SIGAR on Economic Growth—Good History, Flawed Policy
In the decades following World War II, economic development overseas was funded largely by foreign aid. That started changing in the late 1980s, with a dramatic increase in foreign direct investment (FDI). Today, along with mobilization of internal financial flows, FDI dwarfs foreign aid as the financial driver of international development.
Only a few countries still rely principally on foreign aid to generate economic growth. Afghanistan is one, but it too will have to increasingly rely on its ability to attract investment and generate internal capital flows. Because promoting foreign investment is an essential element of economic growth strategies, the new lessons learned report from the Special Inspector General for Afghanistan Reconstruction (SIGAR)—Private Sector Development and Economic Growth: Lessons from the U.S. Experience in Afghanistan—is important.
The Historical Rack-Up
As history, SIGAR’s “legacy” report is an excellent case study of how economic growth is pursued in a country at the extreme ends of the conflict and development spectrums. The first eight chapters are both relatively thorough and refreshingly balanced. This may be the best historical rack-up of USG economic growth work ever compiled for any country. The report addresses what it calls ‘the five major areas of economic intervention’—the enabling environment, access to finance, investment promotion, trade, and enterprise support—and focuses on the first and last.
One major shortcoming is that it limits discussion of the enabling environment to economic policy and economic governance. It barely addresses economic infrastructure—the road, rail, aviation, power, water and ICT systems that enable private sector development. This is by far the most expensive element of most economic growth strategies. Afghanistan has seen huge progress in every line of infrastructure since 9/11, built by a dozen major donors at a cost of billions of dollars.
The biggest problem with the report comes from its takeaways—its findings, lessons, recommendations and conclusions. These range from the obvious (‘spending too much money too quickly can lead to corruption’), to the trite (‘investments in human capital can have significant returns’), to the elementary (‘grants and below-market-rate loans can undermine commercial banks’), to the misguided (‘market interventions should focus at the sector and not firm level’), to the highly contentious (‘the USG overestimated the speed of transition’). Among many issues with the takeaways, four stand out.
Introduction of a Market Economy. Tracking changes in government macroeconomic policies since the reign of King Mohammed Zahir Shah (1933-1973), SIGAR contends that “neither the Afghan government nor society was adequately prepared for the sudden introduction of a Western-style market economy.” Afghanistan has been a major commercial crossroads since the Bronze Age, however, when it linked Mesopotamia with the Indus Valley. It later thrived for almost 1700 years as a regional hub of the Silk Road (130BC-1453AD), and it has remained a particularly active nexus of regional commerce ever since.
Given their history, it’s no surprise that Afghans are some of the most aggressively commercial people in the world. They stand in stark contrast to the citizens of the communist states liberated after the 1991 crackup of the Soviet Union. In many former Soviet states, the U.S. and others indeed promoted quick conversion to ‘Western-style market economies’—and did so with considerable success. That experience, along with experience from decades of private sector work in Latin America, Africa, eastern Europe and central Asia, led to the private sector approach applied in Afghanistan after 9/11. There was nothing wrong with the approach. The approach works.
Inter-Agency Coordination. A recurring SIGAR narrative is that there was ‘insufficient coordination within and between USG civilian and military agencies.’ This is a standard-issue SIGAR complaint, but in Afghanistan there were many layers of coordination—formal, informal, institutional, collective and individual.
Between civilian agencies and the military specifically there is a hierarchy of collaboration, progressing from de-confliction through cooperation, coordination and integration to synergy. Collaboration was more or less constant after 2006 with the placement of development advisers in the PRTs, regional commands, select SOF units and elsewhere. While some seasoned hands would argue just the opposite of SIGAR—that there was too much time and staff wasted on coordination, to too little effect—better coordination is always good. More coordination, not necessarily.
DoD Experience. SIGAR finds that “Afghanistan reconstruction was the first in which military institutions played such a central role in development activities…” The U.S. military, however, has been deeply engaged in development as an integral part of both conventional and irregular warfare since the birth of the Republic.
Yates, for example, tracks the history of military stability operations since 1789. Many of these involved expeditionary development at the tactical, operational or strategic levels, including, inter alia, the United States during the 19th century westward expansion; the start of the Mexican-American War (1846-1848); the U.S. Civil War (1861-1865); post-Civil War reconstruction of the south (1867-1877); Cuba (1899-1902); the Philippines (1899-1913); Veracruz, Mexico (1914); Germany (1945-1949); Japan (1945-1951); the Dominican Republic (1965-1966); various countries in Latin America (1960-1989); Vietnam (1965-1973); and Panama (1989-1990).
Other examples include Russia (1918), the Persian Gulf (1942-1944), Greece (1947-1949), Saudi Arabia (~1965-1988), sub-Saharan Africa (1980s-1990s), Kuwait (1991) and Iraq (2003-2011). Not to mention foreign internal defense (FID) operations in the Philippines (2002-2015) and scores of other countries where SOF have pursued tactical development in recent years as an integral part of FID, unconventional warfare and counterinsurgency operations.
The U.S. Army Corps of Engineers, which started building economic infrastructure in 1794, built over 5,000 projects in Iraq and over 1275 in Afghanistan after 9/11. For years it also carried much of the engineering load for an exceptional but wildly understaffed USAID engineering office in Afghanistan. In addition, DoD’s Task Force for Business and Stability Operations occupied the largely vacant niche of operations-level business and sector development in both Iraq and Afghanistan, doing critical foreign investment promotion that civilian development agencies could not or would not do effectively at war.
The problem isn’t lack of DoD development experience. The problem is that, in contrast to the early days of development when it was an integral part of the national defense, it has since become an industry obsessed with the notion that development is somehow a civilian lane on which the U.S. military, in doing its job, is encroaching.
Leading Private Sector Work. SIGAR recommends that ‘USAID lead an interagency working group at the start of any major reconstruction effort to plan and coordinate private sector development across civilian and military agencies.’ This may make sense for countries at peace, but not for countries at war.
There are important differences between tactical, operational and strategic economics. There are also important differences between traditional economics designed to achieve long-term development objectives, and expeditionary economics designed to achieve shorter-term military objectives. While these lines of effort sometimes conflict, they are mostly complementary. In any case, at war they have to co-exist.
Traditional economics is critical to long-term stability, and USAID has a central role to play in it. When expeditionary economics is required, however, it must be led by DoD—the only organization with the ways and means to successfully plan and execute it.
SIGAR’s economic growth report is an excellent case study of economic development in a country whipsawed by decades of insurgent warfare. But while it makes some helpful suggestions for future work, it delivers only at the margins.
Security and political stability are the main constraints to economic growth in Afghanistan, including to both private sector development and foreign direct investment. In 2017, the World Bank survey 754 senior corporate executives about their foreign investment decisions. Fully 87% identified ‘political stability and security’ as either a ‘deal-breaker’ (50%) or important (37%).
In Afghanistan, security and political stability are the elephants in the room. The priorities don’t get any higher.