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The Political Economy of Peace

MONTEVIDEO – January 16 marks the 20th anniversary of the peace agreement between El Salvador’s government and the Frente Farabundo Martí para la Liberación Nacional (FMLN). Signed at Mexico City’s Chapultepec Castle, the agreement ended a 12-year civil war that killed roughly 100,000 in a country of about five million people.

Anniversaries provide an opportunity to reflect on the lessons of the past, as well as on setting new paths for the future. This is particularly fitting in light of post-conflict countries’ dismal record in accomplishing a transition to peace; since the end of the Cold War, roughly half of them have reverted to conflict within a few years, while most of the rest ended up highly dependent on foreign aid.

El Salvador stands out as an exception in both respects. Compliance with the peace agreement led to a perfectly observed cease-fire, in contrast to countries such as Angola, Timor-Leste, Iraq, Afghanistan, and others that relapsed into conflict. The country also managed to keep the peace without becoming aid-dependent.

Indeed, aid as a percentage of national income in El Salvador reached 7% in 1992 and fell rapidly thereafter. By contrast, in Mozambique, another country marking 20 years since the signature of its peace accord, aid peaked at more than 80% of national income in 1992, was 55% ten years later, and remains higher than 20% today. Aid reached extraordinary levels in other countries, too: in Liberia, it peaked at 178% of national income, in Democratic Republic of Congo at 100%, in Rwanda at 95%, and in Afghanistan at more than 50%.

El Salvador’s experience was instrumental in showing the dangers of a lack of collaboration between the United Nations, which supported the implementation of the peace agreement, and the Bretton Woods institutions (the International Monetary Fund and the World Bank), which supported the program for reactivating the economy. Clashes between these organizations put peace at risk nine months after the Chapultepec agreement, when the government proved unable to start the arms-for-land swap that was a key part of the accord.

For example, after El Salvador’s warring parties accepted in October 1992 a renegotiated arms-for-land program – the main channel for productive reintegration of former combatants and FMLN supporters – the World Bank refused a UN request to support it. The Bank argued that the “equity principle” that guides normal development activities could not be ignored in order to give preference to a few when there were 300,000 peasants without land in El Salvador.

That early grim experience ultimately convinced the IMF, the World Bank, and others to start working more closely together in matters of human security in subsequent operations in Angola, Guatemala, and the Balkans. The Bretton Woods institutions finally came to accept that economic reconstruction is not “development as usual,” and became more sensitive to the specific needs and idiosyncrasies of countries affected by conflict. In its 2011 World Development Report, the World Bank belatedly recognized that “[t]o break the cycles of insecurity and reduce the risk of recurrence, national reformers and their international partners need to build the legitimate institutions that can provide….a stake in society to groups that may otherwise receive more respect and recognition from engaging in armed violence…”

This was precisely what the arms-for-land agreement aimed to achieve – and could have achieved better with World Bank support had it come when the UN requested it. At the same time, the UN has become more aware of the key importance of reactivating the economy both for implementing peace-related programs and for properly addressing the serious financial consequences of peace.

Unfortunately, El Salvador did not fully benefit from these policy changes. In retrospect, the early exit of the UN Observer Mission in El Salvador (ONUSAL) in 1995, before the expected completion of the agreements, was a mistake. The inadequate resources of MINUSAL (the successor UN operation) and, most importantly, the development-as-usual attitude of the UN Development Program and the World Bank, together with reduced involvement by critical donors, contributed to the international community’s failure to support the sustainability of reintegration programs.

As former combatants abandoned the arms-for-land and other programs because of lack of support, they often resorted to illegal or criminal activities. This, together with the Clinton administration’s policy of deporting hundreds of Salvadoran gang members who had settled illegally in the United States during the war, resulted in a sharp increase in crime and public insecurity, which has been a major deterrent to investment.

This, together with the fiscal cost of two major earthquakes in early 2001 (and that of other natural disasters), has undermined otherwise good macroeconomic management and limited the resources available for development and security.

Otherwise, the balance is largely positive. Peace was maintained and dependence on foreign aid was largely avoided. The political transition and alternation in power between the rightist ARENA party and the leftist FMLN has worked smoothly. Income per capita has more than tripled, and the country’s ranking in the UN’s human-development index has improved significantly, with the poverty rate plummeting from 66% before the Chapultepec agreement to 38% today.

El Salvador’s experience provides key lessons that should serve as a model for other transitions to peace. In particular, as we see today in Iraq, Afghanistan, and elsewhere, economic policy should, first and foremost, serve the goal of averting relapse into conflict.

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