and Reconstruction Reconciliation: Whats
Economics Got to Do With It?
by Christopher J. Coyne
R
econstruction and reconciliation are perhaps the most pressing issues of our
time. The ongoing conflicts in the Middle East, as well as the many problems
generated by weak, failed, and conflict-torn states in other parts of the world, are
examples of situations where these topics are relevant. Reconstruction entails
rebuilding, and in some cases constructing, both formal and informal institutions in
weak, failed, and postwar countries. More specifically, the reconstruction process
involves the restoration of physical infrastructure and facilities, minimal social
services, and structural reform in the political, economic, social, and security sectors.
The end goal is the establishment of liberal democratic institutions, or at least the
foundations of such institutions. A liberal democracy refers to political institutions
which recognizes, respects, and enforces individual and civil rights, the rule of law,
and private property.1 Typically the reconstruction process involves some array of
indigenous citizens and elites as well as exogenous actors, whether they are military
occupiers or international policymakers.
Reconciliation can be seen as a key aspect of the broader reconstruction process
and involves individuals coming to terms with past human and civil rights abuses,
oppression, and violations of the rule of law and private property. Any shift from an
illiberal to a liberal regime requires some form of reconciliation between enemies.
The past violations of human, civil, and property rights by certain individuals must
be addressed, but when doing so, a balance of retribution and reconciliation should
be established. In the absence of such an ethic of forgiveness and reconciliation, the
transition toward a liberal order will be incomplete.
As the historical record indicates, policies that aim to advance reconstruction
and reconciliation efforts are among the most difficult to implement.2 For the most
part, research regarding the issues of reconstruction and reconciliation have been
limited to the disciplines of history, political science, and public policy. My primary
aim in this paper is to explore the contribution that the economic way of thinking
can make to this existing literature. Specifically, I examine the economic concepts of
incentives, constraints, opportunity cost, institutional path dependency, and gains
Christopher J. Coyne is an Assistant Professor of Economics at Hampden-Sydney College in
Virginia. This paper was written while the author was a summer post-doctoral fellow at the
Mercatus Center, Arlington, VA.
69
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from trade in the context of reconstruction and reconciliation. In order to make this
connection, I extend the lessons learned from the economics professions
experience with transition economies and with the provision of monetary aid to
developing countries. Additionally, I examine the economic theory of trade as one
mechanism for achieving sustainable change. I believe that incorporating the
economic way of thinking into the analysis of the reconstruction and reconciliation
process will contribute substantially to the ongoing debate regarding the ability of
governments to effectively export sustainable liberal democracy via foreign
intervention.
The array of actors involved in reconstruction and
reconciliationoccupiers, policymakers, indigenous
citizens, etc.each have specific goals and constraints
that will influence the overall success or failure of the
broader effort.
When one looks at the fundamental nature of the reconstruction and
reconciliation process, it becomes evident that economic issues are of central
importance. That is, reconstruction and reconciliation require the creation of rules
and can therefore be considered problems of political economy. A central emphasis
of political economy is the reason of rules.3 The underlying logic is that rules
provide the parameters within which individuals can carry out private activities while
simultaneously establishing the scope and strength of political institutions and the
activities of political agents within those institutions. For example, a key part of
constructing liberal institutions is the creation of constitutional rules and binding
checks and balances that are credible and sustainable. Likewise, reconciliation
requires the creation of formal (codified laws) and informal (norms) rules to deal
with past injustices without bankrupting the future potential of a society.
Viewed from the perspective of political economy, the reconstruction and
reconciliation process can be seen as an issue of incentive compatibility. Incentives
are a central concept in economics and refer to factors that influence the direction
of human behavior. A core assumption of the economic way of thinking is that
people behave purposefully and therefore respond to incentives. By way of example,
consider the profit/loss mechanism in a market economy: the lure of profit is a
positive incentive for entrepreneurs to satiate consumer wants; the possibility of a
loss is a negative incentive against failing to do so.
Within the context of incentives, those directing the reconstruction and
reconciliation process must establish the rules of the game such that there is a
positive incentive for citizens to utilize, respect, and invest in liberal democratic
institutionspolitical, economic and socialover the long run. Further, to the
extent that this process involves external occupiers or policymakers, they must
ensure that incentives are in place for the populace of the reconstructed country to
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follow those rules once occupiers exit. In other words, occupiers must not just
establish rules at the point of a gun, but instead ensure that those rules are durable
and sustainable after the occupation ends. Absent such incentives, the reconstructed
country will backslide.
