# **2.3. Security and Public Institutions**

Finally, lack of security has a very harmful impact on public institutions. First, it adversely affects public finances by directly reducing the capacity to raise revenues if the government does not control the country, and raising expenditures on the security sector when insecurity is rampant. Conflict also destroys state assets (direct destruction; erosion due to lack of maintenance; destructive conflict between factions contesting State authority). Second, by demonstrating that the government has lost the monopoly over organized violence, a key function of the Weberian State, lack of security weakens the legitimacy of the State and hence its capacity to deliver (legitimacy tends to make it easier and cheaper for the State to collect revenues and deliver services). Third, crime can become closely linked to corruption (itself a form of criminal activity), with very destructive consequences for development and public finance management. Corruption and other forms of crime can erode the revenue base of the state and thereby its effective functioning. As a consequence of these effects, trust between people and the state is destroyed or is prevented from being rebuilt.

Security-related risks also generate suboptimal ex ante risk mitigation and prevention strategies by public institutions. A classic example is the secrecy around security institutions, often viewed as a necessary working requirement for these institutions, whereas experience in both developed and developing countries indicates otherwise (Roberts, 2007). Policies might also respond in a suboptimal way to a large informal sector, for instance with excessive reliance on trade taxes which are easier to collect than consumption taxes (Emran and Stiglitz, 2005). Anti-corruption strategies also can become counterproductive if excessive controls and untargeted prosecutions lead to paralysis of the State, or if anticorruption is approached by systematically disengaging the State (Khan and Gray, 2006).

Similarly, coping strategies are costly. The imperative of revenue collection can lead to excessive enforcement that further deters private investors. Widespread corruption encourages private deals with corrupt officials. Government policies become oriented excessively toward the short-term.

Unfortunately, the adverse implications of insecurity for development and for public institutions continue, and in some respects may increase, after the end of outright conflict. So-called “legacy” costs of conflict, based on cross-country analysis (see World Bank, 2003a, pp. 19-31), include in particular (i) higher residual military expenditure;<sup>7</sup> (ii) government policies, which on average are negatively affected after conflict; (iii) deterioration of political institutions which takes time to reverse; and (iv) destruction of the revenue apparatus and loss of revenue culture, which tends to persist after conflict. These legacy costs are often associated with constituencies created during the conflict. For instance, higher military expenditure is usually controlled by interest groups of government officials and military commanders that have little incentive to reduce the size of the army. Corruption can also result in the State degenerating into a “mafia state” where the interests of corrupt officials are closely aligned with those of a corrupt private sector. Weakened (possibly autocratic) political institutions have very limited incentives to reform themselves toward a more participatory and citizen-based approach. For instance, Kaufman (2005) notes that the proportion of firms reporting high costs of organized crime in countries with low institutional capacity of the parliament or police is two to four times higher than is reported in countries with high capacity.

> 7 Gupta et al (2002) report that, based on 22 conflict episodes, armed conflict is associated with lower tax revenues, higher government spending on defense, and less macroeconomic stability.

9