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Microfinance as an Instrument for Conflict Prevention?

Image by Antonio Olmos / HelpAge International (found on Flickr.com)

Microfinance is nowadays widely recognized as a powerful tool for combating global poverty by giving micro-entrepreneurs access to small loans and other financial services to which they usually would not have access. Investing in grassroots efforts like microfinancial services unfolds an invaluable potential of innovation and empowers the people at the bottom of the pyramid to work out of chronic poverty and to sustainably transform their and their families’ lives. Poverty often is the result of violent conflicts, which disrupt economic activity, severely impact social and political structures, and deteriorate the quality of life of civilians. As such, microfinance can also be considered an effective instrument for post-conflict reconstruction. Extensive research has been done on these topics, and there is a huge variety of literature.

However, there’s an area which I regard as interesting but where I have not found much information, namely whether there is a potential for microfinance as a conflict prevention instrument. This is obviously a hard question to answer, since it is difficult to analyze whether specific pre-conflict settings would actually have led to a conflict situation, had there not been microfinancial activities. Further, in order to analyze this question in more detail, many aspects would have to be considered, such as the type of the potential conflict (i.e. is it likely to be an ethnic conflict, a “social grievance” conflict, etc.) or the risks for microfinance institutions (MFI’s) to operate in such pre-conflict environments. For the purpose of this post, however, I will concentrate on some brief reflections on a rather general level, i.e. looking at the economic causes of civil conflict as defined by Paul Collier[1], and how microfinance could potentially address these issues before the violent conflict breaks out.

In his paper “Economic Causes of Civil Conflict and their Implications for Policy”, Collier states that there are two ways of looking at the causes of civil conflict. On one hand, there is what he calls the “popular perceptions of the causes of conflict”, which see rebellion as a fight against injustice, hence motivated by grievance. On the other hand—and this is the point of view he defends—there is the economic theory of conflict. It argues that the factors which ultimately determine whether a country will experience civil war are not related to grievance, but rather depend on the potential for a rebel organization to sustain itself financially.

Collier lists a series of risk factors which, as he argues, determine the likelihood of a civil war to break out. Here’s a short summary of these factors:

Natural Resources: Countries with a substantial share of their income coming from the export of primary commodities bear a higher risk for civil conflict.
Geography: It is more difficult to control a highly dispersed population than one in a small area.
History: If a country recently had a civil war, the risk of further war is very high (40% chance of further war).
Diaspora: Countries with large diasporas in wealthy countries bear a higher risk than countries with small diasporas (36% vs. 6%). Diasporas harbor rather romanticized attachments to their group of origin, they are much richer than the people in their country of origin and can therefore afford to finance vengeance, and they do not suffer any of the awful consequences of renewed conflict as they don’t live in the origin country.
Economic opportunities: i.e. the higher the education level, the lower the risk; the higher the population growth, the higher the risk; the higher economic decline, the higher the risk.
Ethnic and religious composition: Risk of conflict doubles if one dominant ethnic group constitutes between 45% and 90% of population. By contrast, ethnic and religious diversity makes a society much safer.

Microfinance can certainly not influence on geographic conditions and the recent war history of a country, on the size of its diaspora, or on the ethnic and religious composition of its society. Where it actually could have a positive impact is on the economic opportunities and maybe, to a lesser extent, on a country’s primary commodity export dependency. Access to microfinancial services can certainly contribute to a deceleration of economic decline and to economic growth. Further, the influence microfinance can have on the level of education is not be underestimated. On one hand, it gives families a higher financial independence and allows them to send their children to school rather than to force them to child-labor in order to help sustain the family. On the other hand, many MFI’s do not only provide microfinance services, but also transformational training covering topics such as basic business skills, budgeting, leadership, communication, and civic responsibility. And if fostering social entrepreneurship leads to economic diversification, this could even result in a shift in the GDP, lowering the share of primary commodities exports.

Based on the above reflections, microfinance is certainly not the instrument for preventing civil war. But it can be considered a helpful contribution to positively impact some of the risk factors outlined by Collier. I admit, this is a rather superficial analysis. But it’s certainly an aspect which deserves more attention by researchers and academics.

[1] Paul Collier is Professor of Economics at Oxford University and the former Director of the World Bank’s Development Research Group (1998-2003). In 2000, he published a paper called “Economic Causes of Civil Conflict and their Implications for Policy”, upon which this post is based.

Image: © Antonio Olmos/HelpAge International 2008

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  1. Nkosi
    April 1, 2010 at 10:27 am

    Diaspora: Countries with large diasporas in wealthy countries bear a higher risk than countries with small diasporas (36% vs. 6%). Diasporas harbor rather romanticized attachments to their group of origin, they are much richer than the people in their country of origin and can therefore afford to finance vengeance, and they do not suffer any of the awful consequences of renewed conflict as they don’t live in the origin country.

