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Putting the Pieces Back Together
MIGA’s Work in Restoring Conflict-Affected
and Fragile Economies
 

January 31, 2011—Fully one quarter of the world’s countries are affected by conflict or fragility.

For the citizens of these countries, day-to-day life is exceedingly difficult, as roads, hospitals, and schools are destroyed or in disrepair. At a national level, communications networks and trade links may be unviable; currency is weakened. Institutions are shaky, while dysfunctional financial, government, and legal structures further complicate recovery.

While foreign aid and humanitarian work can provide immediate relief, foreign direct investment (FDI) can have an enduring impact on rebuilding conflict-affected countries while also encouraging spin-off investment.  Research strongly shows that such investment can help make the difference between a country relapsing into more conflict or emerging from fragility on the road to recovery.

Mobilizing FDI into conflict-affected and fragile economies is a strategic priority for MIGA, especially because the ability of private insurers to enter these markets is often limited.  "MIGA’s support to projects in difficult environments can boost investors’ confidence, as well that of partners and lenders," says MIGA Executive Vice President Izumi Kobayashi. "This can make a real difference in whether or not a project goes forward."

For example, MIGA’s support to a Baghdad plant that manufactures the raw material used in beverage bottles was instrumental to making the project a reality, according to a director of the Turkish company that invested in Iraq. Esra Pelitozu of Karo Dis Ticaret ve Sanayi Ltd. observes,  "The fact that the company was seeking a MIGA guarantee helped significantly in negotiations with a number of counterparties—including the machinery manufacturers, government authorities, and raw material suppliers."

Another very recent example of MIGA’s focus on conflict-affected countries is our first guarantee of an investment in Liberia. The investment in a Liberian cultivator that collects and processes non-productive rubber trees for export to European power plants provides a sustainable biomass source, while helping Liberia to rehabilitate Liberia’s rubber industry – which suffered significantly from 15 years of civil conflict. 

In Afghanistan, MIGA has issued more than $80 million in guarantees in support of investments in agribusiness, telecommunications, banking, and services since 2006. One innovative project addresses the need for durable construction materials to aid in the country’s reconstruction through the manufacturing of compressed-earth blocks called GeoBricks. The project provides builders in Afghanistan with a lower cost, higher quality, and more energy-efficient building material.

In Sierra Leone, MIGA currently insures six projects and has signed two contracts with private equity funds planning several small-scale investments in the country. One MIGA-supported project provides the local market with crushed and cubed ice, most of which is sold to local fishmongers and artisanal fishermen who are at sea for days at a time and need ice to preserve their catch.

MIGA’s reinsurance arrangements with public and private counterparts allow the agency to increase capacity to insure projects in conflict-affected countries. Along a similar vein, MIGA can boost other insurers’ willingness or capacity to enter these challenging markets. This is critically important in large-scale infrastructure projects where lenders will insist on the presence of political risk insurance.

Apart from MIGA’s core business of providing political risk insurance to these countries, the agency also seeks to build general awareness of the importance of FDI for conflict-affected and fragile states. MIGA’s 2010 World Investment and Political Risk report looks at the role that political risk perceptions play in influencing investment into conflict-affected and fragile economies. In fact, MIGA held an investor and industry-focused event discussing the report in London in December. Similar discussions will be held in Johannesburg, Vienna, Washington, and Singapore.

In addition, MIGA—in partnership with member-state donors—is also looking at innovative ways to address the gap between the exit of post-conflict official development assistance and the re-emergence of a resilient private sector.

"Our mandate as a development institution sets us apart," notes Kobayashi.  "MIGA’s bottom line differs from that of private providers in that we must be willing to take on risks that the private market won’t bear for the purpose of supporting economic growth and reducing poverty­. Our work in conflict-affected and fragile countries is the clearest example of this."

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