Unsettling the Peace? The Role of Illicit Economies in Peace Processes.

∗
Jasmine Bhatia

Abstract
The long-term legacies of civil war economies—often characterized by widespread illicit economic activities and
the proliferation of criminal and quasi-criminal networks—pose significant challenges to achieving sustainable
postwar settlements. This discussion paper surveys the current literature on illicit economies and peace processes
and identifies dominant strategies used to address war economies. While there is no clear consensus on which
approach is most likely to succeed, the literature suggests that peace agreements that fail to sufficiently account
for how illicit economies shape national and subnational political settlements are more likely to produce unstable
and highly criminalized postwar regimes in the medium to long-run. I conclude with some reflections on future
research agendas and potential policy implications that merit further exploration.

Introduction

In countries emerging from war, how do illicit economies impact the likelihood and character of peace settlements?

Are actors profiting from these economies likely to view the prospect of peace as threatening to their interests, and

act as spoilers? Or can illicit financial flows be used to incentivise violent actors to lay down arms? Should illicit

economies be addressed as part of the peace process, and if so, how and when? How do the interests of international

actors—particularly with respect to global drug policies—shape the peace process?

This paper investigates the impact of illicit economies in shaping the peace processes in contemporary civil wars.

I begin with a brief overview of literature highlighting the characteristics of war economies, the link between illicit

economies and conflict duration, and the challenges war economies pose for achieving long-lasting peace settlements.

I survey a number of transformation strategies used in past peace processes, from the criminalization of insurgent

economic networks to the use of financial incentives to lure rebels to the peace process. While there is no clear

consensus on which strategies are most effective, the literature suggests that neglecting the economic dimension of

conflict in peace processes is risky and potentially destabilizing in the long-run. Instead, stakeholders participating

in peace processes should recognize how illicit economies shape national and subnational political settlements, often

making positive contributions to the economic resilience and stability of marginalized communities. Policymakers

should take account of these realities when drafting formal agreements. Finally, I conclude by reflecting on further

avenues of research and policy implications that could yield useful insights on how illicit economies should be

managed in peace processes.

do not circulate or cite without permission. Comments are welcome and can be sent to [email protected].

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 Legacies of War Economies: A Threat to Sustainable Postwar

Settlements?

From the mid-1990s, civil war literature has increasingly drawn greater attention to the economic dimensions

of conflict (Berdal and Keen, 1997; Collier and Hoeffler, 1998, 2004; Ross, 2004; Keen, 2005; Snyder, 2006). Case

studies conducted by scholars such as Reno (1999) and Olsson and Fors (2004) have documented numerous examples

of looting, extortion, and other forms of predatory economic activity against civilians by all parties to the conflict,

including government soldiers and rebels alike. This body of work has emphasized the economic motivations of

armed combatants, with opportunities for self-enrichment being the primary motivator for participating in violent

conflict.

Early iterations of this literature have come under criticism for being too dismissive of other socio-political

drivers of civil war, including collective grievances, inequalities, and ideological beliefs (Cederman et al., 2013;

Ballentine and Nitzschke, 2013; Sanı́n and Wood, 2014). While scholars have generally moved beyond theoretical

models of civil war that attribute conflict to economic motives alone, a key insight from this literature relevant to

the discussion on peace settlements argues that, once unleashed, civil wars generate unique political and economic

conditions that often prove tenacious and difficult to reverse (Spear, 2006). These conditions tend to linger beyond

the conclusion of formal peace agreements, posing significant challenges for those hoping to craft sustainable postwar

settlements.

Characteristics of war economies

Ballentine and Nitzschke (2013) have identified five properties common to war economies: the destruction or

circumvention of the formal economy, with increasingly blurred distinctions between formal, informal, and criminal

activities; widespread predatory behavior by armed combatants, such as pillaging, extortion, and violence against

civilians to acquire control over lucrative assets; highly decentralized and privatized economies, both in terms of

production and exchange; armed group exploitation of licit and illicit trading networks; and finally the prevalence of

cross-border trading networks, often based on kinship or ethnic ties, dominated by individuals with vested interests

in the continuation of conflict and instability. Cockayne and Lupel (2011) further observe that the political and

economic importance of borderlands tends to expand during wartime relative to urban centers, due to the presence

of licit and illicit cross-territorial networks that combatants depend on for funding and external access. Where

non-state armed groups draw funding from these networks, they may be disincentivised from participating in peace

negotiations due to their access to a reliable resource base that sustains their capacity for armed violence (Cornell,

2007). War economies also present opportunities for individual combatants to amass significant personal fortunes;

such individuals may see little economic benefit in supporting a transition to peace (Spear, 2006).