    I find that point interesting even though I don’t agree with it. If there are examples then I might take it but at the moment, its a bit difficult for me to include that point on my risk factors. The main cause of conflict are the means of production and the main ones are land, resources i.e. minerals. People who tend to finance vengence or restlessness are not natives of a certain country, these are countries like USA who tend to want to control the world. I might be wrong but countries that want to dictate their foreign policies on others are the ones that start conflicts. Colonial masters who realised that there is human rights after they were kicked from the nationed they had inslaved are the ones that finance restlessness. I doubt if the number os diasprians can be included in that list, I am open to any opinions.


    • April 6, 2010 at 10:51 pm

      Dear Nkosi,

      Thanks for your feedback. I think you make a valid point, and I partially agree with you. I also believe that the struggle over land and its resources is a main driver in conflicts. I also agree that many of today’s conflicts are fuelled by interested “third parties” with various objectives, such as territorial dominance, access to resources, etc. But there’s many conflicts which don’t fall under this category, e.g. Northern Ireland, Sri Lanka, or Colombia.

      Further, “diaspora” is a wide term. Most often, there are diasporas of different ethnic, social, or religious backgrounds but from the same home country. And often these are from parties which are fighting each other in the home country. Also, I believe that diasporas can have both positive and negative effects on the conflicts in their home countries. In some cases, such as parts of the Irish diaspora in the US, their roles have even shifted from initially fuelling the conflict by funding the IRA to a later support of the peace process. In other cases you certainly have diaspora groups which support rebel groups in the country of origin while other groups support peace building initiatives. While I’m no expert on that topic and also have not done much research, I would argue that these settings were given in the case of Sri Lanka and the Balkans.

      And I believe that this is what Collier points out. Not all countries/peoples with large diasporas in wealthy countries end up in violent conflict – a powerful example which comes to my mind for that is Tibet. Nevertheless, the potential for conflict is higher in cases where remittances could end up in the hands of parties which would use them for war instead of peacebuilding, rather than in cases where there are no flows of financial support from diasporas.

      Many thanks again for your input…happy to discuss further.

      Best regards,

  2. Tatjana
    April 8, 2010 at 12:56 am

    Dear Roberto,

    I read with great interest your blog posting, and your analysis of the link between micro-credits and conflict prevention.

    I wrote a report some time ago touching on this issue (and using Collier as one of the sources) regarding economics and armed conflict. More then ethical, historical or social grievances, countries who have access to natural resources are most likely to suffer from conflict, with rare eceptions such as Norway (petrol), Chile (Copper) and Botswana (diamonds). A lack of economic opportunities, institutional mis-management, corruption, little access to education, and authoritarian regimes are other factors which cannot be ignored when discussing conflict.

    If we stay in purely economical grounds, micro-credits provide economic opportunities which can alleviate to a certain extent poverty, and most importantly promote social entrepreneurship. I do agree that micro-credits can also eliminate factors of dependence, whether is is on disapora or the state. Most importantly, they provide an economic opportunity, and allow the development of certain industry sectors. By targeting these issues, micro-credits, as all economic tools can play a part as a conflict reduction instrument.

    Nonetheless, you have to take into account the business environment, and the management of this, and the economy by the state and institutions. If institutions are weak, corrupt, and mis-managed, this creates a negative environment for business growth and investment. Therefore the main issues remain if they are not tackled from the core, and the benefits of micro-financing may only be short-term. Micro-credits can have much more impact at reducing the risk of conflict in a small-scale geographical zone (ex. within a community) as it may provide economic and educational opportunities within that particular disadvanatged community, but at a national level, it is one of the many instruments which can be used to prevent the causes of conflict, but is not a solution in itself.

    I look forward to continue reading your blog when you update.

    • April 8, 2010 at 8:40 am

      Dear Tatjana,

      Many thanks for your feedback. In your last paragraph you mentioned the state and institutions. I fully agree with that. I did not mention it in my post, but for microfinance to work effectively, it needs a regulatory and institutional environment which favors its evolution and reduces risks that MFI’s could face. I also agree that where MFI’s can have the most valuable positive impact is on local (small-scale) communities.

      Best regards,

  3. October 12, 2010 at 4:42 pm

    Hi Roberto,

    The relationship between poverty, those disenfranchised and risk of conflict is a part of our founding paper on People-Centered Economic Development.

    As a social enterprise we focus on ‘soft power’ development strategies for communities at risk. It began in Russia in the wake of their 1998 economic collapse and continued in Crimea and then Ukraine as a whole.

    From the link below you will find links to an interview and proposal on Crimea and the P-CED synopsis.


  1. April 12, 2010 at 11:02 am
  2. May 6, 2010 at 1:14 am

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