Foreign Aid in Post-Conflict Countries: The Case of South Sudan

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INTRODUCTION

The purpose of this paper is twofold. First, it examines the approach to foreign aid being used in South Sudan, which reflects the new thinking in providing assistance to post-conflict countries. The United States Agency for International Development (USAID) adopted the extensive empirical work by Collier, Hoeffler, and Soderbom (1) in its policy and program guide to economic growth in post-conflict countries. (2) Second, by building upon this new approach the paper suggests how foreign aid can mitigate the risk of violent conflict recurring in the newly independent South Sudan. It explores strategies for growth and development by encouraging the private sector to take the lead in addressing key impediments to business development, trade, and investment. It concludes with some observations of future challenges for South Sudan. (3)

Sixty years of development experience demonstrate there are multiple paths to growth and development, all of which have records of success or failure under certain circumstances. From the 1950s through the early 1980s, foreign aid emphasized overcoming market failures through active government interventions and balanced growth, with focus shifting to the basic needs and redistribution with growth approaches of the 1970s. (4) Reaction to failed and excessive government interventions led to critical scrutiny and comparison between market and government failures. Critics pointed to the pervasive government failures in addressing basic needs and redistribution without growth, most notably in sub-Saharan Africa and South Asia. Yet there were also successes, particularly in countries such as Japan and the East Asian Tigers. Between 1980s and 1990s, development strategies shifted to promote market liberalization, privatization, and stabilization. This shift gave rise to the structural adjustment and market fundamentalism as approaches to development with renewed emphasis on growth. (5) It produced development successes, particularly in the economic growth and rising standards of living in China. India, Brazil, and other emerging economies. However, the successes of many of these countries were not primarily attributable to market fundamentalism along the line of the structural adjustment programs advocated by the World Bank, International Monetary Fund (IMF), and U.S. Treasury. (6) Rather, these countries successfully combined market-based approaches with active government interventions and socioeconomic development policies. Market fundamentalism as an approach had its share of unequivocal failures in Africa, Latin America, and South Asia; arguably the largest of all was the global financial crisis and the Great Recession of 2007-2008 that originated in the developed world and affected both developed and developing countries. (7)

For the first time since the 1970s, a significant number of countries in Sub-Saharan Africa (SSA) have experienced high rates of economic growth. According to the IMF's regional economic outlook report, the economies of twenty of the SSA countries grew at an annual average of more than 6 percent during 2004-2008 and more than 4 percent in 29 more nations. (8) The growth pattern is consistent across a wide variety of national traits: low income and middle income: resource rich and resource poor; and coastal as well as landlocked. The region, though adversely affected by the 2007-2009 global economic and financial crises, has recovered. It is expected to grow at the annual average of more than 5 percent in the near future. Major factors that have contributed to the emerging pattern of high and sustained growth are: pro-growth macroeconomic stability; improved economic governance; and a decline in the number of violent conflicts. Foreign aid has played a major role not only in ending conflicts but also in post-conflict recovery. Most of the recent foreign aid debate that attracted headline attention tended to focus on aid effectiveness at the ultimate level of per capita economic growth and poverty reduction, with less emphasis on the role of foreign aid in assisting recipient countries in removing impediments to the path toward these ultimate goals. One area where foreign aid has had encouraging results is in post-conflict economic recovery and growth. South Sudan, which seceded from Sudan and became an independent nation on July 9, 2011, is such a case.

The 2005 Comprehensive Peace Agreement (CPA), facilitated by the United States through the State Department and USAID, officially ended the 22-year civil war in Sudan. As Sudan approached the CPA-scheduled referendum in January 2011 to decide whether South Sudan would secede from the North and become an independent nation, there were reports that Khartoum was deploying its army with heavy weapons along the North-South border in the fall of 2010. In response, the South threatened to proclaim its independence unilaterally and destroy its own oil infrastructure rather than allow its occupation. With the support from the international community, South Sudan managed to hold the referendum peacefully and as scheduled, with nearly 99 percent of voters in favor of separation from the North. (9) Some observers, however, have suggested that South Sudan will be born a failed state. (10) The most important challenge for donors that have facilitated the change is how to assist the newly independent South Sudan in maintaining peace and security and avoiding the return of conflict.

This paper is limited and modest in scope. It primarily attempts to show how foreign aid can be used as a catalyst to prevent fragile states from returning to violent conflict by promoting sustained economic recovery, growth, and critical economic reforms in a post-conflict situation. The rationale --the what and why questions--is based on empirical models suggested by Collier and others and the new way of thinking adopted by major donors, such as the United Sates, which has provided substantial development assistance to address the new challenges posed by politically fragile states. Given the amount of aid going to politically fragile countries (nearly 40 percent of total aid in recent years), it is an important public policy issue in itself. (11)

However, it is beyond the scope of this paper to address the larger question of aid effectiveness (or lack thereof) in socio-political and economic development in general--issues such as equity and distribution of benefits from economic growth and development, gender, human development, basic social service provision, public goods, governance, accountability, and justice. (12)