Nonetheless, there are indications that not all aspects of war economies are equally threatening to peace pro-

cesses. Goodhand (2004) has disaggregated conflict economies into three typologies: coping economies, shadow

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economies, and combat economies. Coping economies describe how economically vulnerable individuals and com-

munities participate in illicit economies out of economic necessity, particularly as conflict destroys their assets and

closes off alternatives. In this case, revenues from illicit economies have positive effects on their economic resilience

and livelihoods. Rather than fueling conflict, access to steady informal incomes might raise the opportunity-cost

of participating in the conflict and make some individuals otherwise susceptible to violence less likely to join.1 For

these sectors of the economy, the cessation of hostilities following a peace settlement may mitigate the problem, as

sustained peace is likely to generate more economic alternatives in the medium-to long-term, allowing communities

to gradually move beyond coping activities (Ballentine and Nitzschke, 2013).

Shadow and combat economies pose different challenges for peace processes and postwar statebuilding. Shadow

economies refer to cases where the economic activities of the state are captured by criminal groups, and combat

economies refer to economic transactions that directly facilitate war, including those dominated by state security

services, rebel groups, and other conflict entrepreneurs (Ballentine and Nitzschke, 2013). Illicit networks established

and dominated by armed combatants in wartime readily transform into criminal economies in peacetime, potentially

diverting resources away from the state and empowering actors with little stake in establishing stable political

settlements or supporting effective rule of law (Wennmann, 2005; Ballentine and Nitzschke, 2013). Past experience

suggests that these factors increase the risk of conflict recurrence: one comparative study of sixteen peace processes

found that the continuation of these networks and the ongoing proliferation of armed actors were major reasons

for failure (Nitzschke and Studdard, 2005). And yet, peace settlements that ignore the reality of political authority

established through conflict and exclude powerful elites with de-facto political and economic power are also likely to

fail (Wennmann, 2014; Cockayne and Lupel, 2011). Wennmann (2005) expresses the dilemma facing stakeholders

as follows: “How do you manage non-state actors that, as a result of their parallel markets, are more powerful than

the state or the donor community?”

Grappling with Illicit Economies in Peace Processes: Dominant

Approaches

Governments and donors engaged in peace processes have opted for a number of strategies for addressing the

potentially destabilizing effects of war economies. Below, I describe three common strategies: co-optation, crimi-

nalization, and neglect. I briefly explore the benefits and risks of each.

Before proceeding, it should be emphasized that these strategies are not mutually exclusive; they may each be

used at different stages of the process, and/or may be applied simultaneously to different segments of the illicit
1 The opportunity-cost hypothesis — that stronger employment prospects for young men are likely to have dampening effects on

rebel recruitment — has been challenged by some scholars, who argue that the relationship between unemployment and participation
in violence is more complicated and mediated by a variety of other factors (Berman et al., 2011; Cramer, 2011). Recent studies have
found evidence in favor of a more nuanced version of the argument, which holds that unemployment generates grievances that are in
turn important drivers of violent extremism (Brainard and Chollet, 2007; Gouda and Marktanner, 2018).

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economy. They nevertheless provide a useful framework to explore dominant approaches to addressing challenges

of peacebuilding in these contexts.

Co-optation of Elites and Illicit Networks

One approach utilized during peace processes is to engage dominant non-state powerbrokers by enticing them

with formal positions in a postwar settlement and/or other economic opportunities. These powerbrokers may

include both pro- and anti-government combatants, as well as organized criminal groups. This approach typically

occurs when conflicts have reached long-term stalemates and outright victory is unlikely to be achieved by either

side. Co-optation may be targeted towards individual elites, or be institutional in nature: a common manifestation

of the latter approach is formally integrating non-state militias into the state armed forces or providing them with

some kind of quasi-regulated status as private security companies or community policing units, for example. This

approach has been adopted during peace settlements in numerous conflicts, including Afghanistan, Sudan, and El

Salvador, among others (Giustozzi, 2003; Johnston, 2007; Hartzell and Hoddie, 2003).