As such, the economic way of thinking can assist in understanding if formal and
informal rules provide the necessary incentives for members of the populace to
engage in activities that support a self-sustaining, liberal order. In other words,
economics provides the means of adjudicating between the factors and mechanisms
that generate the incentive to cooperate, versus to fight. In what follows, I explore
how the economic way of thinking can contribute to our understanding of the
process of reconstruction and reconciliation.
ECONOMIC INSIGHTS ON THE RECONSTRUCTION PROCESS
In addition to their focus on the role of incentives, economists also focus on the
role of constraints. In assuming that individuals act purposefully, economists
emphasize that individuals have specific goals that they seek to achieve. The
economic way of thinking indicates that the opportunities to pursue these goals are
constrained by a number of factors including time, income, imperfect knowledge
and information, and informal and formal rules. Given their goals and constraints,
individuals pursue their desired objectives using the best options available to them at
the time of action. The array of actors involved in reconstruction and
reconciliationoccupiers, policymakers, indigenous citizens etc.each have specific
goals and constraints that will influence the overall success or failure of the broader
effort. Let us consider some specific insights from economics as they relate to these
constraints.
Insights from the Transition Experience
A wealth of relevant knowledge exists in the economics literature regarding the
transition experience of former communist countries. Similar to the process of
reconstruction, a central policy issue following the fall of communism was the
transition from often illiberal communist regimes to liberal democratic ones.
Fundamental changes in the political, economic, and social spheres were required to
achieve these outcomes.
According to the economist Peter Murrell, the early economic reforms proposed
for transition countries suffered from two major issues.4 The first issue was that
reforms often neglected the nuances of the existing society and existing rules of the
game. This issue highlights the importance of context. Prior to the collapse of
communism, a social system had evolved with a unique set of customs, norms, and
rules which provided an incentive for certain types of behaviors. Oftentimes, these
rules operated outside the formal rules in the black market.
The second issue plaguing reforms in transitioning countries was that the
reforms failed to consider whether the behavior associated with capitalist systems
was the result of historical development or the result of present-day incentives.
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Historical experience matters. The social system that evolved under communism
could not be discarded or shifted overnight. This indicates that social structures that
had developed in the communist period carried over to the transition period and
served as a binding constraint on the effectiveness of transition reforms and policies.
For instance, in the case of the Soviet Union, reformers knew the general
characteristics of formal liberal institutionschecks and balances, rule of law and
the protection of human, civil, and property rightsbut were unable to generate
effective change because they could not provide the informal complementary
institutions (i.e., the underlying experiences, belief systems, and organizational
forms) necessary for widespread acceptance and adoption of the new order.5
A related issue that affected economic reform during the transition period,
which is equally important for reconstruction efforts, was the problem of credible
commitment.6 For new institutions to be successfully adopted, a significant number
of individuals must be confident that they are credible and legitimate. In other words,
they must be confident that reconstructed institutions will be sustainable after the
reconstruction process ends and foreign occupiers exit. The issue is one of shifting
the institutional trajectory from often illiberal regimes to one that credibly supports
liberal ends.
The main problem stemming from this issue of plausible commitment is that
the necessary legitimacy cannot be established quickly. In short, why should citizens
who were formally repressed now believe that a reconstructed government will treat
them differently? Moreover, social scientists and policymakers have a poor
understanding of how to design rules and institutions that are viewed as legitimate
and binding by the individuals who must accept and invest in them. This is evident
when one considers that historical attempts by the US to establish liberal democratic
institutions abroad have produced more failures than successes.7
These insights from the transition experience apply beyond purely economic
reforms and have important implications for reconstruction and reconciliation
efforts. Formal Western style institutions require the existence of informal
complementary institutions to serve as a foundation. Complementary institutions
encompass informal norms and values such as trust and the related art of
association, conventions, beliefs, and organizational forms which allow formal
institutions to operate in the desired manner.