THE POLITICAL ECONOMY OF AID IN POST-CONFLICT SITUATIONS: NEW THINKING AND NEW APPROACH

The classic theoretical framework for analyzing economic growth in developing countries is the Harrod and Domar growth model and the Solow model. (13) Other models emphasizing structural change include Lewis's two-sector model, labor surplus and the dualistic nature of developing countries. (14) Many newer theories of economic growth and development that became influential in the 1990s emphasized complementarities and coordination in investments undertaken by many and different agents. When complementarities are significantly present, an action taken by one firm, worker, or organization increases the incentives for other agents to take similar actions. (15)

These models provide theoretical insights for shaping policies for growth and development. They also generally assume a stable country--one with political stability, absence of violence, and legitimacy of the state. (16) State fragility is viewed as a pre-development stage. When confronted with a situation of a country emerging from violent conflict, the traditional approach for aid donors is to intervene in a sequential, discrete manner to bring about political stability and the absence of violence before economic growth and development. Following this line of thinking, a familiar framework for donor assistance in a post-conflict situation generally involves four phases of efforts along a continuum, each with characteristic program emphases: (1) relief and humanitarian assistance; (2) disarmament, demobilization and reintegration of soldiers, refugees and internally displaced persons into the warless economy and society; (3) reconstruction of physical infrastructure and institutions; and (4) the introduction of reforms in economic policy, governance, and institutions. (17) This sequential approach places economic issues, policy and institutional reforms toward the end of the relief-to-development continuum.

A new way of thinking about sequencing for growth and development. supported by recent empirical evidence, challenges the sequential, non-overlapping approach and raises the question of whether addressing economic issues should be delayed until the last phase. Paul Collier, a leading expert on African economies and post-conflict countries, and others (18) argue that external peacekeepers supported, for example, by the United Nations and robust economic growth have both proven to be more critical than political reform in preventing a return to conflict. (19) Many donors are absorbing lessons learned from the empirical literature, but organizational learning and reprogramming is an incremental and at times slow process. The United Sates, through USAID, has recently addressed this question with its new policy and program guidance. According to USAID, "The relief community has already begun to abandon this obsolete 'relief to development continuum' concept and many interventions geared to facilitate economic growth have been adopted at the very beginning of the rebuilding process [concurrently with political reform], much earlier than traditionally has been the case." (20) A new approach is emerging which places less emphasis on a discrete, sequential approach and argues for an overlapping sequence of categories of assistance. Specifically. foreign aid should prioritize early interventions in policy reform, economic recovery and growth while securing and maintaining peace. Sound economic policies, robust economic recovery and growth, and rising income turn out to be important for reducing the risk of reverting to conflict and promoting sustainable peace. From an economic perspective, a combination of low income, lack of economic opportunities, and slow growth can be interpreted as lowering the recruitment cost for rebel groups or organizations and thus increasing the likelihood of violence. At the same time, slow growth implies fewer resources for security, defense, and peace building for the fledgling government.

Each country's situation and the nature of their conflict are of course unique, and therefore understanding a specific country's context is critical. The long civil war and history of other conflicts in Sudan have created a situation that is multifaceted and complex. It has exacted an immeasurable toll on the life of ordinary southern Sudanese and on the society in general. The physical infrastructure was devastated and is still very much in disrepair, the human capital growth mostly held back and decimated. Economic governance and institutions have been newly created, while some existing ones need reform. This makes it important to consider several factors. First, South Sudan, as a new nation, is quite different from a post-conflict unification that relies on rebuilding or reforming existing institutions. The creation and development of new economic and governance institutions, systems, and procedures could provide a window of opportunities for starting off on the right path. This is distinctive from rebuilding failed institutions that may have contributed to the conflict to begin with.

Second, in key economic institutions, opportunities to break away from the old systems or old ways of doing things should be pursued, particularly in the areas of fiscal management and central banking and in policies governing financial institutions. Third, building up absorptive capacity, while challenging, will become more urgent as South Sudan will only inherit a portion of Sudan's previous capacity, and most of the institutional and human capacity is concentrated in Khartoum and the north. This puts a premium on the ability of the new South Sudan to be able to attract all sources of capacity, including nongovernmental organizations, and the private sector.

Finally, a new South Sudan in 2011 cannot simply rely on conflict and political victory to unite the country and provide legitimacy. Rather, the Government of Southern Sudan (GOSS) should rely on its established track record since the CPA. It can be held accountable in a democratic process. To maintain the government's legitimacy, past performance, such as how well it has managed public sector resources entrusted to the GOSS, is an important consideration. Though the six-year interim period has provided some space to learn and grow, the end of the interim period is approaching and the challenge remains daunting for the GOSS and South Sudan.