The primary advantage of this approach is that it takes account of existing power differentials between the

government and non-state actors, and may prevent difficult confrontations with these parties that the state has

no realistic capacity to control by force. It recognizes that military networks controlled by powerbrokers are a

common mechanism used to extract rents from illicit economies, and reduces the incentives of elites in control of

these networks to oppose the peace process. In some cases, non-state actors have more capacity to provide security,

basic services, and employment in borderland communities than the state; thus formally conferring them with

responsibilities for service provision may avoid the disruption of services to civilians in the immediate aftermath

of a peace agreement (Ballentine and Nitzschke, 2013). However, co-option also risks conferring legitimacy on

unpalatable and abusive warlords and other non-state actors, which may in turn damage the legitimacy of the

state as a whole (Studdard, 2004). Furthermore, co-opting belligerents may facilitate transitions to peace in the

short-term, but may entrench corrupt patronage networks into the formal system, encouraging the proliferation of

what Le Billon (2003) refers to as “spoils politics”. Absent a realistic strategy for improved governance, attempting

to reign in illicit economies by co-opting elites who control them may come at the cost of elite accountability and

have the perverse effect of corrupting the formal system in the long-run.

Criminalization and the Establishment of Control Regimes

Another approach to managing illicit economies involves establishing stronger control regimes over conflict-

specific commodities and conditioning peace processes on the reduction or elimination of cultivation and trafficking

of narcotics and other illicit goods. These control regimes often aim to reduce illicit smuggling of lootable com-

modities associated with conflict: the Kimberly Process Certification Scheme was one such initiative created to

reduce illegal mining and sale of diamonds linked to civil wars in Africa (Paes, 2005). The lifting of international

commodity sanctions may also be contingent on the establishment of stronger legal frameworks to manage com-

modities and the achievement of peace process benchmarks by all parties (Le Billon, 2012). Criminalization and

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forced eradication is also a common approach in countries where illicit drugs are perceived to be funding parties

to the conflict, as evidenced by substantial investments by the international community in counter-narcotics poli-

cies in post-2001 Afghanistan (SIGAR, 2016) and the current peace process in Columbia, where the government’s

negotiating position remains fixated on the end goal of prohibition (Vargas, 2014; Eventon, 2016).

An argument in favor of this approach is that careful and judicious targeting of illicit economies may bring

benefits to peace processes by depriving belligerents of resources and incentivising armed groups to cease hostilities

(Le Billon, 2012). Where parties are highly motivated to reach a peace agreement, donor conditionality may also

provide incentives to pass positive governance reforms that would be more difficult to achieve once a settlement

has passed. In many cases, however, an excessive focus on interdiction has been found to be counterproductive

to peacebuilding. As Kalyvas (2015) has argued, linking insurgency with crime is often a convenient narrative

for governments, as it underplays political grievances and assigns blame for the conflict to those motivated by

opportunism. However, casting insurgents as criminals may foreclose political solutions that are necessary for

long-term stability (Ballentine and Nitzschke, 2013). Studdard (2004) has likened this approach to liddism, or

attempting to suppress symptoms issues without addressing the root causes of crime and violence. Goodhand

(2008) observes that this reductionist approach ignores the complexity of subnational political settlements, and fails

to recognize that illicit economies have beneficially contributed to the stability and economic viability of these many

of these settlements, particularly in marginalized borderland communities. Policies aimed at rapidly disrupting or

dismantling illicit economies may therefore increase economic hardships in these communities, undermining support

for the government, the donor community, and the peace process as a whole.

Neglect

A third strategy is to limit the scope of the peace process to addressing high level political and security issues,

while paying comparatively little attention to organized crime and illicit economies. Policymakers may see several

virtues in this approach. It may simplify and accelerate peace processes considerably, and avoids conditioning

peace agreements on conditions or reforms that will, in practice, be difficult or impossible to enforce. Unlike

more confrontational approaches towards illicit economies, it also recognizes that some informal activities can be

beneficial to statebuilding and reconstruction (Studdard, 2004). It is pragmatic about the fact that, contrary to the

assumption that illicit economies are driven by conflict, the outbreak of peace may in fact create new opportunities

for illicit networks to flourish. In Myanmar, for example, poppy cultivation has ballooned in certain border areas

that have become more stable in recent years (Meehan, 2017). Finally, some studies suggest that incomes from

illicit economies may be put to positive use by helping to buy off belligerents, facilitating negotiations and helping

to solidify peace agreements (Jonsson et al., 2016).

While this strategy may accelerate negotiations and remove obstacles to reaching a peace agreement, focusing

on resolving national-level political issues and ignoring local-level political economic issues is also fraught with risk.