In order to understand the importance of complementary institutions, consider
the following from Nobel Laureate economist F.A. Hayek who noted the importance
of underlying beliefs and dispositions, which in more fortunate countries have
made constitutions work which did not explicitly state all that they presupposed, or
which did not even exist in written form.8 Hayeks point is that a constitution is a
codification of the underlying beliefs, traditions, and habits of a society and, hence,
successful instruments of liberal democracies if those underlying beliefs were part
of the cultural endowment in the first place. When aligned, formal and informal
institutions will operate effectively, but any disjuncture between the two will result in
the failure of formal institutions to operate in the desired manner. Unfortunately,
policymakers and social scientists lack the knowledge of how to effectively construct
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these complementary institutions where they do not already exist. Stated differently,
an understanding of how to construct or impose the underlying values and belief
systems required for the desired operation of formal liberal institutions does not
exist.
When aligned, formal and informal institutions will
operate effectively, but any disjuncture between the two
will result in the failure of formal institutions to operate in
the desired manner.
In modern economics literature, the recognition of the importance of past
experiences manifests itself in the concept of path dependencythe way in which
institutions and beliefs developed in past periods constrain choices in the current
period. In other words, past experiences will facilitate or constrain the
transformation of situations of conflict into situations of cooperation in current and
future periods. Nobel Laureate economist Douglass North, who is a key contributor
to the path dependency literature, has emphasized that formal rules and institutions
are indeed important, but they must be complemented and reinforced by informal
rules and institutions in order to operate in the desired manner.9
The recognition of the importance of both formal and complementary
informal institutions has important implications for reconstruction efforts.
Policymakers and social scientists often focus on the controllable variables in
reconstruction efforts such as troop levels, monetary aid, the timing of elections, and
exit strategies.10 While these are clearly important variables, the focus on informal
institutions indicates that reconstruction is not merely a technical issue.11 The exact
level of controllable variables employed in different reconstruction and
reconciliation efforts will have drastically different outcomes because of the
constraints of historical experiences and the existing endowment of skills,
knowledge, beliefs etc. in the country being reconstructed. In other words, the
presence of existing rules and endowments of informal knowledge and experiences
will serve as hard constraints on the effectiveness of controllable variables.
To further highlight this point, consider an analogy employed by the economist
Luigi Zingales. Zingales likens the situations in postWorld War II Japan and
Germany, typically considered examples of Americas ability to reconstruct countries
along liberal lines, to a firm whose plant had been destroyed by fire.12 Both Japan and
Germany were developed and industrialized before entering World War II and,
therefore, the plant (i.e., country) was operating at a relatively high level of
productivity. While the fire (i.e., war) destroyed the physical plant, the skills and
knowledge that generated the pre-fire level of productivity were still in place. Stated
differently, the fundamental skills, knowledge, and organizational forms that had
evolved prior to the fire were carried over to the reconstructed plant, allowing the
firms (i.e., Japan and Germany) to eventually achieve their prior levels of
productivity.
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While the resources to invest in rebuilding the plant are indeed important to
achieving success, it is the underlying endowment of skills and knowledge that allow
the firm to be productive in the first place. Without these complementary institutions
(i.e., the skills and knowledge of how to organize production activities and run the
plant), the plant would be nothing but an underutilized or empty building. In the
context of reconstruction, countries lacking complementary institutions to serve as
a foundation for formally reconstructed institutions will fail to become sustainable
liberal democracies.
This insight goes a long way in explaining the drastically different outcomes
across reconstruction efforts. The main issue for policymakers is that the
fundamental skills, norms, and knowledge, or culture, is deeply embedded in a
society and cannot be easily manipulated through policy. Along these lines, Francis
Fukuyama contends that democratic consolidation must take place on four levels
Ideology, Institutions, Civil Society, and Culture. Culture is the deepest level and
therefore is safely beyond the reach of institutional solutions, and hence of public
policy.13 The cultural constraint on policy indicates that those who wish to export
liberal democratic institutions to other countries must consider mechanisms for first
establishing the necessary complementary institutions that will allow formal
institutions to stick and sustain over time. As it turns out, the economic way of
thinking offers one potential mechanism which I will discuss in a later section.
Insights from the Development Experience
Monetary aid is a central part of most, if not all, reconstruction efforts.
Research in the area of development economics and, specifically, research regarding
the effectiveness of monetary aid in developing countries, is yet another area where
the economic way of thinking can contribute to the process of reconstruction and
reconciliation. From an economic standpoint, it is not just the total amount of aid
that is important, but also how effectively aid is allocated and utilized. Economics
can assist in identifying whether the incentives are in place for aid recipients to utilize
aid effectively.