The return of peace has energized resourceful private entrepreneurs and unleashed the power of the market and the private sector. One area in which the peace dividend of the CPA has materialized is in increased economic activity in the informal and small services sectors, particularly in most of the urban settlements and surrounding areas in the ten states of southern Sudan. Juba shows particularly strong signs of activity. The informal sector of the economy has been thriving and growing during the past few years. Construction is booming, not in large capital-intensive sectors, but mainly in the construction of hotels and lodges, residential buildings, and roads. Retail trading including cross-border trade from Uganda and Kenya, and transportation services have surged and are growing. (21)

The pattern of economic rebound to date is typical of a post-conflict situation. According to one World Bank study that analyzed growth performance from 1974 to 1997 in 62 post-conflict countries, the post-conflict recovery typically was marked by growth rebound in the first three years followed by above normal average growth rate over the next four to seven years if peace continued and security improved. (22) There are several reasons for this. First, at the onset of peace, improving security tends to attract new economic actors back to the economy. Second, increases in international aid flows and the presence of aid agencies raise consumption demand. The third source of post-conflict growth is increased demand driven by donor investments in a wide range of public goods.

RISK MITIGATION, TRANSITION, AND SUSTAINED GROWTH

The transition from recovery to sustained economic growth, while maintaining peace and developing necessary economic, political, and legal institutions, is possible only through the resumption of growth-producing and job-creating private investment. A typical progression from peace to sustained economic growth may take up to ten years. Evidence also indicates that in this initial decade, the probability of setback and risk of return to conflict is high, as high as 40 percent according to Collier, Hoeffler, and Soderbom. (23)

An important element of a risk mitigation strategy is creating transitional employment and economic opportunities, which the Government of South Sudan has been pursuing since the CPA with support from the international community. Creating jobs and economic opportunities are a key challenge and responsibility for any government, in a post-conflict situation the problem is more acute. Unemployment is higher than usual because ex-combatants are now added to the unemployed pool. During this early post-conflict period, private investors and businesses face high risks and uncertainty, because of the less predictable economic, commercial, and legal environment. Private entrepreneurs are more cautious with their investment decisions. This results in a longer lag in the recovery of private investment and job creation.

In South Sudan's case, the Disarmament. Demobilization, and Reintegration (DDR) program added some 9,000 ex-combatants into the existing labor force in 2009. They are mainly women and children associated with the Sudan's People Liberation Army (SPLA), but also include disabled and elderly ex-combatants. According to the SPLA Affairs Ministry, donors plan to spend about $25 million total for the DDR program. Some 748 candidates (527 male and 221 female) were enrolled in the program as of 2009. which involves skill and vocational training to prepare them to be reintegrated productively into the economy. (24) One of the challenges that the government faces is how to deal with newly demobilized soldiers and former combatants without raising the risks that they will engage in destabilizing behaviors. crimes, and other violent acts. The initial 9000 persons may not be of high threat, but as more young ex-combatants are released from the SPLA, the risk will rise. As the DDR efforts are further implemented, the pool of potential workers will expand. The agricultural sector will not be adequate for absorbing and reintegrating these workers. Some of these new entrants may not want to go back to the rural area, preferring urban jobs. Under the circumstance, there is a role for the public sector to accelerate job creation and other economic opportunities in the immediate short run.

Nour estimated that only 43 percent of the total labor force for the entire Sudan was economically active in 2008. Of this labor force, 15.9 percent was unemployed. (25) The unemployment rate among youth was 42.5 percent. The total labor force in Sudan was about 26.5 million of which 48.5 percent was employed in the agricultural sector, 31 percent in the services sector and 7.6 percent in industry. In order to make significant progress beyond transitional employment for ex-combatants, policy makers will need to focus on generating employment in the rural agricultural sector, the informal sector in urban areas, and focusing on the youth of the country regardless of the setting.

Agriculture remains the largest untapped employment opportunity. Jobs can be created through commercialization of agriculture and by supporting agricultural businesses. In South Sudan, there are opportunities in the commercialization of sugarcane and sugar processing, in the production of exotic fruit beverages such as apple, pineapple, and berries, and in producing organic components for cosmetics. Additional crops that could be targeted are coffee, tea, vanilla, cassava and sorghum. Flowers and foliage for exports could be another source for income and employment generation. Other sectors that could be targeted are dairy, livestock, and timber wood, which already show potential in attracting private foreign direct investments.

The informal sector can be a bridge between the rural sector and the formal urban sector. Activities in this sector are relatively labor intensive, consequently, there exist potentials for employment generation. The sector could be targeted for microenterprise loans. Apprenticeships and vocational training programs could stimulate demand for semi-skilled and unskilled workers. Access to appropriate technologies and local resources would help in developing these areas. As women are a large part of the informal sector, they could be helped through women's groups such as Women for Women International (WfWI), the Women's Training and Promotion (WOTAP), and the New Sudan Women Federation (NSWF) of South Sudan. For the unemployed youth, the service sector will remain the largest engine for job creation. (26) Skill development will be necessary.

While the informal and small business sectors have responded strongly to the post-war climate of the past several years, their performance will not be adequate to sustain broad-based growth into the remaining years of the first post-conflict decade. More investment, both private and public, to stimulate economic growth and jobs will be needed. This becomes even more critical as demobilization and reintegration efforts progress and the supply of labor grows, much of it unskilled or semi-skilled. Unless the demand for unskilled and semi-skilled labor rises adequately, through investment and growth to absorb the increase in the labor supply, the already high unemployment rate will grow. The rural sector--subsistence agriculture, livestock, and fisheries--can provide an outlet to absorb some additional workers, but not those who do not want to go back to the rural area, particularly younger ex-combatants. The informal sector in urban areas may provide some outlet for these potential workers. Even in combination, however, the agricultural and informal sectors are unlikely to provide adequate opportunities. Additional investment in the formal sector--small and large, private or public or in combination--has to increase to accelerate growth and generate more demand for labor.

