Threats and Opportunities of Doing Business in Conflict Zones
The increasing instability in the Middle East, precipitated by the Arab Spring, necessitates global firms to better accentuate political risk and conflict, including terrorism and kidnapping for ransom, in their daily operations.
The increasing instability in the Middle East, precipitated by the Arab Spring, necessitates global firms to better accentuate political risk and conflict, including terrorism and kidnapping for ransom, in their daily operations. Clearly, there is a growing recognition that peace – largely, the absence of internal and external violence – enhances economic activity, while conflict has the opposite effects. Countries suffering conflict cannot abandon economic activity until violence subsides. Still, impediments to doing business exist in conflict zones more so than elsewhere. Even in countries where conflict is pervasive, some positive economic activity is engendered. Against this backdrop, it is critical to highlight which policies, activities and organizations tend to contribute to economic activity in conflict zones. In doing so, governments, industry, nongovernmental organizations and the populace can focus on such productive efforts in the economic arena, and, thereby, inject some positive features in conflict zones.
Enhancing and Undermining Economic Activity
Peace contributes to economic development and conflict has negative effects.
Business investment benefits from security and stability. During peacetime, economies prosper and business becomes efficient.
In contrast, conflict impinges upon traditional business activities and pushes businesses into otherwise less transparent and competitive settings. With fewer opportunities, private sector activity is stifled. Globally, companies tend to eschew investments in conflict zones, as the physical and financial risks are viewed as outweighing the benefits of such high-risk venues. In such milieus, businesses also become targets of kidnappings and extortion, further undermining private sector activities.
Likewise, conflict situations can contribute to macroeconomic weakness, ultimately undermining monetary and fiscal activities. So too, the demand and supply sides of the economy are exacerbated by conflict. In fact, the costs of conflict globally are estimated at $100 billion annually.
As conflict interferes with traditional payment systems and financial intermediaries, business deals increasingly occur in cash with limited access to credit markets. Conflict enhances infrastructure degradation as transport links, energy and fuel facilities and trade facilities are often targeted. In weakening economic activity, conflict also undermines workers and labor markets as underemployment ascends. In fracturing governance and industry capacities, conflict likewise diminishes social capital as trust among individuals, groups and organizations are stymied.
The severity of conflict in weakening economies rests on the geographical scope (nationwide or localized) as well as the stage (ongoing or has ended) of the conflict. Inadequate infrastructure and the absence of functioning markets, along with the lack of security and displaced populations, are often endemic in armed conflicts. Likewise, growth domestic product rates are generally lower in conflict zones than elsewhere.
Impediments to Doing Business, Particularly in Conflict Zones
Impediments to doing business comprise political instability, traditional crime, inadequate infrastructure, taxes, policy uncertainty and corruption. Other obstacles for conducting business include limited entrepreneurship skills, such as customer service and accounting. Also, small and medium-sized enterprises (SMEs), which are among the main drivers of job growth worldwide, unfortunately suffer from a number of impediments, encompassing: access to financing, networks and business skills.
The lack of strong and predictable business regulatory environment, like difficulties with registering business and the enforcement of contracts, foment an increasingly informal business framework – often found in conflict zones – with higher levels of inefficiencies. In markets dominated by few competitors, market domineers often utilize price manipulation, political influence and vertical integration.
Limited electricity and transport capacities undermine economic development, including job growth, while simultaneously raising the costs of doing business.
The enabling environment of business is weakened in conflict zones as institutional fragility runs rampant, which also hastens corruption. In some countries, warlords, often buttressed by political power players, are able to accumulate sizeable businesses and create monopolistic businesses. Therefore, companies should try not to assist corrupt government officials, insurgents or terrorists, as sometimes occurs with some extract industries, such as conflict diamonds in Angola or timber in Thailand and Cambodia.
Doing Business in Conflict Zones
The private sector creates wealth, promotes socio-economic development and contributes to preventing and resolving conflict. For successful entrepreneurship, particularly in conflict-affected areas, public-private-non-profit partnerships are critical. Through their operations, firms can take advantage of first-mover advantages, even in conflict zones. Still, companies should be cognizant of the unique business factors and risks – security, costs, insurance, contractual obligations, personnel – that exist in distinct conflict zones, as they are all not alike.
Despite various externalities inherent in doing business in conflict zones, some opportunities appear too attractive to dismiss. This is particularly true for companies working in extractive industries where business in inextricably tied to the host country, even one suffering the ailments of conflict. For instance, in 2010, it was revealed that Afghanistan had nearly $1 trillion of untapped mineral deposits, including iron, copper and cobalt. Unfortunately, there are also some indications that easily movable commodities, including diamonds and drugs, can contribute to non-separatist conflicts.
Some entrepreneurial successes in conflict zones are worth highlighting. Roshan is the largest mobile phone company, employer and taxpayer in Afghanistan. Since 2003, the firm has invested more than $390 million, operates in all 34 provinces of Afghanistan with more than 3.5 million subscribers. The company employs directly and indirectly (as dealers, distributors, contractors and suppliers), 1,000 and 25,000 persons, respectively, one-fifth of them women.
Women-owned businesses have succeeded in some conflict zones, as in the sewing business started by Kamila Sidiqi in Afghanistan, who was featured in the book, “The Dressmaker of Khair Khana.” Likewise, Afghan women formed a business called DOTSI – connoting the term friendship in Dari – that successfully sells soccer balls.
In providing training in relation to entrepreneurship, it is important to find partners with track records of success as well as catering training in relation to local requirements.
Tourism, while obviously a stronger contributor to growth during peacetime, has some dimensions of peace building – reconciliation and socio-economic foundations – that have attractiveness as a conflict wanes. For instance, in post-conflict Rwanda, the tourism sector quickly became the country’s leading foreign exchange earner.
Promoting Business in Conflict Zones
According to the United Nations Global Compact Office, there are various activities companies that operate in conflict zones can commence in order contribute to promoting business, such as:
- Undertake an extensive assessment of the needs and risks inherent in such areas of operation
- Resolve disputes within communities constructively and rapidly
- Adopt international best practices in relation to the hiring of security professionals
- Shun providing funds or assistance to armed groups
- Avoid being complicit with human rights violators
- Prohibit participation in bribery and corrupt actions
- Consult and communicate with local communities
- Ensure that actions take into consideration the operating environment
- Promote collaboration with civil society and international organizations
A multitude of partnerships among and between government, business, business associations and nongovernmental institutions have developed in promoting commerce and assuaging the levels of conflict. Such relationships have also fostered the development and adherence by many companies to voluntary codes of conduct connected with their business activities.
While peace aids nations in achieving economic prosperity, conflict undermines such efforts. Although obstacles exist for businesses to flourish, especially in conflict zones, industry manages to excel nevertheless. In fact, diverse entrepreneurial successes occur across a variety of sectors, even in conflict zones. There are many domestic, regional and international governmental, nongovernmental and private sector entities that encourage and facilitate commerce in conflict zones. In order to ensure economic development is accelerated in conflict zones, it is imperative that such organizations are allowed to play a constructive role in transforming conflict zones into post-conflict zones. The profitability and safety of global companies hinges largely on how well a multitude of organizations players can sustain post-conflict zones.
About the Author:
Dean C. Alexander is director of the Homeland Security Research Program and Associate Professor of Homeland Security at Western Illinois University.