In his detailed analysis of foreign aid, the economist William Easterly
emphasizes the dual issues of incentives and delivery mechanisms. First, statesmen
and policymakers in the country receiving aid must have the incentive to utilize and
disburse aid funds effectively.14 Easterly demonstrates that oftentimes the incentive
structure created by the provision of foreign aid directs officials and policymakers
toward unproductive activities that generate perverse outcomes and cause more
harm than good.
Even if the correct incentives are in place, many underdeveloped, weak and
failed states lack the delivery mechanisms to allocate aid effectively.15 For instance,
feedback loops that provide information of accountability and the effective
allocation of resources are typically absent or lacking in scope. As such, even if the
right incentives are in place, getting the aid to those who need it most presents an
additional problem.
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Approximate year of Time under IMF programs in
onset of state failure preceding 10 years (%)
Afghanistan
1977
46
Angola
1981
0
Burundi
1995
62
Liberia
1986
70
Sierra Leone
1990
59
Somalia
1991
74
Sudan
1986
58
Zaire
1991
73
Average
55
Average for developing countries 1970-90
20
TABLE 1: ALL EIGHT CASES OF STATE COLLAPSE WORLDWIDE AS OF 1990
AND PRIOR IMF PROGRAMS16
Mainly due to the issues raised by Easterly, one should not expect monetary aid
in itself to be a catalyst for sustainable political, economic, and social change in
illiberal states. Indeed, the evidence seems to indicate that monetary aid is largely
ineffective in overcoming the major problems in weak and failed states. A brief
review of the performance of aid in those countries that experienced complete state
failure seems to support the claim regarding the ineffectiveness of aid in generating
sustainable change.
As Table 1 illustrates, engaging in programs of the International Monetary Fund
(IMF) for an extended period of time correlates with a greater risk of complete state
collapse. Of course, this says nothing about causation, and the magnitude of the
effect of IMF programs relative to state collapse is unclear. Nonetheless, it is safe to
conclude that the general problems of incentives and the lack of information related
to the dispersal of aid played some role in the ineffectiveness of the IMF programs.
As this data indicates, there is no reason to believe that monetary aid is a suitable
mechanism for generating widespread sustainable change toward liberal democratic
institutions. Instead, spending significant time in an IMF program is associated with
a higher likelihood of complete state collapse.17
Within this context, another important insight from economics is that
policymakers must be careful not to fall prey to the nirvana fallacy. In its simplest
form, the nirvana fallacy indicates that it is incorrect to hold the view that the grass
is greener on the other side by assuming that government intervention is preferable
to the status quo. In the context of reconstruction, a nirvana fallacy occurs when it
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is assumed that, in the face of a weak, failed, or illiberal government, external
policymakers or occupiers can provide a better outcome relative to what would exist
in the absence of those efforts.18 This is not to say that the provision of aid can
never have beneficial effects, but neither can it be assumed that they will yield
beneficial outcomes.
Consider also that there are many historical cases where monetary aid has been
given to illiberal regimes generating the unintended consequence of strengthening
those very regimes, as well as increasing dependence on aid. Somalia is one example.
Prior to the collapse of Siad Barres regime in 1991, foreign aid accounted for 70
percent of Somalias budget, which allowed the regime to continue to function and
repress a large part of the Somali population.19 In addition to propping up the brutal
Barre regime, the aid created what James Buchanan, a Nobel Laureate economist,
called the Samaritans Dilemma. In providing assistance, the Samaritan who
provides the aid shifts the incentives facing those receiving aid, and in doing so,
provides a disincentive to save and invest while providing a positive incentive to
become dependent on aid.20 In the case of Somalia, while the intention of those
providing aid may have been to better the situation of Somali citizens, the aid had
the negative, unintended consequence of creating a dependency that actually made
the shift toward self-sustaining institutions liberal that much more difficult in later
years.
For example, the expectation of aid is at least partially responsible for the
conflict that has occurred in the capital city of Mogadishu. As Karin von Hippel
notes,
Many Somalis erroneously believe that a restored central government, based in Mogadishu,
will once again cause the foreign aid floodgates to open at similar levels to those prior to state
collapse. Mogadishu therefore remains the most hotly contested piece of real estate in the
country[].21
This expectation that control of Mogadishu will also yield foreign aid, as it did in the
past, has increased the payoff to engaging in conflict to gain control of the capital
city. Similar logic extends beyond the case of Somalia to aid provided to other weak
and failing states. The important point is that the tools of economics are critical in
understanding the incentives created by effortswhether military occupation, aid, or
some mix of the twoto reconstruct foreign countries. Neglecting the insights
provided by the economic way of thinking is likely to produce wrongheaded policies,
which will often generate perverse outcomes.
