COIN & the Capitalists: Private Sector Development and the Endgame in Afghanistan

COIN & the Capitalists: Private Sector Development and the Endgame in Afghanistan

Daniel Fisher

Things have not been going especially well for Afghanistan in recent months. In Kunduz Province—where the infantry and scout platoons I led four years ago had extensive freedom of movement—insurgents seized the provincial capital on September 28^th, setting Afghan National Security Forces (ANSF) back in what was previously considered to be a government stronghold. Meanwhile, the Taliban continue to employ suicide attacks to rock Kabul, sowing uncertainty and fear even among a population amply accustomed to violence. Although the Afghan government has launched an offensive to retake Kunduz City, and despite a visible effort to increase security presence in Kabul, it is clear enough that the surge of violence in Northern Afghanistan reflects an insurgency as strong as it is unpredictable.

While the tenuous security situation continues to transfix the American public and perplex the American defense establishment, what most stakeholders fail to appreciate is that Afghanistan is fighting a parallel, and far less visible, battle that is likely to have as profound an effect on the fate of the country as the strength (and weakness) of the precarious Afghan government. This is a fight that the U.S. government, on its own, is poorly positioned to win. It is the battle—perhaps better appreciated as a concurrent, long-term sub-war—to develop Afghan businesses.

Private sector development, although an essential component of a broader reconstruction effort, is extraordinarily easy to ignore. It is dangerous but not especially sexy. It requires long term, patient investment that rarely results in substantial short run gains. More pertinently though, it is a veritable blind spot for government agencies charged with stabilization, counterinsurgency, and wholesale, country-level reconstruction missions.

In a general sense, this is because the role of government in such missions (particularly its defense and intelligence apparatuses) is frequently narrowly relegated—even over time—to the establishment and maintenance of physical security. More pertinently, governments (especially their diplomatic and development corps) are generally far more familiar with how to manage economies than with how to run the businesses that drive them. Consequently, they have a discouraging tendency to continue to exclusively prioritize security on the one hand, and the development of an economic foundation on the other, even after a counterinsurgency or stabilization mission matures. This phenomenon occurs despite the need, arising in the mid to late stages of such conflicts, to reallocate resources to the kind of private sector development that supports long-run economic health.

Admittedly, a well-run COIN campaign reflects a “whole of government” approach to addressing the underlying causes of insurgency. And, in fact, developed governments engaged in such campaigns do have agencies, such as USAID and DFID, designed to promote national economic self-sufficiency. However, it does not take an especially well-attuned counterinsurgent to ascertain that the “whole of government” approach more often amounts to mere doctrinal word than it does to commensurate, accompanying deed. Arguably, the slightly newer “whole of society” concept falls even shorter of its all too aspirational goals.

Moreover, government departments and their associated non-governmental partners, like most other organizations, tend to focus on what they do best. While development agencies, and the network of NGOs that provide them parallel support, are fairly proficient at establishing the foundational conditions for a strong economy—such as physical infrastructure, a functional education system, and the assurance of consistent, at least moderately robust social service provision—they have a penchant for avoiding those activities or lines of effort, however critical, where they are less able to provide added value.

As a consequence, the economic development effort in Afghanistan has focused almost exclusively on core projects designed to raise Afghanistan’s economic potential—building roads, schools, wells, and investing in similar initiatives where government is (or perceives that it is) capable of adding immediate value—at the expense of targeted, sustained, and, most importantly, capitalistic private sector development. In Afghanistan, such focus, not myopic per se but nonetheless inadequate, has created a situation in which indigenous businesses—many of them small, poorly capitalized, and inefficient—lack the ability to grow and prosper at a rate and magnitude that would eventually allow them to fully leverage economic infrastructure, and by extension support a thriving state.

The secondary effects of this circumstance, although perhaps obvious, could be quite profound. Suboptimal economic activity generates poor levels of tax revenue, which over time could prevent the Government of Afghanistan from raising adequate funds to support sustained investment in its critical security infrastructure. Further, to the extent that weak, underdeveloped private sectors are characterized by uncompetitive businesses, they can produce chronic trade (and thus current account) deficits, turning states into persistent net borrowers, and generating long-term macroeconomic instability that both severely discourages private investment and weakens government.

In fact, this is precisely what is occurring in Afghanistan. The country’s current account balance has ballooned from a deficit of -$5.4 billion in 2008 to -$9.2 billion in 2014 (see Figure 1 below).[i] Similar to other frontier markets, Afghanistan’s poor current account position is due primarily to a persistent trade deficit. Due to a lack of competitive producers, the country consistently imports more goods and services than it exports, the difference financed primarily by official transfers (see Figure 2 below).[ii] Short of a perennial flow of such transfers (which is as unlikely as it is impractical), the best prospect for shoring up Afghanistan’s current account and trade deficits resides in its underdeveloped private sector. Were Afghan businesses more competitive, the country could find other ways of financing its deficits—through foreign direct investment (FDI), for example, or by eventually becoming a competitive exporter.

