Chatham House Report
This report examines the common economic factors that continue to drive conflict in Iraq, Libya, Syria and Yemen.
It also makes specific recommendations to Western policymakers addressing these types of sub-economies in detail.
Recommendations specific to conflict sub-economy types
Transit areas and borderlands
To varying extents, the conflicts in Iraq, Libya, Syria and Yemen have created internal territorial divisions.
These in-country lines of territorial control have in turn distorted markets and created distinct sub-economies across the fault lines that divide areas controlled by different armed groups.
‘Transit areas’ have risen to prominence as sources of tax revenue (levied on the movement of goods) and arbitrage income (realized from cross-border differences in the prices and availability of goods).
Outside of capital cities, trans-market taxation and arbitrage have turned transit areas into prized assets for armed groups and other conflict economy participants.
In most cases, the economic activity in transit areas falls outside the control of the state.
In some cases, state actors cooperate with the armed groups to take a cut of the profits from these locations, rather than reporting such activity up through the command structure.
Similar informal arbitrage and taxation opportunities are also visible in international border areas – which this report terms ‘borderlands’ – with the difference that neighbouring state actors and their economic systems become engaged.
Transit areas and borderlands are major sites of competitive violence.
Although the conflicts in the region have typically been depicted as ethno-sectarian ortribal in nature, they can alternatively be understood in economic terms, as actors competing for rents along formal orinformal trading routes.
The consequent revenue-generation opportunities often perpetuate the existence of territorial divisions, which further reinforce ethno-sectarian or tribal divisions, with harmful welfare implications for local populations.
Western policymakers should consider the following issues when designing interventions in transit areas and borderlands:
1. External interventions should support the development of local governance structures that have clear mandates and are accountable to local populations.
More equitable and inclusive distribution of state resources – even accepting problems of corruption and accountability – can reduce the pressure on armed groups to use violence.
Yet historically, borderlands have had limited connection to centralized state structures.
Rather than simply subsuming local authorities in borderlands into the state system, the goal should be to develop systems that are appropriate for the operating environment.
Given that service provision often underpins government legitimacy in MENA states, this may mean devolving more authority to local governance structures if the central state is not realistically able to provide services.
2. The development of sustainable local economies can be fostered through reconstruction and development programming.
However, in some cases, it will not be possible to participate in aid programming without legitimizing and strengthening conflict actors.
Where regimes are hostile and there remains political pressure to ‘do something’, external actors must develop a solid understanding of the local operating environment in order to mitigate the risk of funding being diverted to unintended beneficiaries.
Efforts to address conflict economy dynamics in borderlands need to be broadened to target the many root causes of smuggling, which are often linked to socio-economic inequalities across identity groups.
In borderlands, Western governments could encourage negotiations with neighbouring countries to enable the free flow of goods produced in these areas. This would also encourage local production activity.
3. Negotiated zones of control need to be agreed by a wide array of actors.
In eastern Yemen, a robust system of informal taxation emerged at the outset of the war, allowing for the flow of goods in and out of the area without causing unmanageable price increases.
Since 2017, however, growing regional interest in the area has disrupted this arrangement, and at times has seen the eastern border cut off entirely.
In southern Libya, the proliferation of checkpoints used by armed groups as sources of financing has contributed to goods shortages and high inflation.
Brokering reciprocal taxation agreements between communities in these areas could help to mitigate the negative impacts of price inflation on local populations, which in turn could mitigate some security concerns (i.e., over the protection of populations, property and markets).
4. Anti-smuggling measures should focus on disrupting flows of goods that are directly related to conflict, such as arms and ammunition, rather than on preventing trade in basic goods essential for economic survival.
Smugglers operated in the borderlands of Iraq, Libya, Syria and Yemen prior to the outbreak of hostilities, but their activities have intensified and diversified as the conflicts have evolved.
It should be noted that not all forms of smuggling are directly connected to violence, and consequently not all of these should be targeted.