ECONOMIC INSIGHTS ON THE RECONCILIATION PROCESS
The economic way of thinking can also assist both policymakers and social
scientists in understanding the process of reconciliation. In many cases the success
of reconstruction efforts requires the development of an ethic of forgiveness that
provides the incentive for citizens to move forward and make the necessary
investment in liberal democratic institutions. For instance, as noted earlier, the issue
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of credible commitment is central in any reconstruction. The problem of
transitional justice magnifies this problem. In many illiberal societies, citizens were
repressed and suffered grave injustices. As such, citizens will tend not to trust the
new government based on historical experiences with repression.
Within this context, rules must develop that simultaneously signal a break from
the past and a credible commitment that those rules will be followed in the future.
For obvious reasons, achieving this task is one of the most difficult policy
achievements. The tools of economics can assist in identifying some of the central
issues involved in developing an ethic of reconciliation that is effective and credible.
The tools of economics are critical in understanding the
incentives created by effortswhether military
occupation, aid, or some mix of the twoto reconstruct
foreign countries.
For instance, a key issue in the process of reconciliation is determining how
much justice to pursue. At one extreme, the decision not to pursue any level of
justice will fail to generate a sufficient break from the past, and those who have
suffered past injustices and harms may refuse to participate in the new order. In such
an instance, reconstructed institutions will lack legitimacy because they will be
associated with the former illiberal regime. On the other hand, pursuing total justice
can bankrupt the future of a society. Investing an abundance of resources in
transitional justice can erode the ability of the system of exchange and production
to serve as a basis for peaceful social interaction and cooperation in the future.
At a minimum, the economic way of thinking highlights that there is an
opportunity cost to investing resources in the pursuit of justice and reconciliation.
The notion of opportunity cost is used by economists in reference to the next best
alternative opportunity that is forgone by pursuing some activity. In the context of
reconciliation, resources allocated to the pursuit of justice cannot be allocated to
other activities. A society that allocates a substantial amount of resources to
rectifying past injustices trades off the use of those same resources for other
activities that may allow a society to move on. To be clear, this is not to say that
justice should not be pursued at all, but rather to recognize the inherent trade-off
involved.
To further understand how the pursuit of justice and reconciliation can
bankrupt the future of a society, consider the issue of determining just retribution.
Principles of restitution often stress that in the face of criminal destruction or
confiscation of property, the victim should be made whole through compensation
for the full value of the property. However, serious problems come to the forefront
with the passage of time, because just compensation will require some form of time
discounting. For instance, the economist Tyler Cowen has pointed out how the
attempt to right past injustices by a restitution principle, using basic compounding
techniques, can quickly lead to financial claims that consume a significant portion of
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the output of an economy.22 In order to understand this point, consider the
following example provided by Cowen,
Consider the loss of a billion dollars worth of resources in the past. At a one percent rate
of compounding, for a loss suffered one hundred years ago, positive compounding suggests a
reward of 2.7 billion dollars rather than one billion. For a loss suffered two hundred years
ago, compounding increases the reward to 7.3 billion dollars. At a three percent rate of
compounding, the awards jump to 19.2 billion dollars and 369.4 billion dollars respectively.
At a five percent rate of compounding, the sums raise to 131.5 and 17.3 trillion dollars.23
As this example illustrates, when positive compounding is employed to
determine retribution for victims, and the decedents of victims, the result can be a
significant claim on current and future output. Restitution can bankrupt a society
because these high levels of retribution prevent a society from realizing the gains
from production and exchange that would have occurred absent the need to pay
retribution. Stated differently, high levels of restitution can potentially slow, or
altogether prevent, a society from breaking from the past and moving forward. Of
course the magnitude of restitution depends on how far in the past the wrong
occurred, as well as the rate of compounding used in the calculation.