Figure 1 - Source: Trading Economics, “Afghanistan Current Account, 2003-2015.”[iii]

Figure 2 - Source: Trading Economics, “Afghanistan Trade Balance, 2003-2015.”[iv]

To be fair, some degree of private sector development has occurred in Afghanistan. USAID, among other organizations, has injected seed money into a handful of Afghan businesses, such as Tolo News,[v] which are now thriving. These sorts of capital infusions—that is, those provided to businesses that provide goods or services to Afghans (as opposed to ISAF or ISAF contractors)—can be especially effective because they bolster domestic consumption, which is a more sustainable path to growth in an environment in which foreign commitments are steadily decreasing.

Perhaps more encouragingly (at least from a conceptual standpoint), the U.S. Department of Defense established the Task Force for Business and Stability Operations (TFBSO) in 2006. TFBSO initially supported small and medium-sized enterprises (SMEs) in Iraq, and expanded operations to Afghanistan in 2010. According to the Special Inspector General for Afghanistan Reconstruction (SIGAR), TFBSO initiatives included “activities intended to facilitate private investment, industrial development, banking and financial system development, agricultural diversification and revitalization, and energy development.”[vi] Significantly, TFBSO was led by COL (ret.) Jim Bullion, who in addition to his military background, had substantial executive experience in the private sector, most recently as President of management consulting firm Phoenix Global Services LLC.[vii]

However, these success stories seem few and far between, suggesting that development investment directed specifically at Afghan businesses (as opposed to investment in foundational infrastructure) has not been adequate enough to aggressively drive the Afghan economy to self-sufficiency. Moreover, a comparison of cumulative U.S. funding for Afghanistan’s reconstruction reveals just how insignificant government-funded efforts to bolster the country’s private sector have been, relative to other priorities. While the U.S. appropriated more than $60 billion to the Afghan Security Forces Fund (ASFF), $17.7 billion to USAID’s Economic Support Fund (ESF), and $4.4 billion to the Department of State’s International Narcotics Control and Law Enforcement (INCLE) fund, appropriations explicitly made for private sector development remained extremely meager, with a paltry $810 million allocated for TFBSO (see Figure 3 for a comparison of appropriated funds).[viii]

Figure 3 - Source: SIGAR Quarterly Report to the U.S. Congress (January 30^th, 2015), Table 3.2.[ix]

Indeed, after a period of rapid GDP growth from 2001-2012 (reflected by an average annual growth rate of 9.3%),[x] the country has since stagnated (see Figure 4). Due to slowing inflows of foreign capital and the drawdown of ISAF forces (which has severely hindered growth in the country’s previously booming services sector),[xi] Afghanistan’s economy has since stagnated, growing at a comparatively low rate of 2% from 2013-14.[xii] Short of the ability to stand on its own economic legs, Afghanistan is in danger of becoming a permanent ward of the international donor community, whose patience as a supplier of capital runs thinner and thinner—reflected by an almost $1.5 billion decrease in net official development assistance from 2012-13.[xiii]

Figure 4 - Source: World Bank.[xiv]

The danger is especially apparent given Afghanistan’s recent uptick in violence. Equally pressing, the country has entered a new era of political uncertainty in the wake of the highly contested election between Abdullah Abdullah and Ashraf Ghani. Meanwhile, rumors of a “Karzai comeback” certainly do not help to alleviate investor concerns about an unstable political climate.[xv]

Of course, international aid transfers can be an enormous economic boon, provided that they produce sustainable returns. Indeed, some efforts have been highly effective, such as the massive investment in Afghan healthcare, a success of truly rare proportions that resulted from an equally uncommon alignment between USAID, the World Bank, and a handful of European donors.[xvi] However, other initiatives—such as Promote, USAID’s $416 million effort to empower Afghan women—even if they might be moderately effective in the short-run, provide unsteady assurance that they will provide any long-term social or economic benefit, if we ascribe any extent of credibility to the reports published by SIGAR.[xvii]

As in so many cases, any lack of efficacy with respect to development investment has less to do with the underlying conceptual validity of initiatives such as Promote. In this case, the goal of incorporating women into economies where they are largely marginalized, for instance, has a powerful logic that overwhelms, and arguably forgives, the obvious nod to liberal Western values. Rather, it is the probability of successful implementation—assessed as low by SIGAR—that presents the problem. Furthermore, it seems doubtful that even those initiatives appearing to hold more immediate promise for unlocking the country’s economic potential, such as investments designed to commercialize Afghanistan’s copper and iron ore, will reach fruition before donor fatigue sets in,[xviii] especially if insecurity and political uncertainty persist. Falling commodity (particularly non-consumable commodity) prices in the wake of slowing economic growth in China may also significantly lower the return on such investments, if not make them altogether unprofitable. 

