Growth, Aid and Policies in Countries Recovering from War

Abstract

What happens to countries after civil war or other conflict comes to an end? This paper shows that post-war economies can experience a peace dividend involving higher than average growth rates, and that aid can increase this dividend. Since post-war countries face the twin challenges of avoiding further conflict and rebuilding their economies, enhancing the peace dividend is a high priority. While there is evidence that this peace dividend can be increased through aid it is not well understood why this may be the case. The paper considers policy reform and particular types of aid but finds no evidence that they hold the key to understanding why aid increases post-war growth. To rebuild their economies and thus prevent them reverting to conflict, there are distinct policies that post-war governments should pursue in the short term: high aid, low taxation, independent public service delivery and low inflation. Post-war societies face enormous needs while having very limited revenue. Aid should fill the gap in the short run, but in the long run aid dependence can be avoided by phasing in a cap on aid. This cap should be relative to tax revenue.

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