Finding an acceptable solution to this issue requires knowledge of history,
philosophy, and political theory; however, the tools of economics are also of utmost
importance in considering different proposals for retribution. Specifically, economics
can assist in identifying the relevant tradeoffs and costs associated with different
options for seeking justice and retribution. As discussed, depending on the relevant
time frame and rate of compounding, the costs of carrying out justice and
retribution may quickly outweigh the associated benefits. Economics alone cannot
solve this issue, but the economic way of thinking is one important input for
determining a recipe for reconciliation around an ethic conducive to sustainable
liberal democratic institutions.
ECONOMIC INSIGHTS ON MECHANISMS OF SUSTAINABLE CHANGE
As previously stated, complementary institutions are necessary foundations for
formal institutions. Absent the required complementary norms, belief systems and
organizational forms, formal institutions will be dysfunctional and fail to operate in
the desired manner. A central issue facing policymakers and social scientists is how
to export these complementary institutions where they do not already exist. The
economic analysis of international trade can contribute to finding a solution.
Economists rarely disagree regarding the economic benefits of free trade. As the
economists David Dollar and Aart Kraay write,
Openness to international trade accelerates development: this is one of the most widely held
beliefs in the economics profession, one of the few things on which Nobel prize winners on
both the left and the right agree.24
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Indeed, the economic impact of free trade on wealth is significant. William Cline
estimates that worldwide free trade could help 500 million people escape poverty
while simultaneously injecting $200 billion annually into developing nations.25 This
indicates that the US can utilize its global economic status and trade policy to
influence development and change abroad.26 Moreover, it is important to realize that
the benefits of trade extend beyond purely economic ones.
In addition to the economic benefits of free trade, economists have also
emphasized cultural benefits. For instance, Tyler Cowen analyzes the impact of
globalization on culture and concludes that free trade not only makes societies better
off in terms of increases in wealth, but also in terms of the array of cultural
products available to consumers.27 Cowens core argument is that cross-cultural trade
has the dual effect of allowing cultures to simultaneously maintain and develop
certain aspects of their unique identities, while partially merging with other cultures
and becoming similar in other aspects. In other words, the impact of globalization
on culture is not an all-or-nothing proposition, whereby a culture must either remain
isolated or be destroyed. Instead, while globalization admittedly destroys certain
aspects of culture, it simultaneously allows other aspects of culture to grow and
flourish.
To illuminate this point, Cowen cites the restaurant market. On the one hand,
chain restaurants (i.e., McDonalds) continue to increase their overall market share in
the global marketplace, which tends to make cultures more homogenous. However,
the overall increase in dining has simultaneously increased the number of ethnic and
niche restaurants that are able to remain profitable in the broader restaurant market,
which has made the options available in the overall restaurant market more diverse
and heterogeneous.28 While one can find a McDonalds restaurant in many places
around the world, many ethnic and niche restaurants are available as well. Cowens
reasoning can be extended across cultural products and includes not just physical
goods and services, but also intangible things such as values, ideas, and other
informal, complementary institutions. As in the restaurant market, cross-cultural
trade has the dual effect of making intangibles more similar and homogenous in
some respects, while causing intangibles to be more diverse and heterogeneous in
others.
It is important to note that the material gains from exchange and the intangibles
produced by cross-cultural trade are not necessarily mutually exclusive. For instance,
the economist Benjamin Friedman has recently explored the implications of
economic growth or stagnation for the moral character of a country. He concludes:
Economic growthmeaning a rise in standard of living for the clear majority of citizens
more often than not fosters greater opportunity, tolerance of diversity, social mobility,
commitment to fairness, and dedication to democracy. 29
In short, increases in material wealth provide individuals with the ability to
pursue other, often intangible, ends, and influences other, often non-economic,
aspects of society.
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To return to the central dilemma of how to export the required complementary
institutions where they do not already exist, it is my contention that a commitment
to free trade on the part of the US can be viewed as one mechanism of change to
establish the foundation for formal, liberal institutions. Societies tend to become
more similar, at least in their awareness of others outside their borders, as they
become aware of and integrate the ideas, values, organizational forms, and practices
of others. A commitment to free trade is not a panacea, but it is one important tool
for spreading the awareness of formal and informal Western institutions.
Although much more can be done, US policymakers have realized the benefits
from free trade as they relate to economic development and social change. For
instance, in May 2003, President Bush announced an initiative to establish a free
trade area between the US and Middle East over the next decade. In their simplest
form, free trade agreements (FTAs) attempt to eliminate barriers to tradequotas,
tariffs, etc.between parties in the agreement. The specific dynamics of each FTA
varies depending on how it is written and what goods, services, and barriers it covers.