More corrosively, the country’s dependence on foreign aid, to the extent that it has encouraged rampant corruption, has in many ways stunted the very economic growth that it is intended to promote. Despite the efforts of the reform-minded Ashraf Ghani, a rent-seeking government, which in 2014 ranked 172^nd out of 175 public sectors in Transparency International’s Corruption Perception Index,[xix] continues to impose unnecessary costs on Afghan businesses, constricting private sector growth. In doing so, corruption also reduces the level of organic capital available for poverty alleviation, prolonging and validating the economic logic of insurgency as security officials, meanwhile, line their pockets and weaken government credibility.

Not all has been in vain. After all, businesses cannot grow and flourish in the absence of sufficiently passable roads (admittedly a relative metric in pothole-filled Afghanistan), access to water and electricity, and reasonable healthcare, all of which have improved since the 2001 invasion. But alongside the investment in this very basic economic infrastructure, and external to the standard development formula that most governments and NGOs seem to apply in conflict-ridden environments, some level of effort must be made to instill the skills and attitude necessary to grow business—an effort extending beyond public sector economic management (including infrastructure investment) and improvements to education.

Hindsight may be 20/20, but this gap in development, viewed retroactively, now seems glaringly clear. Notably absent from the (for the most part) admirable, but unevenly effective cadre of military service members, diplomats and development workers who drove the reconstruction effort were the hardcore capitalists—those members of our society best positioned to raise Afghanistan to its economic potential after a reasonable amount of underlying infrastructure was in place. Indeed, although it seems likely that the War in Afghanistan all but doubled the list of worldwide acronyms, a close look reveals that the alphabet soup mostly lacked some critical ingredients: CEO, COO, CFO, MD, VP—and on it goes.

Additionally, the reality that the United States military operated (and arguably continues to operate) at the tip of the proverbial “development spear” may have constrained private sector development during critical years where security had actually increased in many areas. In Kunduz and Baghlan provinces, for example, my unit became quite adept at applying the standard formula. We paved roads, constructed (and reconstructed) bridges, built wells, and generally tended to what we (mostly accurately, I think) perceived as the underlying causes of the insurgency without directly attending to the circumstances in which the primarily small and medium-sized Afghan businesses operating in the area could grow.

This was hardly my unit’s, or in fact the military’s fault. As it is, counterinsurgency warfare places so many demands on the shoulders of young, company-grade officers that adding more to the mix—for example, the task of training aspiring business owners in entrepreneurial finance—seems an altogether impractical bridge too far. Here, as elsewhere in COIN, the opportunity cost of time imposes fairly severe constraints on officers who are already critically overworked as they struggle to balance the traditional responsibilities of combat with the innumerable additional demands created by the complexity and nuance of a COIN effort. In truth, the failure to develop Afghanistan’s private sector lies far deeper, below the level of institutions, in the philosophy of reconstruction, itself informed by a poor understanding of how conflict-ridden states stabilize.

Although supported by strong security and sound statecraft, private sector development in Afghanistan—as in any other fragile state—depends on the transfer of technical competencies (the ability to conduct empirical market research, for example, or to financially evaluate and build a business case for a prospective project). In addition to provisioning technical know-how, however—the point, seemingly logical, where less creative efforts often stop—truly successful private sector development requires inculcation of a competitive, inquisitive, and precise attitudinal posture that most businessmen and woman from prosperous capitalist economies take for granted. The truth is that there comes a point, at a certain level of conflict maturity, where ruthless capitalists are as vital to a successful counterinsurgency campaign as diplomats, development workers, and warfighters. In truth, we have reached this point in Afghanistan.

The time has come to surge on private sector development in support of a strategically intelligent endgame that sets Afghanistan on a self-sustaining economic trajectory. Setting this trajectory requires one critical component of successful capitalist economies that the current effort to (re) construct Afghanistan seems to miss: human capital. Encouragingly, the United States and its developed allies possess this critical input in great abundance.