Failing to address particularly exploitative or violent aspects of war economies can result in the continuance of

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micro-level violence and the strengthening of local militias once formal peace agreements are concluded. In Haiti,

armed combatants left to their own devices reconfigured themselves into violent criminal gangs; similar dynamics

have been observed in the Balkans (Hansen, 2014). Kalyvas (2015), Debos (2011), and Newman and Keller (2007)

have each cautioned against drawing dichotomous distinctions between wartime and peacetime; indeed, the influence

of armed actors and levels of physical violence and exploitation against marginalized communities may continue

at similar rates after the conclusion of a peace agreement. These conditions may constitute a dangerous breeding

ground for future conflicts, placing prospects for long-term stability at risk.

Conclusion: Emerging Findings and Areas for Future Research

This discussion paper contains an overview of key debates on illicit economies and peace processes. I identified three

predominant strategies — co-option, criminalization, and neglect — that policymakers commonly use during peace

processes to address the perverse effects of war economies, along with the benefits and risks of each. At present,

there is no clear consensus on which strategies are most likely to succeed. A theme common across the literature

is that peace agreements frequently fail to address illicit economies adequately, if at all, and that more resources

should be devoted to understanding these dynamics by stakeholders engaged in peacebuilding. Nonetheless, a few

general themes can be observed of relevance to policymakers.

On the imposition of control regimes, most studies concur that nuanced strategies have the best chance to

improve prospects for peace. Scholars are generally skeptical about the usefulness of widespread criminalization of

the informal economy, and argue in favor of a sector-by-sector approach. An increasingly significant body of evidence

suggests that the illicit drug economy provides positive economic benefits to marginalized communities, and that

forced eradication policies may be deeply unpopular and potentially destabilizing. Instead, formal agreements that

take account of existing political settlements—and how these are shaped by illicit economies—are more likely to

succeed. Other studies emphasize the importance of developing regionally-focused strategies to avoid transplanting

illicit economies across borders (Studdard, 2004; Nitzschke and Studdard, 2005).

When engaging with insurgents and organized criminal groups, Cockayne (2010) argues in favor of a balanced

approach: dealing pragmatically with the majority of participants in the illicit economy, while ostracizing the most

egregious norm-violators. He acknowledges, however, that distinguishing between these groups can be exceedingly

difficult, and ultimately must be determined on a case-by-case basis. Spear (2006) also recommends differentiating

between individual combatants, and notes that mid-level officers in insurgent groups are often neglected in peace

negotiations, though they often carry the most direct influence over rebel fighters.

Scholars and stakeholders engaged in peacebuilding should move away from state-centric models that consider

illicit economies as a phenomenon limited to the informal sector, and acknowledge that state institutions often have

a symbiotic relationship with illicit economies (Spear, 2006). As Torjesen (2006) has argued, scholars should not

6
only conceptualize peace processes as aimed at reducing the number of fighters and weapons, but consider more

broadly how peace settlements will impact the economy, markets and the functioning of the state.

There is much more to learn about the relationship between peace processes and illicit economies, which future

research agendas in this area could address. First, the vast majority of scholarship in this area have analyzed peace

settlements at a national-level, while meso- and micro-level subnational settlements are comparatively neglected.

Rigorous comparative studies of how illicit economies are affected by local ceasefires—and vice versa—would make

valuable contributions to the literature. Furthermore, how success and failure of illicit economies and peace agree-

ments are defined and measured require more refinement. At present, most studies measure success in terms of

reductions in insurgent activity or violence; similarly, “success” in managing illicit economies is often defined ac-

cording to narrow criteria such as reductions in levels of crop cultivation. These indicators often mask underlying

realities of the political economy, and say little about how these variables affect political dynamics that might

support or undermine peace settlements.

Lastly, we would also benefit from further research on how international interventions might play a negative or

destabilizing role in managing illicit economies. A few studies have shown that peace operations and foreign aid can

become a contributor to fueling war economies, acting as a source of rents which can be co-opted by armed militias

and criminal mafias (Cockayne and Lupel, 2011; Hansen, 2014). As discussed above, pressure from external actors

can compel governments to pass unpopular policies such as forced eradication, potentially undermining prospects

for peace. More systematic research clarifying to what extent these actions contribute to destabilization —and

developing improved policy recommendations so that these negative impacts may be avoided in the future—would

be welcomed.

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