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costs associated with the crisis—often create low morale in public service institutions.
At the same time, systems of public accountability are often weak. As incentives for patronage
and rent-seeking rise in this environment, work ethics tend to slide, and public
offices may be used for private gain. The bypassing of the public interest in favour of
special interests and the exclusion of certain social groups can hinder the recovery of
sustainable livelihoods and fuel conflict. Perceptions among citizens and the international
community of a high level of corruption discourage private investment and donor
support. When state participants are perceived to be corrupt, to have failed to protect
communities, or to have themselves perpetrated violence, , citizens are likely to distrust
the state’s legitimacy and capacity as an agent for recovery. Restoring public trust in the
competence and integrity of national institutions of governance is a central challenge
vis-à-vis livelihoods and economic recovery.
Macroeconomic management. Macroeconomic policies—including fiscal, monetary,
and trade policies—largely determine the environment for private sector investment
and economic activity, yet essential capacity for macroeconomic management is often
lacking in crisis and post-crisis countries. While the imperatives of consolidating peace and
ensuring access to basic services often take centre stage, the macroeconomic environment
is also critical. In terms of fiscal policy, peace and economic recovery require that public
revenue mobilization and expenditure processes are equitable, efficient, and crisis and
disaster-risk sensitive. Effective fiscal management is a significant challenge in most crisis
and post-crisis countries because low incomes result in low tax collection and a largely
informal economy makes tax avoidance easy. At the same time, public expenditure is
often constrained by weak budget execution mechanisms and inadequate administrative
capacity to design and implement programmes and projects. Public financial management
systems are often inadequate with regard to prioritizing recovery programmes and
ensuring transparency, accountability, and efficiency.
Domestic financing of programmes to support peace and economic recovery can increase
the deficit, the domestic debt stock, and the inflation rate. Moreover, crises often
motivate governments to finance military and other expenditures by printing money at
a time when output levels are falling. While some level of well-managed deficit spending
can benefit society, beyond a threshold it becomes destabilizing and undermines
the recovery process. Rapid increases in prices erode the real incomes of wage earners,
generate uncertainty among investors, and can lead to political instability. The value of
domestic currencies and their credibility as a medium of exchange then declines, and
markets may be restricted to those with access to alternative currencies, such as the U.S.
dollar and/or the Euro. These individuals are likely to be the wealthy and powerful members
of society, including warlords and other beneficiaries of the crisis economy. Livelihoods
are then adversely affected among poor and vulnerable populations and inequality rises,
sowing the seeds for social unrest.
Integration into the global economy is essential for post-crisis countries in order to gain
access to markets and investments, especially during early recovery when a scarcity of
commodities often raises the cost of living. These countries often suffer, however, from
weak international competitiveness. If the government fixes the exchange rate rather
than allowing market forces to determine it, high levels of inflation lead to real exchange
rate appreciation and currency overvaluation. Large influxes of aid can also contribute
to nominal currency appreciation. In either case, or treated as two aspects of the same
problem,, exports then become less competitive because they are more expensive in
Livelihoods & Economic Recovery in Crisis Situations