Building human capital in a war-torn country is a tricky endeavor. The most obvious response is to invest in education. USAID reports that since 2001 international donors, in conjunction with Afghanistan’s Ministry of Education, “have built more than 13,000 schools, and recruited and trained more than 186,000 teachers.”[xx] The effect of these investments has been profound. Primary school enrollment, as measured by the Gross Enrollment Ratio (GER), increased from an abominable level of 21% in 2001 to 106% in 2013.[xxi] Growth in the GER for secondary school enrollment is similarly encouraging, increasing from 13% in 2001 to 54% in 2013.[xxii] More significantly, the quality of education in Afghanistan has improved dramatically. Literacy rates among people aged 15-24 years are on an upward trajectory, with the growth rate in literacy increasing substantially since 2010.[xxiii] Meanwhile, Education in Crisis, a monitoring group, notes that “Since 2001, the curriculum has been changed from extremist Islamic teachings to one relatively better with new books and better training.”[xxiv]

Buttressing institutional education, however, represents only a partial solution to the veritable human capital crisis that underpins Afghanistan’s suboptimal economic growth. Even in developed economies, many business leaders argue that education systems inadequately prepare students to immediately add value to firms. However, when they transition to positions as full-time employees, these same students, critically, continue to learn. Many of the skills, both hard and soft, that allow them to be effective on the job they pick up from other employees who have effectively combined their academic training with practical experience. Although on-the-job learning also reinforces academic training in frontier markets like Afghanistan, the informal learning system that compensates for the shortcomings of education in developed countries is much stronger. This is partly because developed education systems themselves are better. More pertinently, though, this is because businesses in mature economies are more competitive, and thus generally possess much more robust stocks of human capital than their frontier market counterparts.

As a result, one of the most effective ways that the United States could support the Afghan private sector is through a human capital infusion, which could be effected through policies that encourage American businessmen and women to work for Afghan companies. One such policy could involve salary subsidies to Americans working for Afghan businesses. These subsidies—quite modest when compared to the massive investment in development already undertaken—would allow Afghan companies to hire foreign employees who would otherwise be too expensive. Such a subsidy program might also encourage talented American capitalists to consider working for Afghan companies, by mitigating any sacrifice of their earning potential. Smaller-scale initiatives designed to encourage students to work in untraditional markets have been adopted by many U.S. institutions of higher learning. For instance, Harvard Business School supports the Emerging and Frontier Market Assistance Program, which supplements the modest stipends that students typically receive when interning for companies operating in untraditional markets.

In addition to policies that indirectly encourage American businessmen and women to work in Afghanistan, the U.S. should also consider directly hiring private sector talent, with the intent of placing this talent into Afghan firms. A potential model for this already exists in the Department of Defense’s Afghan Hands program. Fashioned after the China Hands program of the 1940s, which employed a cadre of service members, diplomats and journalists possessing knowledge of Chinese language and culture,[xxv] Afghan Hands fills a well-established gap between the Foreign Area Officer (FAO) and Special Operations Forces (SOF) communities. “Hands”—a term used to refer to the service members selected for the program—receive substantial language and cultural training, and are either placed as advisors in Afghan government ministries, or partnered with SOF teams engaged in Village Stability Operations (VSO). The U.S. could conceivably build a similar program for Afghan businesses, by providing volunteers from the American private sector with the same level of language and cultural training, and placing them within Afghan businesses at no cost to the enterprise.

For such a program, the recent instability in Northern Afghanistan could prove a counterintuitive boon. Many military officers exiting service move on to attend business school while remaining in the National Guard or the active and inactive Reserves. Observing the country’s increasing insecurity, many former officers wish that they could do more to contribute to the ongoing fight. However, while demand for such opportunities is relatively high, supply is unfortunately quite low—limited by a paradigm in which responsibility for Afghanistan’s stability is relegated almost exclusively to the warfighter. Should the Department of Defense (or the Department of State) establish a new permutation of Afghan Hands, it would have a ready pool of talent from which to draw volunteers. Critically, such a move would also alter the current stabilization paradigm, better aligning it with a more inclusive, holistic, and accurate conception of what successful reconstruction entails.

Admittedly, human capital infusion along the lines of an expanded Afghan Hands program, or a salary subsidy regime, is by no means a panacea to the challenges facing Afghan businesses. A more expansive set of policies would also, for instance, have to address poor access to credit (especially among SMEs). Nevertheless, the gap in the Afghanistan endgame is glaringly clear. In the absence of a strong private sector, the country’s economy is unlikely to grow at a rate, and reach a magnitude, that would support national self-sustainment. Although the United States and its allies should continue to provide security force assistance and traditional development aid to Afghanistan, providing security and aid alone—even in the wake of the recent assault on Kunduz City—is a losing proposition in the absence of a human capital infusion that drives much-needed private sector growth. At the end of the day, the old adage extends to frontier and developed markets alike: “It’s the economy, stupid!” And an economy, after all, cannot flourish without competitive business.

End Notes