Initially, there will be a need for public investment to play a catalyst role and to directly create jobs. There should, however, be a clear exit plan in areas where public sector outputs do not represent a public good and where there is no market failure to justify government direct involvement. Over the medium and long-term the goal should be to provide a business and economic environment that is conducive to private sector growth and development. Opportunities to remove obstacles to both formal and informal economic activity should be taken at the earliest stage as possible. A continuing role for the GOSS would be to promote wide consultation between the private and public sectors in order to facilitate a better understanding of the constraints to private sector investment, employment, and growth.

One of the key challenges facing business and investors in South Sudan is the uncertainty and unpredictability of the laws and regulations governing the operation of business and the commitment and ability of the government to implement them in a transparent, accountable, and consistent manner. Investors and business people want transparent and predictable rules to allow them to apply cost-benefit calculus and risk assessment in their business decision. This places a premium on keeping burdensome regulatory, licensing, and tax requirements to a minimum. Simplicity and transparency arc important. A good starting point could be to eliminate any impediments, especially those that create rent-seeking opportunities associated with economic activity in the informal sector. The cost and risk of doing business in South Sudan is already very high, a legacy of the war in terms of poor infrastructure and security. There is no reason to add more obstacles to investment with cumbersome rules, and regulations, or other burdens on the emerging entrepreneurs in the informal sector, even if it means sacrificing potential revenues for the government. In the end, increased government revenue can only be sustained in the long run when the economy expands and grows.

The World Bank publishes an annual, inter-country comparative report called Doing Business. (27) It evaluates the ease of doing business across 183 countries by topic reflecting government regulations and practices affecting business activity at different stages of a business's life such as starting, operating and closing a business. There are nine sets of indicators that together help assess the ease or difficulty of doing business in a country. Table 1 below highlights Sudan's "ease of doing business" ranking by the nine indicators and their change between 2010 and 2011. Sudan ranks 154th out of 183 economies listed in the Report. The overall business environment has actually declined marginally from 153rd to 154th.

For individual indicators, Sudan ranks in the bottom or near-bottom quintile in cross-border trade, contract enforcement, protection of investors, as well as ease of starting a business, obtaining construction permits, getting credits, and closing a business. Sudan ranks last when it comes to closing a business. The indicator is related to bankruptcy or insolvency procedures, such as expectations of creditors and debtors about insolvency proceedings. Individual indicators are measured in terms of the time and resources required to operate a business legally or through other proxies. Where there are several dimensions included in an indicator a simple weighted average is used to allow international comparison.

Figure 1 below shows aspects of Sudan's business environment that are serious barriers to private sector led growth and development in comparison to global good practice as well as selected neighboring economies in the region. Sudan's business and investment environment is relatively weak when compared to nearby economies in the region.

[FIGURE 1 OMITTED]

All these measures have limitations. They do not capture other aspects that are important to investors and business, such as the quality of infrastructure services, physical security of property from theft and looting, the proximity to other markets in the region, the quality of the government's macroeconomic management, and the underlying strengths and weaknesses of its institutions. In the case of South Sudan, including these other measures are not likely to change the comparative standing in any significant way, particularly with regards to improving its ranking. Policymakers should take these indicators as suggestive of how investors, especially international ones, perceive Sudan as a place for doing business. It should also be noted that these results are based on Sudan as a whole and not specifically for South Sudan.

The overriding objective of nurturing private sector and enterprise development is to create an environment in which a reasonable degree of predictability exists and risk can be reduced or managed. In some post-conflict cases such as those in Eastern European countries, this could be done quickly by building upon or reforming pre-conflict institutions. In South Sudan, there were hardly existing institutions even prior to the long conflict. During the interim period following the 2005 CPA, ministries and other public institutions have been created. There are many areas in which Sudan's business environment needs significant improvement to create an environment promoting private sector investment.

In the immediate to short-term, pragmatic and consistent measures by the government send an important signal to build business trust and confidence. Among the confidence boosting measures should be assurances that the government, especially the security force, will restrict their role to protecting and encouraging private investment and its legitimate interests. In addition to maintaining physical security and macroeconomic stability, the GOSS should review constraints to the informal sector, which is where economic activity in post-conflict South Sudan has emerged during the last few years. The authorities ought to engage private sector actors in dialogue in order to understand the prevailing constraints and respond appropriately in loosening them. Some of the constraints and regulations can be removed quickly with the stroke of a pen by the government. Foreign aid could facilitate the public-private learning dialogue. The goal should be to make it happen in a timely manner. This would mean some purposeful trade-offs have to be made, such as choosing effective, immediate solutions over the most economically efficient approach, or making trade-offs between urgency and long-term legitimacy.

