Microfinance as an Instrument for Conflict Prevention?

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.

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Footnotes:
[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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