Policy tools based on incentives, sanctions and conditionality are used in any aspect of foreign policy, and their effective application can probably extend to processes of transforming conflict. Third party involvement in a peace process is often required to address a mutual absence of trust between the parties and inability to make progress toward a negotiated settlement on their own. However, as Sri Lanka's experience shows, it does not follow that foreign policy tools of inducement and pressure will have more than a limited influence in addressing these problems. Incentives may be used to help build confidence and encourage a process based on certain values, and a coherent international consensus (including regional powers) on how to support the parties make steps towards reaching a settlement is vital. But external pressure and condition-setting are difficult to bring to fruition, and will not necessarily support the essential development of trust and confidence between the conflict parties, who must ultimately take responsibility for their own transformations.

This article briefly deals with three areas of international involvement in the Sri Lankan peace process that have been the subject of much debate: the impact of terrorist designations on the Liberation Tigers of Tamil Eelam (LTTE), the use of aid as a lever, and the orchestration of international support.

The LTTE claims not to have been treated equally during the peace process, but there have been diverse approaches among international actors to the issue of equal treatment. As facilitator and head of the monitoring mission, Norway has always striven to be accepted as neutral and to maintain equal treatment of the parties in the context of the peace process, seeking to influence each to make the compromises required for progress, even if they have attracted criticism from the Tamil and Sinhala nationalists alike. But many other countries have designated the LTTE as a banned terrorist organisation and in the course of foreign policy simply do not deal with the government of a sovereign democratic state and a terrorist organisation as equals.

While some policy instruments are focused on peace process outcomes, terrorist designations also reflect internationally accepted norms of civilised behaviour such as democracy, non-recruitment of children, humanitarian and human rights norms. When considering the impact of terrorist designation on the peace process, we must recognise the actions that contribute to the designation. The democratic transformation of the LTTE has occurred at a slower pace than expected or anticipated by many countries. The Irish Republican Army and Palestinian Liberation Organisation each underwent a transformation from being perceived as terrorists to political actors prior to a settlement and as a part of an ongoing political peace process. The LTTE, on the other hand, has opted to remain primarily a military organisation, and absence of progress in the peace process has hampered wider recognition of the LTTE as a legitimate actor and peace process partner by the international community.

What is ultimately of prime importance in the peace process is the engagement and relationship between the parties to the conflict, not necessarily the relationship between the parties and foreign governments or organisations. To build the trust levels required to negotiate a durable political solution, the peace process must focus on creating small measurable steps of mutual agreement between parties that create confidence to move on the bigger issues.

Experiments in aid conditionality – linking aid to progress in the peace process – have not been seen as entirely credible in Sri Lanka and have consequently been ineffective. The Tokyo Donors Conference in June 2003 had little effect. While the Government of Sri Lanka was keen to proclaim a large peace dividend and instrumentalise aid as both carrot as a stick, the attempt to use economic conditionality to achieve political concessions in the peace process was not thought out. The pledged US$4.5 billion spread over four years was no more than the approximate annual average of US$1 billion Sri Lanka receives as development assistance (almost entirely in the forms of repayable loans as opposed to aid indicating grants). The donor pledges largely reiterated existing or pipeline commitments, mostly from the multilateral lending agencies that would have and did disburse the funds in conformity with the specific project loan covenants, irrespective of progress in the peace process (only relatively small sums of money were held up – perhaps USD$50 million by the EU). Furthermore, only a part of this was designated for the conflict affected areas.

With the disintegration of the peace process since 2005, many western countries have sought to reduce or withhold aid and disengage with Sri Lanka. The current administration and Sinhala nationalist forces are unlikely to view disengagement by Western countries as causing sufficient discomfort to prompt a course correction. Meanwhile disengagement by sections of the international community committed to a negotiated settlement reduces their scope for influence. A disengaged Europe weakens Norwegian influence. Decreasing development assistance budgets and lack of robust economic or trade involvement in Sri Lanka gives Europe relatively few levers for influence. Critical statements have little weight except for signalling policy shifts. With Sri Lanka not on the radar screen of the EU's high-level political leadership, its policy on Sri Lankan conflict is less coordinated and more reactive.

Economic policy is more effective as a carrot rather than as a stick. In practice, the two uses are mutually exclusive. In a peace process, where political progress is slow and where flexibility and the creation of a sufficient consensus in the southern polity are required, an alternative course of action would be to use generous reconstruction and normalisation of civilian life as a confidence-building, goodwill measure.

The Co-Chairs (Norway, the USA, Japan, and the EU) are in a position to play open and broadly complementary roles, although the absence of real international consensus on Sri Lanka has sometimes led to a lack of coordination between them. The reluctance of India to move from an informal 'behind the scenes' role to a more involved role has been the real weakness in the attempt to orchestrate international support to the peace process. India's strategic and vested interests in Sri Lanka, including the impact of Sri Lankan politics on the politics of Tamil Nadu, give it a crucial role to play. An increasing number of Sri Lankan actors recognise the value of a more active Indian role. Given Indian sensitivities, they would avoid a direct role and the Norwegian facilitators could explore using India's considerable authority behind the scenes to create a sufficient and tactically valid consensus that could focus firstly on ensuring the creation of an international consensus on the contours of a settlement, then on a possible road map – working out the means of arriving at the desired solution.

International actors can support conflict resolution and encourage the parties back to the table while legitimately criticising human rights violations and assassinations. A peace process based on a commitment to values of democracy, pluralism, human rights and dignity are crucial for the viability of the process, the sustainability of the settlement and the political legitimacy of the compromises required along the way. A commitment by external actors to such a value-based process would perhaps provide important parameters outside which the parties risk serious isolation. Rather than try to force or induce certain outcomes, they should encourage a process-oriented approach to transforming Sri Lanka's conflict, not solely focused on the end solution but what political dynamics are required to get there and what is required to get those political dynamics.