Another area that donor assistance will be needed is in the banking and financial sector. Establishing financial intermediation would help private sector development. This will require more than filling the current gaps that some states in South Sudan have encountered, such as the withdrawal of Islamic banks from the Upper Nile State in reaction to a policy adopted by the GOSS. Appropriate legal and regulatory frameworks to encourage private investment in banking services will be needed. Such a policy and regulatory. framework should aim at mobilizing and facilitating financial savings, including remittances from the Sudanese Diaspora as well as foreign savings. Moreover, the government should also support microcredit as it is the main source of financial capital for the informal sector as well as small-scale businesses in agriculture, retail trade, and other services. This is an ideal opportunity for USAID to build on its considerable experience in microfinance in Sudan. Nongovernmental organizations, such as World Vision, Catholic Relief Services, and Oxfam, should be used to complement the limited capacity of public organizations, such as Sudan Microfinance Institution (SUMI) for the expansion of microfinance. The microcredit sector is particularly important for the informal sector, small businesses, and smallholder farmers for creating employment opportunities.

Road infrastructure in South Sudan is dilapidated. This has added to the cost of doing business significantly and affected the region's competitiveness and labor productivity. More comprehensive efforts to develop intrastate and interstate linkages as well as improvement in the feeder road system are urgently needed. Given the extensive work needed in this area, investments should be prioritized. Coordinated donor assistance should support construction or rehabilitation of feeder road networks in selected states that potentially support marketing of agricultural products and supply of agricultural inputs. Many nongovernmental organizations have had experience implementing public works program in feeder road infrastructure. Donors should also support the government in encouraging broader private sector participation in infrastructure and construction work, with consideration for leveraging private sector resources through, for example, public-private partnerships.

Finally, creating a favorable foreign investment climate is important for South Sudan in the medium to long term. Since foreign investors are more sensitive to uncertainty and risks than local investors, it is important to address those issues identified in international comparative ranking and assessment reports, such as the World Bank's influential Doing Business 2011. Predictable and transparent rules and regulations enforceable by laws are important to investors and businesses since they affect profitability. The government should take advantage of this influential assessment to improve its business and investment environment. Donors should support the development and passage of legislation that promotes internationally acceptable codes of investment. Under the Juba Compact, there is a plan to assist the government to promote investment promotion legislation. Provisions to address these concerns are needed. (28)

Careful and coordinated technical assessment should be given to avoid granting subsidies, tax exemptions, or other special preferences without proper appraisal of possible market distortions resulting from these policies. Currently, several donors are providing technical assistance in this area, but there is a broader need to coordinate this effort. In general, both the government and development partners should not be bounded by some artificial or bureaucratic timeline such as the December 31, 2009 set in the Juba Compact's matrix. It is better to have a greater buy-in by stakeholders that include private and nongovernmental sectors, even if that takes longer to achieve. In this case, the trade-off is in favor of more careful assessment and legitimacy. This should not prevent the government from using its executive power to remove some of the more obvious impediments to private sector growth and development while preparing the way for the promotion of investments.

CONCLUDING REMARKS: CHALLENGES AHEAD

Though the implementation of the CPA has been uneven, the January 2011 referendum is clearly a critical milestone achievement that furthers the confidence building process. However, a number of thorny issues remain and are likely to persist in the foreseeable future. Some of the fundamental and most critical issues include: first, the dispute over the area of Abyei around the present, tentative border between northern and southern Sudan, where intermittent violence occurs; second, the sharing of the oil revenue; and third, the apportionment of the country's debt. Other immediate challenges involve the creation of necessary macroeconomic institutions, such as a central bank and tax and fiscal institutions. The border dispute around Abyei (29) is the most likely to produce violent conflict.

he United States Government has been the first and largest bilateral donor to deliver aid beyond humanitarian and emergency assistance to South Sudan, beginning when the peace negotiation was about to be concluded successfully in January 2005. This was followed by bilateral aid from the Netherlands, Norway, Sweden, the United Kingdom and later joined by aid from Denmark (December 2005) and Canada (May 2007). They jointly reached agreement with the government in southern Sudan and established a Joint Donor Team (JDT) based in Juba. They agreed to coordinate their aid closely by pooling their resources in a Multi-Donor Trust Fund (MDTF). The United States, for legislative and accountability reasons, has not participated in the MDTF. Instead, it provides and manages its development assistance through USAID. International financial institutions, such as the World Bank and the IMF, provided technical assistance and advice but no direct financial support because their main client is the national government in Khartoum, which has been in default owing to its outstanding loans. The IMF is involved peripherally through its Staff-Monitored Program. The World Bank's field office in Juba manages part of the MDTF under the direction of the JDT.

The roles of the IMF and World Bank will change with South Sudan's emergence as an independent nation. The IMF is currently reviewing South Sudan's application to join the IMF. It is currently seeking to create a trust fund of $10.6 million intended to finance capacity building for South Sudan over the next four years. (30) Some of the macroeconomic and other institutions have already been created with bilateral assistance as a result of the CPA; they are still evolving from their nascent stages of functioning at varying degrees o f effectiveness. Creating new institutions and strengthening the existing ones will be a priority area for improving economic and democratic governance for South Sudan in the immediate future and foreign assistance will continue to play a critical role.

