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Working Paper
Finance in Conflict and Reconstruction
The relationship between an economy's financial sector and the occurrence and resolution of conflict may at first sight appear tenuous. Banking systems, financial regulation and currency arrangements do not appear to be relevant in understanding why nations collapse or why people kill each other. However, the linkages between the financial sector and issues of conflict are closer than one might expect. Narrow development—development that fails to reduce poverty and which exacerbates initial inequalities—is an important cause of conflict (but, needless to say, not the only one). Narrow development must be financed—and it is financed in ways that increase poverty and inequality and raise a society's propensity to violent conflict. During conflict, finance (both internal and external) can be decisive in determining who wins, as well as the duration of war. Rebuilding the financial system is important to reconstruction from war, since otherwise private investment is constrained. But ‘post-conflict’ economies generally have weak regulatory authorities, and the financial system may be flooded with unsound loans, leading to economic problems that can endanger economic recovery and therefore peace.