However, while the specifics vary, FTAs typically phase out barriers to trade while
establishing some basic agreement on standards regarding a variety of issues, such as
labor and the environment. Since 2003, steps have been taken to meet President
Bushs FTA goal through the negotiation and signing of Free Trade Agreements
with Bahrain and Morocco. Furthermore, negotiations with Oman regarding an FTA
were concluded in September 2005. Therefore, the growth of FTA frequency shows
that they are believed to serve economic development and social change.
Similar to the emphasis on free trade through FTAs, unilateral reductions in
barriers to US markets also have some precedent. In May 2003, senators Max Baucus
and John McCain introduced the Middle East Trade and Engagement Act to create
a trade preference program for countries in the Middle East. The proposed bill
would have allowed the president to implement unilateral reductions in barriers to
US markets for countries in the Middle East that met certain requirements. While the
proposed bill was never enacted into law, the proposal indicates that the use of trade
policy as a tool for generating change has some foundation in current practice.
Similarly, under the Generalized System of Preferences (GSP) program
instituted in 1976, the US provides preferential duty-free treatment for several
thousand products, from over a hundred designated countries and territories. The
underlying logic of the GSP program is that lesser developed countries benefit from
free access to US markets. In other words, the GSP program illustrates that
policymakers recognize the benefits of free trade with lesser-developed countries.
The economic and cultural benefits from free trade become clear only through
economic analysis, again highlighting the importance of economics in understanding
how to generate sustainable social change.
CONCLUSION
I have discussed only a few insights from the economic way of thinking that are
directly applicable to reconstruction and reconciliation. Policymakers and social
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scientists involved in these efforts have a large number of tools at their disposal. It
is my contention that the economic way of thinking has been largely neglected and
should be added to this toolkit. Basic economic concepts such as incentives,
constraints, opportunity cost, institutional path dependency, time discounting, and
gains from trade can provide important insights into the process of reconstruction
and reconciliation. In sum, the key insights of the economic way of thinking on the
topics of reconstruction and reconciliation are as follows:
1. Policymakers and social scientists suffer from a knowledge problemWhile the general
characteristics of liberal democracies are well known, policymakers and
social scientists lack the knowledge of how to construct these liberal
institutions where they do not already exist. This is evidenced by the fact
that the historical record of US reconstruction efforts shows more failures
than successes. Where failure has occurred, it is not necessarily due to a
clear end-goal, but instead to a lack of knowledge of how to achieve the
desired end.
2. Context mattersFocus is often placed on the controllable variables (i.e., troop
levels, timing of elections, monetary aid, planning and exit strategy, etc.)
involved in the reconstruction process. While important, the effectiveness
of these variables is constrained by uncontrollable variables such as
historical experiences and culture. These uncontrollable variables serve as a
constraint on the effectiveness of variables that can be controlled, and limit
what can be achieved.
3. Incentives and allocation mechanisms matterWhile monetary aid is an important
aspect of the broader reconstruction process, it will be ineffective in the
absence of the proper incentives and feedback mechanisms. Recipients of
aid must have the incentive to use aid to improve their position and become
self-sustaining instead of becoming dependent on continued aid. Further,
there must be feedback loops, including mechanisms of accountability for
ensuring that aid is utilized effectively. Typically the countries most in need
of aid are also those most lacking regarding incentives and allocation
mechanisms. Policymakers lack an effective solution to these issues.
4. Reconciliation must take place with an eye toward the futureThe emergence of an
ethic of forgiveness and reconciliation is often critical for the long-term
sustainability of a society where past harms and abuses have taken place.
However, when considering the calculation of restitution, it is critical to
recognize the associated trade-offs. At some point, the payment of
restitution consumes such a significant portion of current and future output
that it will bankrupt the society in question.
5. A commitment to free trade is an alternative means of political, economic and social
changeSustainable change toward liberal democracy requires certain
complementary institutions to serve as a foundation. Efforts to impose
liberal democratic institutions via military occupation suffer from the
knowledge problem of how to construct these complementary institutions
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where they do not already exist. A commitment to free trade provides an
alternative and is a means of engaging in economic and cultural exchange
with trading partners around the world. Free exchange allows for the
imitation of both formal and informal institutions, providing the potential
for social change through peaceful interaction.