In this paper, we have suggest that foreign aid in a post-conflict situation requires a new approach different from the traditional one of discrete phases along the emergency relief, political reform, to development continuum. Instead, aid intervention aimed at accelerating the economic recovery and growth ought to be at the forefront of aid as soon as it can be managed securely, and is most effective when enacted concurrently with political and democratic change. This can be achieved through economic and institutional reforms that encourage private sector led growth. Countries that emerge from violent conflict or civil wars are generally characterized by weak policies, institutions, governance and higher probability of reverting to conflict. South Sudan fits all these characteristics but it also has the additional challenge of building new institutions and rules of governance as an independent nation.

However, foreign aid has its own limitations. In the case of South Sudan, in addition to severe capacity limits constraining its ability to absorb aid effectively, it faces the challenge of establishing a basic institutional framework in the context of a low human capital stock with a public sector comprised largely of former leaders in the military and other ex-combatants. The U.S. Government through USAID began to invest in technical assistance and training in 2004 prior to the creation of the CPA. The program was intended to develop core institutional structures to strengthen the executive function of the semi-autonomous GOSS, the legal framework, and the financial sector. The goal was to establish five core institutions: the Bank of Southern Sudan, a branch of the Central Bank of Sudan, that can become the Central Bank for South Sudan when it becomes independent; the Ministry of Finance and Economic Planning; the Ministry of Legal Affairs and Constitutional Development; the Ministry of Labor, Public Service, and Human Resource Development; and the Office of Presidential Affairs. The overall results have been mixed and several components of the program did not reach their intended objectives. The MDTF managed by the six-country JDT experienced a similar challenge related to aid absorption capacity. According to its midterm evaluation, it found the results disappointing. The JDT estimated that aid absorption rate measured by disbursements was only 15 percent in 2006 and 40 percent in 2007, in spite of supposedly better coordination and harmonization of aid on the part of the JDT by pooling their resources. The evaluation found that, in ignorance of the reality on the ground, they had created the MDTF based on unrealistic assumptions and expectations. On top of poor planning and design, the program also suffers from excessive layers of bureaucracy between the headquarters in six different capital cities and generally weak management at the field level. (31)

The USAID and the JDT experiences are indicative of the difficult choices facing aid donors in post-conflict situations. Identifying capable, motivated, and reliable counterparts to work with is not always successful. Technical assistance, though well intended, often ends up deliberately underutilized by counterparts, as demonstrated by the USAID Core Institutional Structures program. This can be the result of lack of trust or ownership of the program. It highlights the need for donors to adequately staff their field organizations to facilitate relationships between the aid recipient government and technical assistance teams and to provide sufficient oversight to minimize the agency problem--an inherent issue of relying on contractors. This is further complicated by intermittent violence, which is likely to continue until the border and related oil-revenue sharing issues are satisfactorily addressed.

Nevertheless, the approach of deploying additional aid for economic and institutional reforms in support of more rapid growth led by the private sector has yielded to date positive results, but more ought to be expected. The case of South Sudan provides preliminary support and suggestive lessons in support of the new approach for aid intervention in post-conflict economies.

NOTES

(1.) Paul Collier, 2007,"Post Conflict Recovery: How Should Policies Be Distinctive?" Oxford University. http://users.ox.ac.uk//-econpco/ reserach/pdfs/PostConflict-Recovery.pdf. Paul Collier and Anke Hoeffler, 2002, "Aid, Policy, and Growth in Post-Conflict Societies." Policy Research Working Paper 2902, World Bank Development Research Group. Paul Collier and Mans Soderbom, 2007, Post Conflict Risk. Centre for the Study of African Economies, Department of Economics, University of Oxford.

(2.) Bureau for Economic Growth, Agriculture and Trade, A Guide to Economic Growth in Post-Conflict Countries (Washington, D.C.: U.S. Agency for International Development, 2009).

(3.) Since southern Sudan has been a neglected region by Khartoum over the years, regional statistics on southern Sudan are hard to come by at this time, this paper relies on information and observations gained during field visit, including interviews and discussions with government officials, local private and foreign businesspeople, technical advisors, officials and aid workers in government, nongovernmental agencies, and civil society, operating in the region. Most of the "conclusory statements", as one reviewer of this paper called them, reflect these informed discussions and many of the statements were recommended by the government officials themselves. In fact, they recognize the reality and importance of broad-based economic growth, jobs, and poverty reduction and the importance of preventing the new South Sudan from returning to violent conflicts with the North and within South Sudan itself. They welcome the role of aid as a catalyst for such strategies. Furthermore, many analysts overlooked the fact that South Sudan is already a large recipient of aid (about $2.2 billion annually, most of which by-passed the government in Khartoum and went directly to the government of southern Sudan during the transition since 2005 before its independence. (For the aid statistics, see website: http://www.oecd.org/dataoecd/63/52/1878796.gif_). A large portion of this aid has been used for socioeconomic development (for example, health, education, agriculture, microfinance, rural roads) and democratic governance (competitive elections, strengthening political and economic institutions). The idea that the government of the newly independent South Sudan will react negatively to economic growth programs is just simply not supported by the experience to date. The increased attention and investment in economic growth suggested in this paper does not mean that other socioeconomic and political development programs will stop. The equity concerns, social development, inclusive and participatory development are certainly important and many activities facilitated by aid are intended to serve these objectives.

