Reconstructing Africa's war damaged economies is an urgent task. This is especially so in a group of countries - Angola, Eritrea, Ethiopia, Guinea-Bissau, and Mozambique - which must also complete their economic and political transition from state socialism. Somalia, which shares their common history, must eventually be rebuilt. All of these countries must address their deep problems of underdevelopment and poverty. The challenges are therefore three-fold: to overcome underdevelopment, to make the transition from state socialism, and to reconstruct economies and societies. Socialism was influential across post-independence Africa. But UTR countries drew more explicitly on Marxism-Leninism and the Soviet development model. With the aim of accelerating growth, enterprises and property were nationalized and controls were established. But the result was a fatal over-centralization of political and economic power, and a slide into conflict exacerbated and fuelled by the politics of the cold war. Somalia collapsed into a turmoil from which it is yet to recover. Mozambique has made the most progress and, until their border war this year, Eritrea and Ethiopia were both moving forward. Angola faces urgent reconstruction problems but progress had been slow, and a return to outright war cannot be ruled out. Guinea-Bissau was knocked off course by a military revolt in 1998. Progress has therefore been tentative in the UTR group, and their future prospects depend on them finding political settlements that can secure their prospects for economic development. War, and the uncertainty associated with it, distorts economies; investments with long- term returns, mainly in production activities such as agriculture and manufacturing, are cut back, and the economy becomes dominated by activities with short-term returns, such as commerce in cities and safe areas. Natural resource sectors may continue to operate, however, when protected by their location (for example offshore oil and gas) and when combatants seek to preserve them as the 'prize' for capturing the state. Past failure to achieve broad-based growth contributed to conflict. This implies that reconstruction cannot simply entail the recreation of the pre-conflict economy. Policies, public expenditures, and institutions must be changed, often fundamentally. For this reason the agendas of reconstruction and economic reform (transition) cross over. Well- designed reforms can contribute to reconstruction and vice versa. But too often there is a mismatch between the reform and reconstruction programmes, and the ground for broad-based development is not secured. Aid is important, but success ultimately depends on the actions of three national actors: communities, entrepreneurs, and states. However, communities are impoverished, private sectors are underdeveloped, and state capacities are weak. For communities, the main challenges are to deal with the immediate post-war humanitarian and security problems and, equally important, accelerate programmes for longer-term poverty reduction. Regarding the first of these, the tasks are to resettle displaced populations, disarm and demobilize ex-combatants and assist their reintegration, reduce the level of violence (by filling the security gap and decommissioning weapons), remove land mines which disrupt community livelihoods, and protect food security while phasing out food aid and increasing targeted support. Regarding longer-term poverty reduction, the future pattern of growth is determined by (i) the distribution of human and social capital, access and control over natural capital (including land tenure) and access to physical infrastructure (ii) the policy framework which determines the returns to household investments and (iii) the quality of institutions, including the legal framework. State socialism and conflict altered every aspect of the pattern of growth, and transition and reconstruction alters it again. Focusing public policy more effectively on poverty reduction, in particular on core services of most benefit to the poor, is therefore an urgent task. To support this, the relationship between donors and governments should be changed in order to focus more on monitoring social outputs and less on unworkable policy conditionalities (and to direct aid to governments committed to poverty reduction). More investment in collecting social data is needed to understand the impact of reconstruction and transition on communities. Turning to the second key actor, entrepreneurs, we can see that a new private sector is being created in UTR countries following decontrol and privatization. Overcoming investor uncertainty is a key task; this can persist and limit investment despite a fall in actual country risks. Angola and Mozambique are so far the largest recipients of foreign investment in UTR countries. But the impact of Mozambique's large investment programme is virtually unknown, while foreign investment in Angola is confined to the oil sector, which has few links to the rest of the economy. Privatization is proceeding at different speeds across UTR countries. Privatization in the financial sector is especially important; reconstruction requires a financial sector capable of mobilizing and intermediating savings into private investment. Recapitalizing the banking sector is expensive, and requires private capital, which implies privatization. Political influence can create unsound banks and better financial regulation is needed. But the phenomenon of 'straddling', in which political leaders invest in commercial enterprises, endangers the independence of financial regulation, and can distort the privatization process. Privatization in the agricultural sector has seen the non- transparent privatizations of state farms and the denial of community rights and some inconsistencies between privatization and agricultural policy reform. Encouraging more private investment in agricultural marketing is especially important for food security and rural poverty reduction. The third national actor is the state. A developmental state must be constructed. This is a set of democratically accountable institutions capable of effective policy design and implementation. If this is successful, the new state will look very different to the old state, but it is unlikely to be 'minimal'. The onus is therefore on democratic governments to prove that they provide value for money to communities and entrepreneurs. The new state agenda will remain a wish list unless it is properly financed, which it is not at present. Reconstruction expenditures are high, revenues are low (war reduced tax bases) and distorted (over dependence on trade taxes). Countries are severely indebted; almost all Africa's conflict/post-conflict countries are classified as 'Heavily Indebted Poor Countries' (HIPCs). The fiscal peace dividend is small (at least in the early years) and the high level of insecurity in Africa keeps military budgets high. Budgetary institutions are weak at mobilizing revenues and allocating them to priorities, and non-transparency and the improper use of public funds must be reduced. As a result of these problems, and the sheer scale of reconstruction expenditures, fiscal deficits before grants are very high. Nobody seriously questions the principle of fiscal prudence but the IMF's fiscal policy conditionality may be over-restrictive; certainly many other donor agencies believe that this is the case. This leaves many investments with high social returns on the shelf, implying slower growth and poverty reduction. A much longer time frame is therefore necessary to evaluate fiscal policy in an economy under reconstruction. The IMF's caution in part arises from the observation that real aid flows are in decline, and it therefore advises governments to move to a fiscal position in which any downturn in aid will not affect their recurrent, as opposed to their capital, spending. However, it is still possible for aid flows to individual countries to maintain their present levels or rise, and this is in fact the way the donor community is moving in seeking to redirect aid to countries committed to broad-based development. The IMF's fiscal policy conditionality, when it is over-restrictive, works against the new aid paradigm. Moreover, over-tight fiscal policy can lead to the use of distorting taxes that undermine reconstruction, it can work against improvements in budgeting, and it may be incompatible with democratization. The paper only touches on some of the major challenges facing the UTR group of countries. Decentralizing political and economic power, minimizing macro-economic shocks, and preventing conflict through broad-based development are all crucial. This requires hard choices over resource allocations and public policy. But these choices are a great deal easier to make than those involved in ending a conflict and initiating reconstruction. Ex ante action - good economic policy - is always better and cheaper than ex post crisis management.