International Finance: The Politics of Post-Conflict Financial Assistance

A Paper Presented to

Instructor Brian C. Ventura

Division of Social Sciences

College of Arts and Sciences

University of the Philippines Visayas

In Partial Fulfillment

of the Requirements for Political Science 183

(Political Economy)

Amiel Ryan A. Rapista

December 2017
 I. Introduction

Political Economy of International Finance

International finance stands as a major force in integrating the modern world economy. Since time

immemorial, private capital has sustained the international economy in the form of loans and portfolio investment

such as stocks and bonds (Gilpin 1987). In a more contemporary era, foreign direct investment by multinational

corporations has improved these traditional means of capital flow. Also, governments and international

organizations have also become important sources of capital through the making of loans and especially the giving

of official aid, in particular to less developed states.

As the focus of this study, international finance has given significant role in the development of international

aid. In international relations, international aid or foreign aid is a voluntary transfer of resources from one state to

another state (Lancaster and Dusen 2005). This can also be classified through financial assistance.

The main focus of this paper is to look on the role of international finance in the post-conflict states. This

would examine the politics of post-conflict states with the financial assistance provided by states or governments,

international financial institutions, private or international organizations, or by private banks. South Korea and East

Timor were used as the case studies in order to answer the research problem.

The Marshall Plan

The history of international aid could also be traced back since the emergence of the Marshall plan.

The Marshall Plan was an American initiative to aid Western Europe. This is an economic assistance to help rebuild

Western European economies after the World War II (Woods 1987). The goals of the United States were to rebuild

devastated regions, remove trade barriers, and modernize industry. In simple words, US would like to make Europe

wealthy again, and prevent the spread of Communism (Hogan 1987). Furthermore, the Marshall Plan required a

decreasing of interstate barriers, drop some of many regulations, and encouraged an increase in productivity and

trade union membership, as well as the adoption of modern business procedures. There is this phrase "equivalent

of the Marshall Plan" which was often used to describe a proposed large-scale economic rescue program or financial

assistance to a devastated state.

International Finance in the Financial Systems of States

International aid may also serve other functions in the financial systems of post-conflict states. For instance,

it may be given as a signal of diplomatic approval, or to strengthen a military ally. It can also be a reward for

a government for a behavior desired by the donor state, and to extend the state’s cultural influence. It may also

provide infrastructure needed by the state for resource abstraction from the recipient state.

Humanitarian and philanthropic purposes are also at least partly responsible for the giving of the financial assistance

(Lancaster and Dusen 2005). Foreign aid through financial assistance may also be given by states or governments,

private or international organizations, international financial institutions, or private banks (Asian Development Bank

2010). Also, there are Financial or foreign aids that are in the form of gifts by private individuals or organizations.

This may be called "private giving" which is generally managed by charities or philanthropic organizations who set

them and then channel these to the beneficiary state (Noland 2010).

Specifically, according to Branczik (2004), international finance through financial aid by doing humanitarian

and development assistance would reduce global poverty and improving people’s living conditions and standards .It

can also support sustainable economic, social and institutional development and help promote regional cooperation

and integration.

Assistance to Post-Conflict States

Furthermore, Branczik also stressed that financial assistance provide special policies and instruments in

place to assist countries as they emerge from conflict (Branczik 2004). This can be achieved through humanitarian

aid by assisting people who have been displaced, prevent the spread of conflict, support relief work, and prepare for

rehabilitation. Also, developmental assistance was mentioned to reconstruct a country's infrastructure, institutions,

and economy. Humanitarian and developmental assistance are often key part of the peace accord in the aftermath

of war.
 II. Role of the International Finance in Post-Conflict States

Conflicts especially by war have been in the global arena since time immemorial (Bhargava 2006). There

were deliberate efforts in order to address and prevent these conflicts. But some conflicts are inevitable. Thus,

assistance were made to help these conflicted areas to recover.

According to Panic (2008), all internal conflicts, especially civil wars, involve serious costs: human, social

and material. As protracted internal conflicts have become more common and more deadly, the impact on civilians

and the states has multiplied. Especially post-cold war conflicts have caused over millions of casualties and

devastations to different states. That is why international finance has the biggest role in helping these conflicted

areas to recover from the damages and this is mainly through financial assistance.

According to World Bank (2014), under the International Development Association, states qualify as post-

conflict states if it is that state has suffered from a severe and long-standing conflict. It can also be a state that has

experienced a short but highly intensive conflict or a newly sovereign state that has emerged through the violent

break-up of a former entity (World Bank 2014).