(4.) See, for example, Michael L. Todaro, Economic Development, 10th Edition (Boston, Addison-Wesley, 2009)

(5.) Erik Thorbecke, "The Evolution of the Development Doctrine and the Role of Foreign Aid, 1950-2000: in Finn Tarp and Peter Hjertholm (ed), Foreign Aid and Development: Lessons Learnt and Directions for the Future (New York, Routledge, 2000). See, also, William Easterly, The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics, (Cambridge, Massachusetts: The MIT Press, 2002).

(6.) See, for example, World Bank, "New Directions in Development Thinking" in Giorgio Secondi (ed.), The Development Economics Reader (New York, Routledge, 2008).

(7.) Development means more than economic growth--rise in national and per capita income--it includes social and political development, such as improved health status, nutrition, access to clean water, literacy, numeracy, improved political competition, inclusiveness, public accountability, human rights, justice, and equitable distribution of benefits from growth and development. See, for example, Amartya Sen, Development As Freedom (New York, Random House, 1999), Irma Adelman and Cynthia Taft Morris, Economic Growth and Social Equity in Developing Countries (Stanford University Press, California 1973), and Dudley Seers, "The Meaning of Development", IDS Communication 44 (Institute of Development Studies, 1967). The United Nations Development Program (UNDP) publishes annually the Human Development Index in its Human Development Report which provides indices quantitatively measured beyond the national and per capita income. This paper focuses narrowly on the role of economic recovery and growth in a post-conflict situation, especially private sector led broad-based economic growth. We are however well aware of the importance of social and political dimensions of development and we are not naive to think that economic growth will automatically without appropriate public policies and interventions address issues such as, equity, sound governance, and human development. For historical and long-term perspectives of how to get low-income developing countries on a path of sustained growth and development, see, for example, William Easterly, The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics, (Cambridge, Massachusetts: The MIT Press, 2002).

(8.) International Monetary Fund, Regional Economic Outlook: SubSaharan Africa, April 2011.

(9.) The Economist, "South Sudan's Referendum Results: Few Surprises," website: http://www.economist.com/blogs/baobab/2011/01/south_sudans_referendum_result.

(10.) For example, the United Nations officials in Sudan distributed a fact sheet entitled Scary Statistics showing southern Sudan's health and education indicators as alarmingly poor even compared to other failed or fragile states in Africa. The statistics were prepared by the U.N. Resident Coordinator's Support Office based in Khartoum, Sudan and they were drawn from Sudan Millennium Development Goals, Interim U.N. Report, 2004. On the other hand, Natsios and Abramowitz suggested that focusing on such statistics alone overlooks the fact that the South has in fact been a functioning state for the last five years and it has made progress under very difficult circumstances. (Andrew Natsios and Michael Abramowitz, "Sudan's Secession Crisis: Can the South Part from the North Without War?" Foreign Affairs, January/February 2011, Volume 90, Number 1.)

(11.) In 1995-98, the share of net Official Development Assistance (ODA) from members of the Development Assistance Committee (DAC) to fragile states was 19 percent ($14.7 of $73.3 billion total ODA); in 2005-08, it doubled to 38 percent ($46 billion of the total $119, of which $17 billion went to Iraq and Afghanistan). Sources: OECD/DAC, aggregate aid statistics online and World Bank, World Development Indicators, online.

(12.) The authors would like to thank the anonymous reviewers for pointing out larger issues of equity, meaning of development, and whether aid has any useful purpose at all that this paper has not addressed. The focus on economic growth in this paper does not imply that development is all about economic growth. It is not. Nor are we suggesting that foreign aid can by itself address broad-based economic growth. Our main point is that foreign aid can be a catalyst to bring about economic growth and raise people's standard of living. Our view is broad-based economic growth, especially in the informal sector, agriculture and job-producing growth, is of strategic importance for South Sudan. It is a necessary, but may not be sufficient condition for development in a larger sense which must include distribution of benefits from economic growth, social, and political development.

(13.) See Roy F. Harrod, "An Essay in Dynamic Theory," Economic Journal 49 (1939), 14-33. Evsey Domar, "Capital Expansion, Rate of Growth, and Employment," Econometrica 14 (1946), 137-47. Robert M. Solow, "A Contribution to the Theory of Economic Growth," Quarterly Journal of Economics 70 (1956), 65-94. Robert M. Solow, "Technical Change and the Aggregate Production Function." Review of Economics and Statistics 39 (1957), 312-320.

(14.) W. Arthur Lewis, The Theory of Economic Growth, (Homewood, IL: Irwin, 1955).