Iraq, Libya, Syria and Yemen each have regions where oil wealth is situated. However, control over the physical territory where oil infrastructure is located does not necessarily translate into taking over oil revenue streams.
There are significant barriers to entry in the oil industry, with a complex supply chain that requires infrastructure, expertise and market access in order to effectively monetize geographical control.
Selling crude oil internationally generally requires market access that is conditional on international legitimacy – though there are no such obstacles to selling refined fuels.
The case of Islamic State of Iraq and Syria (ISIS), prior to its wide-scale loss of territory as a result of the international anti-ISIS military campaign, is instructive.
Because ISIS controlled only part of the oil supply chain in Syria, it was forced to cooperate not only with the engineers responsible for operating oil rigs but also with other actors that had access (which ISIS lacked) to refining capacity and tanker fleets.
This scenario provided opportunities for middlemen who were able to negotiate with armed actors on all sides.
On the other hand, when actors control the entire supply chain, as in the Yemeni province of Mareb, they have much greater latitude to operate independently.
In Libya, the international community has prevented sales of crude oil from unrecognized authorities in the east of the country. This has meant that their opponents in Tripoli have continued to receive the revenues from oil sales.
Meanwhile, in Iraq, smuggling routes established to circumvent international sanctions under Saddam Hussein’s regime continue to operate.
These routes provide a source of patronage for those in control of the oil infrastructure in the south of the country, even as the inequities of the centralized system of distribution remain entrenched.
Western policymakers should consider the following issues when designing interventions in oil-rich areas:
1. The West should leverage its power to grant access to international oil markets.
Insisting that only one recognized authority can market oil internationally is perhaps the most significant lever of control that Western actors possess over the conflict economies of the four states.
As a policy tool, this has been particularly effective in preventing oil sales from the east of Libya, though less so in Iraq (where overland smuggling networks are extensive) or in Yemen and Syria (where oil exports are not a factor).
2. Incentive mechanisms should support the redistribution of oil wealth to local communities.
In some oil-rich areas, such as Basra in Iraq, poverty creates a powerful incentive for local communities to divert oil supplies. This in turn supports a local market for protection.
More equitable distribution of wealth would likely reduce calls for federalism and support for separatist agendas.
Western governments could encourage the allocation by the central government of a specific share of oil revenues to investment projects in the areas of production, in a similar fashion to the rule established for the Kurdistan Regional Government in Iraq.
This could be based on the size of the population or on socio-economic indicators.
3. Interventions should support deeper engagement between local populations and oil industry players (both public- and private-sector operators).
In Libya’s south, the population has limited access to skilled employment within the sector and is reduced to competing for rents by operating protection rackets that target oil installations.
Oil companies (both national and international) should be incentivized to invest in local communities (e.g. via training programmes for engineers).
This should also include efforts to address the environmental impacts of production activities, such as the pollution of underground aquifers, which negatively impact water-scarce areas.
Such approaches may render oil operators less susceptible to strikes and blockades by local populations.
4. Policymakers must understand who profits from oil and fuel smuggling – and the supply chain mechanisms through which those profits are achieved – before attempting to disrupt such activity.
Every link in the supply chain contributes to the conversion of crude oil into money, so disrupting even one upstream link can have a substantial impact on downstream communities.
Policymakers need to design comprehensive strategies that address the entire supply chain rather than just one link.
Through different forms of engagement and intervention – security, political and humanitarian – Western policies play a key role in shaping the dynamics in the conflict sub-economies of Iraq, Libya, Syria and Yemen.
Such interventions present many pitfalls, but there are also opportunities to help reduce violence and insecurity – though a basic requirement is that local dynamics are taken into account appropriately.
Intervention targeting specific conflict sub-economies can increase policy impact, but this requires that Western policymakers invest in developing their understanding of local networks and local economies.
Without such an understanding, there is a substantial risk of unintended consequences causing unanticipated harms.
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The authors: Tim Eaton, Christine Cheng, Renad Mansour, Peter Salisbury, Jihad Yazigi and Lina Khatib.