States emerging from conflict have suffered violence to their population and damage to their economic and

social capital. These conflicts often lead to unsustainable financial and economic imbalances. Conflict-affected states

need substantial support for economic and social recovery, in parallel with the continued provision of humanitarian

and developmental assistance to meet urgent and long-term needs (World Bank and IMF 2001). Thus, international

finance through financial assistance has important roles in many post-conflict recovery efforts in supporting the

political and security framework required for humanitarian, reconstruction and development aid to be effective.

There are certain policies and instruments that were used by states and governments, International

Financial Institutions, International organization, and private banks, in order to assist post-conflict states. For

instance, the World Bank and the International Monetary Fund have enhanced their policies and instruments to

better provide financial assistance to these conflicted areas. According to their report in 2001, a policy for

partnership recovery stresses the role of United Nations in recovery efforts. Effective UN peacekeeping operations

have provided the stability and confidence necessary to begin the process of demobilization and reintegration. UN
agencies sometimes are the only substantial international presence on the ground during and in the immediate

aftermath of conflict.

Furthermore, the role of the World Bank and IMF are to help the states restore macroeconomic stability

and the basis for sustainable growth, and to support economic and social recovery and sustainable development

through financial support and policy advice, with particular attention to human security and to the needs of war-

affected populations. Thus, the World Bank and the International Monetary Fund had significant roles in providing

financial assistance to South Korea after the Korean War, and East Timor after its longstanding conflict since the

Portuguese Timor era and the 1999 East Timorese Crisis. Along with the World Bank and IMF, there are other

financial aid coming from other units which were identified in the two cases below.

III. Case Studies

Korean War

On June 25, 1950, the Korean War started when officers from the North Korean People's Army poured over

the 38th parallel, the limit between the Soviet-backed Democratic People's Republic of Korea toward the north and

the pro-Western Republic of Korea toward the south. This attack was the main military activity of the Cold War. By

July, American troops had entered the war for South Korea's sake. Then, American authorities worked tensely to

form some kind of truce with the North Koreans. At long last, in July 1953, the Korean War arrived at an end. Taking

all things together, millions warriors and regular people lost their lives amid the war (Korean War 2009). At the end

of the imperial Japanese rule, the division of Korea took place- the North Korea and the South Korea. The division of

Korea amongst North and South Korea was the after effect of the Allied triumph in World War II in 1945, concluding

the Empire of Japan's 35-year run of Korea. The United States and the Soviet Union involved the nation, with the

limit between their zones of control along the 38th parallel (Appleman 1998). Moreover, with the onset of the Cold

War, arrangements between the United States and the Soviet Union neglected to prompt an independent, unified

Korea. There is the foundation of the Republic of Korea in South Korea, which was instantly followed by the

establishment of the Democratic People's Republic of Korea in North Korea. The United States upheld the South,
and the Soviet Union bolstered the North, and every administration guaranteed sovereignty over the entire Korean

peninsula. Thus, somehow leading to the factors following the Korean War.

United States Financial Assistance to South Korea

According to a number of articles, it is the United States which have been consistent in providing financial

aid to South Korea after the Korean War (Whyte 2015). Thus, South Korea became a model for United States Foreign

Assistance. South Korea also made its own financial aiding system because of its progressive economic development

with the help of United States. The financial assistance through aid was essential for the country's recovery from the

Korean War in the 1950s and to economic growth in the 1960s because it the state from having to devote scarce

foreign exchange to the import of goods and services (Hadar 1990). It also freed South Korea from the burden of

substantial international debts through the initial phase of economic growth and enabled the government to allocate

credit in accordance with planning goals. From 1953 to 1974, South Korea received around $4 billion US dollars of

grant aid. About US$3 billion was received and utilized before 1968, forming an average of 60 percent of all

investment in South Korea that time (Hadar 1990). During the 1966-1974 period, foreign assistance constituted

about 4.5 percent of Gross National Product and less than 20 percent of all investment (Hadar 1990). Before 1965

the United States was the largest single aid contributor in South Korea.

American economic investment and humanitarian aid produced considerable surpluses by helping to build

the foundation for the economic transformation of South Korea. U.S. foreign assistance not only helped South

Korea’s transformation into America’s trading partner but also it has made South Korea itself a donor of foreign

assistance (Lee 2017). United States assistance concluded in the early 1970s, from which time South Korea had to

meet its need for capital investment on the competitive international market and, increasingly, from domestic

accounts. The government and the private industry received funds from the World Bank and other foreign

government agencies.
Portuguese Timor era and 1999 East Timorese Crisis

From 1702 to 1975, Portuguese Timor was the name of East Timor when it was under Portuguese

control over 270 years. Throughout the years, the Dutch East Indies and the Portugal decided to share in the island

of East Timor (West 2009). This may be traced on 1515 when the Portuguese arrived in the East Timor. They the first