(15.) On complementarities, see, for example Michael Kremer, "The O'Ring Theory of Economic Development." Quarterly Journal of Economics 108 (1993), 551-575. Complementarities models of development are related to some of the models used in the endogenous growth approach. See, for example, Paul Romer, "Increasing Returns and Long-Run Growth." Journal of Political Economy 94 (1986), 1002-37. Paul Romer, "Endogenous Technological Change." Journal of Political Economy 98 (1990), S71-101. Elhanan Helpman, "Endogenous Macroeconomic Growth Theory." European Economic Review, 36 (1992), 237-268.

(16.) Political stability and absence of violence can be measured by the perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including domestic violence and terrorism. See Daniel Kaufmann, Aart Kraay, and Massimo Mastruzzi, "Governance Matters VIII: Aggregate and Individual Governance Indicators, 1996-2008," World Bank Policy Research Working Paper 4978 (Washington, D.C.: World Bank Development Research Group, 2009)

(17.) See for example, Jonathan Haughton, "The Reconstruction of War-Torn Economies," Discussion Paper No. 24 (August 1998), Consulting Assistance on Economic Reform II, Harvard Institute for International Development.

(18.) See note 4 above.

(19.) This is not to say that political reform is not necessary, especially in cases where issues such as lack of voice and accountability, and severe inequity contribute to the conflict in the first place. Promoting democracy, inclusion, and accountability can be inherently of value by themselves.

(20.) Bureau for Economic Growth, Agriculture and Trade, A Guide to Economic Growth in Post-Conflict Countries (Washington, D.C.: U.S. Agency for International Development, 2009).

(21.) Though there are no official statistics, field interviews, and anecdotal evidence from traders, businesspeople, and long-time residents corroborated each other the observation that the informal and small sector of the economy is thriving.

(22.) P. Collier and A. Hoeffler, "Aid, Policy and Growth in Post-Conflict Societies," World Bank Policy Research Working Paper 2902 (Washington, D.C.: World Bank Development Research Group, 2002). See also World Bank, Operations Policy and Country Services), "Good Practice Note for Development Policy Lending: Development Policy Operations and Program Conditionality in Fragile States, website: http://siteresources.worldbank.org/ PROJECTS/Resources/DPOsin fragilestates-June7.pdf_(2005)

(23.) P. Collier, A. Hoeffler, and M. Soderbom, "Post-Conflict Risks" (Center for Study of African Economies, Department of Economics, University of Oxford, 2007).

(24.) Based on author's interviews with government officials and consultants in Juba, July 2009.

(25.) S.S.M. Nour, 2011, "Labour Market and Unemployment in Sudan." Working Paper Series 2011-007, United Nations University Working Paper,

(26.) Garry Jacobs, N. Asokan, and Rajashree Venkatesh, 2000. "Toward Full Employment." Approach Paper for the Youth Employment Summit, International Center for Peace and Development Peace and Development.

(27.) Though South Sudan is currently a sub-region, one may argue that the ranking is not exactly applicable. However, for potential investors and businesses, they are likely to consider the entire Sudan rankings of different aspects of doing business as proxy indicators and assume a close relationship between South Sudan and the entire Sudan.

(28.) Joint Donor Team, "Juba Compact Between the Government of Southern Sudan and Development Partners," (Government of Southern Sudan, Juba, Sudan: 2009)

(29.) Abeyei was granted a special status under the CPA with a joint administration set up in 2008. The January referendum did not include Abeyei because of the disagreement as to who were eligible to vote. The western media headline tends to give the impression that the issue is all about oil. More important, the issue is the conflict between the northern nomad tribe (Misseriya) and the southern permanent resident tribe of the region (Dinka Ngok). The northern nomads were formerly armed and supported by Khartoum and used to attack the south during the civil war. The region continues to be potentially a source of violence and threatens peace in Sudan.

(30.) International Monetary Fund, http://www.imf.org/external/np/sec/ pr/2011/pr11145.htm.

(31.) Norwegian Agency for Development Cooperation (NORAD), "Mid-Term Evaluation of the Joint Donor Team in Juba, Sudan," website: http://www.norad.no/en/Tools+and+publications/Publications/ Publication+Page?key=125142 (2009).

By Kiertisak Toh and Prahlad Kasturi *

* Kiertisak Toh is a Professor of Economies at Radford University, Virginia. He is also a Senior Fellow at Duke Center for International Development, Duke University, North Carolina. Prahlad Kasturi is a Professor of Economies at Rafford University, Virginia. Professor Toh would like to acknowledge with gratitude the support he received from the United Stales Agency for Internatioal Development during his fieldwork in Southern Sudan. The authors would also like to thank the editorial staff of the Journal for comments, suggestions and editorial advice.

Table 1: Sudan's Rankings in World Bank Doing Business, 2010-2011

Topic Ranking                        2010    2011    Change in Rank

Starting a Business                  118     121           -3
Dealing with Construction Permits    141     139           +2
Registering Property                  36      40           -4
Getting Credit                       135     138           -3
Protecting Investors                 153     154           -1
Paying Taxes                          90      94           -4
Trading Across Borders               142     142           -1
Enforcing Contracts                  145     146           -1
Closing Business                     183     183       No Change
Overall                              153     154           -1

Source: World Bank, Doing Business 2011