by the Institute for Economics and Peace calculated the impact of “lost peace” on the world economy at US$7.2 trillion per year.1 In addition to these direct costs, conflict can wreak insidious long-term damage – undermining human, social and economic development and often aggravating the inequality and lack of opportunity that can destabilise countries in the first place.
“The Institute for Economics and Peace calculated the impact of ‘lost peace’ on the world economy at US$7.2 trillion per year.”
In Turkey, over the past decade, high levels of foreign investment have propelled strong growth. Despite this, the country faces significant challenges. Domestically, negotiations with the Kurdish-led insurgency, PKK, have stalled, with ceasefires broken and the government not pursuing essential reforms. Recent anti-government protests in Istanbul have also made markets jittery. Though Prime Minister Recep Tayyip Erdogan’s party, the APK, secured a victory of over 44% in March local elections, the political landscape is increasingly polarised. This polarisation is seen in Turkey’s relationship with Europe.
A recent European Parliament progress report on Turkey’s possible access on to the EU was more positive than expected, but at the same time the European Commission has voiced concerns over corruption allegations and draconian internet laws. Indeed, some politicians have suggested suspending accession negotiations altogether, in response to Erdogan’s authoritarian tactics.
It is outside the country, however, that the gravest threat to Turkey’s security is to be found. The conflict in Syria has led to an increasing number of attacks by jihadi groups, while the constant influx of Syrian refugees into Turkey risks undermining the sensitive societal balances along Turkey’s side of the border.
Further afield, Thailand, another major destination for foreign investment, has been shaken by a protracted political crisis. The country could see the crisis worsening, as an April poll revealed some 70% of Thais thought civil conflict likely.3 Competing Thai elites continue to disagree about how political power should be acquired and exercised. Recently-ousted Prime Minister Yingluck Shinawatra, and her red shirt supporters, defended her position by claiming she had a democratic mandate through the election process. Her opponents want the electoral landscape to be recalibrated, and have appealed to pre-democracy institutions – particularly the judiciary (and perhaps also the Thai royal family), to achieve or force through a solution to the impasse.
Mexico is another emerging economic powerhouse, but faces a different, though no less serious, set of challenges. Clashes between transnational organised crime networks, as well as clashes between the crime networks and the state, have claimed more than 75,000 lives in the past seven years, resulting in some Mexican towns and regions being among the deadliest places on earth. The power of the criminal cartels has resulted in civilian trust in the state being significantly eroded and in Michoacán and other states, self-defence groups have been established in response to the lack of state-provided security.
A strong military anti-drug campaign launched by former President Calderón, failed to achieve clear objectives and further destabilised support for the rule of law. Mexico’s security challenges have contributed to slower growth and, in 2013, growth was only 1.1%.4 The weak rule of law, general instability and a fragile justice system, has meant extortion is a looming threat and private security is often required. This results in economic losses and often deters investors.
In Africa, Nigeria recently took the crown as the continent’s largest economy, due in large part to significant oil wealth. However, particularly in the north of the country, most of its citizens are poorer today in real terms, than they were at independence more than 50 years ago.
Weak governance and corruption, driven by the vast oil revenues, have undercut economic and human development. A four-year-long campaign of violence by Islamist militant sect, Boko Haram, has claimed an estimated 4,000 lives and displaced close to half a million people. It has also ravaged the economy in north-east Nigeria (already one of the poorest regions in the state), where Boko Haram has successfully capitalised on real grievances rooted in economic underdevelopment and corruption.
Difficulties in preventing conflicts are, in large part, due to their complexity, their (often) structural causes and the fact that their protagonists usually face strong incentives to continue fighting. But broader global trends also play their part.
The international architecture for peace and security, notably the United Nations, increasingly struggles to perform its role. The end of the Cold War allowed a consensus on global security with the strengthening of the UN Security Council, as well as the rapid spread of democracy across much of the world. But this era appears to be drawing to a close, buffeted by disagreements over Iraq Libya and now Ukraine.
The Security Council deadlock (as the West faces off with Russia), its inability to forge agreement over Syria, its inconsistency in addressing war crimes – look at its silence over Sri Lanka – all illustrate that the world’s
tools to end conflicts are at stretching point. Though the UN plays little role in conflict prevention in emerging economies, the nature of today’s international markets and the degree to which modern economies are internationally interdependent, means that a civil conflict can all too easily impact on wider security in a region, and have repercussions far beyond national or regional borders.
Shifts in global power are also likely to shape stability, though at this stage their implications on economies and security remain unclear. In the past decade, power has dramatically shifted both east and south. The increased importance of the BRICs in world affairs is undeniable, and other emerging powers such as Turkey, Mexico and Indonesia are, for all their troubles, increasingly projecting power and influence across their regions and beyond. That is not to suggest, as many have, that traditional power, particularly of the US, is
on the wane. But the US, and others, are being joined at the top table and existing institutions will need to adapt or reform to properly reflect this new reality, if they hope to claw back a modicum of legitimacy.
Some institutions have supported this view. In 2011 the World Bank’s World Development Report, which looked at the links between conflict, security and development – prescribed legitimate institutions, employment and a functioning legal system as an “immune system” against conflict and violence.5 Economic growth can be all too easily, and swiftly, undermined if attention is not paid to building capable and legitimate institutions. Yet donors tend to neglect the long-term, and often laborious, tasks of rebuilding legal systems, tackling corruption and instituting a culture of good governance, in favour of short-term post-conflict reconstruction.
“In the past decade, power has dramatically shifted both east and south.”
“There is a strong financial case for peace and stability: simply put, they are good for growth.”
International business can no longer be a bystander. There is a strong financial case for peace and stability: simply put, they are good for growth. Economies benefit from increased confidence and investment. Resources that would otherwise be diverted by violence can, instead, support growth. In turn, greater investment and business development – not simply top-down, but including employment generation across all strata of society – can help consolidate peace; thereby creating jobs and economic prosperity, bringing technologies and knowledge transfers that help human and social, as well as economic, development.
“As current unrest across a number of emerging economies shows, growth can be ephemeral – unless built on accountable governance, the rule of law and peace.”
It is imperative too that businesses do no harm – either by turning a blind eye, or actively engaging in corrupt local practices, or investing in activities that generate revenue for armed groups, for example. Businesses have benefited over the past decade from investments in emerging markets, during a time when the world has steadily become more peaceful and prosperous. But, as current unrest across a number of emerging economies shows, growth can be ephemeral – unless built on accountable governance, the rule of law and peace.
Louise Arbour is the former CEO for the International Crisis Group.
1 “Peace, its Causes and Economic Value”, Global Peace Index, Institute for Economics and Peace (2009).
2 Human Security Report Project, “Human Security Report 209/2010 The Causes of Peace and the Shrinking Costs of war”; “Human Security Report 2013 The Decline in Global Violence”.
3 Poll conducted 1-5 April 2014 by Suan Dusit Poll “Majority say civil war possible”, Bangkok Post, 6 April 2014.
4 World Bank.
5 World Bank, World Development Report 2011.