Europeans to step in the soils of East Timor. It was later on that the Dominican friars established a settlement on the

island in 1556. They declared the territory was a Portuguese colony in 1702. A coup happened in 1974. Because of

this, political parties emerged in a conflict. One political party is the Timorese Democratic Union (UDT). It was

committed to preserving East Timor as a protectorate of Portugal. It also supports for the independence of East

Timor as an autonomous state (Dunn 1996). The other political party is the Timorese Popular Democratic

Association. It emerged in advocating East Timor's integration with Indonesia. This is because of the concerns that

an independent East Timor would be economically weak and vulnerable separated from Indonesia (Dunn 1996). The

dispute between the Timorese parties, gave intensification to an armed conflict. The conflict involved the

participation of members of the police and Timorese soldiers of the Portuguese Army. Following the conflict was the

beginning of a Lisbon-instigated decolonization process in 1975. East Timor was invaded by Indonesia. It was

the Indonesian Armed Forces who launch an invasion and build a settlement in the island of East Timor. With this,

Indonesia formally annexed East Timor. They renamed it Timor Timur and they also declared it as the 27th province

in Indonesia. However, the invasion and subsequent annexation was not acknowledged by the United Nations (UN).

Indonesia’s claim and as such Portuguese Timor existed de jure until a UN administration took over in 1999(Dunn

1996).

In addition, in 1999, the East Timorese crisis began with the occurrences by anti-independence militants on

the civilians (Dunn 1996). It then expanded to a general violence throughout the country. Indonesia and Portugal

proclaimed on 1999 that a vote would be held allowing the people of East Timor to choose. The options were

between the autonomy plan and the independence of East Timor. The violence erupted after a majority of

eligible East Timorese voters chose independence from Indonesia (Dunn 1996). Because of the conflict, the United

Nations Mission in East Timor (UNAMET) was established by Security Council (United Nations Security Council 1999).

Its mandate was to organize and conduct a popular consultation on the basis of a direct, secret and universal ballot,
to ascertain whether the East Timorese people accept the proposed constitutional framework providing for a special

autonomy for East Timor within the unitary Republic of Indonesia or reject the proposed special autonomy for East

Timor, leading to East Timor’s parting from Indonesia, in accordance with the General Agreement and to permit the

Secretary-General to emancipate his responsibility under the Security Agreement.

Because of the on-going conflict, International Force for East Timor (INTERFET) a UN-authorized force, also

emerged to establish peace in the country. The INTERFET comprises mainly of the Australian Defense

Force personnel who were positioned to East Timor in order to establish and maintain peace (UN News Center 2002).

It was also created in accordance with United Nations resolutions to address the humanitarian and security crisis

which happened in East Timor (UN News Center 2002). At the end of the armed conflict on 1999, the United Nations

Transitional Administration in East Timor or the UNTAET was established and settled in East Timor. The UNTAET

governed East Timor for two years. After that, the rule of the state was turned over to the Government of East Timor.

Thus, independence was declared on 2002 (UN News Center 2002).

Economic Recovery in East Timor

After East Timor’s independence, it became a post-conflict fragile state (Benner 2015). Timor-Leste has

made considerable progress in the past years (Australian Government n.d.). It has recently enjoyed a fast-growing

economy and its longest period of stability since its independence. Human development indicators continue to

improve. The revenues are also narrowly based on the economy of oil and gas, and the rate of population growth is

high.

According to the Department of Foreign Affairs and Trade of East Timor, the main actor for the state’s

development was Australia (Australian Government n.d.). Australia had shown its strong interest in a prosperous

and stable East Timor. This is was mainly because geographically, Australia and Timor-Leste are close neighbors,

with a shared history and strong people-to-people links. Since Timor-Leste's independence in 2002, Australia

became its largest development partner. In order to maintain this relationship, Australia–Timor-Leste Strategic

Planning Agreement for Development was created. It articulates the shared commitment of Australia to achieving

Timor-Leste's development goals.

 According to Official Development Assistance (ODA), in 2002, Timor-Leste’s national budget includes 75

percent development assistance or financial assistance. But as time goes by, development assistance is becoming

a smaller proportion of the state’s national budget. Based on its Australia–Timor-Leste Strategic Planning

Agreement for Development, Australia is focusing on assisting Timor-Leste to leverage its own resources and

surplus to develop its economy and eradicate poverty. Australia as stated in their agreement that it will continue

to support a range of sectors in East Timor in order to address constraints to the country's critical development

needs.