Economics alone may not be able to provide an answer to all the questions and
issues associated with reconstruction and reconciliation. However, the economic way
of thinking can complement other tools and contribute substantially to our
understanding of not only the different outcomes of past reconstruction efforts, but
also the limitations of our knowledge of how to establish liberal democratic
institutions where they do not already exist.
Notes
1 Fareed Zakaria, The Future of Freedom: Illiberal Democracy at Home and Abroad (New York: W.E. Norton &
Company, 2003).
2 James L. Payne, Does Nation Building Work? The Independent Review 4 (Spring 2006): 597608.
3 Geoffrey Brennan and James M. Buchanan. The Reason of Rules: Constitutional Political Economy (New York:
Cambridge University Press, 1985).
4 Peter Murrell, The Transition According to Cambridge, MA, Journal of Economic Literature 33 (March
1995): 164178.
5 Peter J. Boettke, Why Perestroika Failed: The Politics and Economics of Socialist Transformation (New York:
Routledge, 1993).
6 Peter J. Boettke, Credibility, Commitment, and Soviet Economic reform, In Economic Transition in Eastern
Europe and Russia: Realities of Reform, ed E. Lazear (Stanford, VA: Hoover Institution Press, 1995) 247275;
Andrei Shleifer, Government in transition, European Economic Review, 41 (1997): 385410.
7 James L. Payne, Does Nation Building Work? The Independent Review 4 (Spring 2006): 597608.
8 F.A. Hayek, Law, Legislation and Liberty, Volume III: The Political Order of a Free People (The University of
Chicago Press, 1979), 107108.
9 Douglass North, Institutions, Institutional Change and Economic Performance (Massachusetts: Cambridge
University Press, 1990); Douglass North, Understanding the Process of Economic Change (New Jersey: Princeton
University Press, 2005).
10 James Dobbins et al., Americas Role in Nation-Building: From Germany to Iraq (Santa California: RAND, 2003).
11 Christopher J. Coyne, The Institutional Prerequisites for Post-Conflict Reconstruction. Review of Austrian
Economics 18 (3/4) (December 2005): 325342; Christopher J. Coyne, Reconstructing Weak and Failed States:
Insights from Tocqueville. Journal of Social, Political and Economic Studies 31, no. 2 (2006): 143162.
12 Luigi Zingales, For Iraq, A Plan Worthy of Zambia, The Washington Post, November 9, 2003.
13 Francis Fukuyama. The Primacy of Culture. Journal of Democracy 6, no. 1 (1995): 714.
14 William Easterly, The Elusive Quest for Growth. (Massachusetts: The MIT Press, 2001).
15 William Easterly. The White Mans Burden (New York: The Penguin Press, 2006).
16 Ibid, 218.
17 Ibid, 218.
18 Christopher J. Coyne, Reconstructing Weak and Failed States: Foreign Intervention and the Nirvana
Fallacy, Foreign Policy Analysis 2 (2006a): 343361.
19 Karin von Hippel, Democracy by Force: US Military Intervention in the Post-Cold War World (Massachusetts:
Cambridge University Press, 2000), 85.
20 James M. Buchanan, The Samaritans Dilemma. In Altruism, Morality, and Economic Theory, ed. Edmund S.
Phelps (New York: Russell Sage Foundation, 1975).
21 Karin von Hippel, Democracy by Force: US Military Intervention in the Post-Cold War World (Massachusetts:
Cambridge University Press, 2000), 85.
22 Tyler Cowen, Discounting and Restitution. Philosophy and Public Affairs 26, no. 2 (Spring 1997): 168185;
Tyler Cowen, How Far Back Should We Go?: Why Restitution Should Be Small, in Retribution and Reparation
in the Transition to Democracy, ed. Jon Elster (New York: Cambridge University Press, 2006), 1732.
23 Tyler Cowen, Discounting and Restitution, 169.
24 David Dollar and Aart Krayy, Trade Growth, and Poverty, The Economic Journal 114, no. 493 (February
2004): F22F49.
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25 William Cline, Trade Policy and Global Poverty (Washington, D.C.: Institute for International Economics,
2004).
Joseph S. Nye Jr., Soft Power: The Means to Success in World Politics (New York: Public Affairs, 2004).
Tyler Cowen, Creative Destruction (New Jersey: Princeton University Press, 2002).
Ibid, 1617.
Benjamin Friedman, (New York: Alfred Knopf, 2005), 4.
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