Economic aspects are at the heart of efforts to rebuild war-torn societies and consolidate peace in countries emerging from years of civil war. Yet relatively little attention has focused on these issues in the specialised press. This may reflect inter alia that economists, and the main institutions of economic development and finance, have long been uneasy and ambivalent about focusing directly on complex politico-economic issues and getting involved in messy post-war situations.

The economic literature on war-torn countries often neglects of simply ignores fundamental questions that are either taken for granted, or do not fit into the prevailing paradigm. We first focus on the dynamics underlying today's wartime and post-conflict economies. The ongoing debate on structural adjustment versus peace-building, external assistance and conditionality are discussed. We argue that absolute priority should be given to political stability in the aftermath of civil war, even if this means sub-optimal economic efficiency. The challenges of post-war rebuilding indeed requires taking into account all intertwined variables that may simultaneously interact with the consolidation of peace (e.g. economic, humanitarian, political, historical, religious, ethnic, environmental, etc.) as well as different types of interventions by local, national, regional and international actors.

The objective of our research is to develop a new conceptual framework for the analysis of war-torn economies and to test it in a case study on Guatemala. The framework integrates the following dimensions:

• The political economy of rebuilding in the case of contemporary war-torn countries, i.e. low-income and low-middle-income countries at different stages of democratization.
• The distributional impact of economic policy, notably fiscal and trade reforms. Understanding how key actors perceive post-conflict economic reforms and identify winners and losers from peace is crucial to design alternative or compensatory measures to prevent the conflict from rekindling.
• The interactions between economic reform, institutional settings and conflict based on a New Institutional Economics perspective.

In our Guatemalan case study, we trace and assess the interactions between decision makers (the government, social groups and external actors), economic and political events (e.g. inflation; upheavals, strikes) and economic and political measures (e.g. credit rationing, subsidy cuts; repression, state of emergency). We then develop an econometric model to analyse the politico-economic interactions in Guatemala from 1979 to 1996 at quarterly intervals. The results highlight patterns - and causes - of economic reform reversals and violent reactions to government decisions. The origin of failed reform attempts does not lie so much in the content of economic reforms themselves but rather in the institutional mechanisms underlying policy formulation and implementation. Recommendations are suggested with a view to getting our of the vicious circle of distrust between public institutions and the Guatemalan people.