Specifically, the Australia–Timor-Leste Strategic Planning Agreement for Development aims for three objectives-

improve livelihoods, enhance human development, and strengthen governance and institutions. Thus, a sample

allocation of the financial assistance was reported in the results from 2015 to 2016. Below is the overview of

Australia's aid program to Timor-Leste from 2015-2016:

a. Supported the Ministry of Education to distribute new curriculum materials to 94 per cent of remote

primary schools and 100 per cent of remote preschools.

b. Helped nearly 40,000 people gain skills through community-led infrastructure projects.

c. Completed the first national study into the prevalence and perpetration of gender-based violence and

provided more than 1,100 new female survivors of violence with access to support services and legal

aid.

d. Through the Market Development Facility, created more than $450,000 in additional income for 2,950

farmers and leveraged over $1.8 million in additional private investment.

e. Helped the Prime Minister's Office to negotiate and agree program structures with 23 ministries and

agencies, against which budgets have been allocated in 2017.

f. Provided 21,775 people with improved access to clean water and hygiene behaviour change programs.
 g. Continued to help the Timorese Government improve its rural road network. Since 2012, Australia

helped rehabilitate more than 130 kilometres of roads, maintain an additional 375 kilometres and

generate more than half a million days in employment for rural communities.

h. Supported the International Finance Corporation to improve business licensing processes, and the time

taken to set up a business was reduced from 90 to 9 days.

With the results mentioned above, Australia is still intensifying its focus on improving nutrition, particularly

for women and children. Lastly, Australia implemented a cross-sectoral approach on nutrition. It believes that it

will develop while encompassing agriculture, health, education, food security and water and sanitation.

IV. Analysis

International finance is a major force in integrating the modern world economy. It has a significant role in the

politics of post-conflict financial assistance. This financial assistance is supported by financial aid or foreign aid from

states or governments, private or international organizations, international financial institutions, or private banks.

Specifically, states emerging from conflict have suffered violence to their population and damage to their

economic and social capital. These conflicts often lead to unsustainable financial and economic imbalances. Conflict-

affected states need substantial support for economic and social recovery. Thus, financial assistance through

financial or foreign aid is provided.

After the Korean War, it is largely the United States which provided the financial aid for South Korea.

Because of this, South Korea was able to modernize and industrialize. It freed South Korea from the burden of heavy

international debts during the initial phase of growth and enabled the government to allocate credit in accordance

with planning goals. U.S. foreign assistance not only helped South Korea’s transformation into America’s trading

partner but also it has made South Korea itself a donor of foreign assistance.

While after East Timor’s independence, it became a post-conflict fragile state. The state suffered since the

Portuguese Timor era until the taking over of Indonesia which caused the 1999 East Timorese crisis . But the with

the immense help from Australia, it has recently enjoyed a fast-growing economy and its longest period of
stability. Australia has been its largest development partner since its independence. Revenues are narrowly based

on oil and gas and the rate of population growth became high.

In this paper, it was shown that is mainly the states or countries that are capable enough to finance other

states after emerging from a conflict. This can be true as we traced back from the history of international aid.

Specifically, the Marshal Plan. It is the initiative of the United States to aid Western Europe in order to rebuild

their economies. This can also be the state’s interests - financial assistance may be given as a signal

of diplomatic approval, or to strengthen a military ally. It can also be a reward for a government for a behavior

desired by the donor state, and to extend the state’s cultural influence.

V. Conclusion

International finance has given significant role in the development of international aid. Since the emergence

of the Marshall Plan, financial aid gained its reputation. Perhaps, there is this phrase "equivalent of the Marshall

Plan" which was often used to describe a proposed large-scale economic rescue program or financial assistance to a

post-conflict state.

Also, international finance through financial aid by doing humanitarian and development assistance would

reduce global poverty and improving people’s living conditions and standards .It can also support sustainable

economic, social and institutional development and help promote regional cooperation and integration. There is

also a policy for partnership recovery from the World Bank and the IMF that stresses the role of United Nations in

recovery efforts. Effective UN peacekeeping operations have provided the stability and confidence necessary to

begin the process of demobilization and reintegration. UN agencies sometimes are the only substantial international

presence on the ground during and in the immediate aftermath of conflict. This case is true with East Timor’s context.

The International Force for East Timor (INTERFET) was established to maintain peace in the country. It is with the

accordance of United Nations resolutions to address the humanitarian and security crisis.

Furthermore, it is mainly the states or countries that are capable enough to finance other states after

emerging from a conflict. States provide financial assistance in order to help rebuild devastated economies of

other states. These states support the political and security framework required for states in order to materialize

humanitarian aid, reconstruction and development aid. After the Korean War, it is largely the United States which
provided the financial aid for South Korea. While after its independence, Australia has been East Timor’s largest

development partner.

Lastly, after the conflicted areas rebuilt its economy, they tend to also a donor of foreign assistance to other

states that were either underdeveloped or just emerged from conflict. Somehow financial assistance became a cycle

in the international finance.

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