Afghanistan, Land of Opportunity (pt II)

There's a certain mythology built about around conflict, as if the laws of physics or economics somehow don't apply.

Our image Afghanistan is of a soldier standing in front of a mud hut. That's not what's going on...Businesses are functioning, even thriving, in a very difficult environment.

We came across a number of medium-sized businesses that are finding opportunities.

Our perception going in was that physical insecurity would be the number one concern of business... But we found that Afghans were generally more concerned about the uncertainty in the business environment than they were about security.

Business feel very threatened by the Afghan government...One entrepreneur had this to say: "Insecurity is caused by the government and the Taliban. They are the same."

Afghanistan is donor drunk. In Kabul, people were gaming the system...We frequently found international organizations nominally "trying to help" actually distorting the system.

War should not be an excuse to resurrect failed policies, such as that centrally planned growth is necessary in a chaotic environment…

These snipets are from a talk that Jake Cusack and Erik Malmstrom (two a MPP/MBA candidates at the Kennedy School and HBS) gave as CSIS last Thursday, previewing their fabulous report on entrepreneurship and the prospects for real development in Afghanistan. The report is based on interviews that Cusack and Malmstrom conducted over the summer in Kabul, Herat, Balkh, Nagarhar, and Kandahar Provinces. (Thanks to Dane Stangler for bringing me along to this event, and H/T to the Kauffman Foundation for funding the study.) The full audio is here and is a must-listen for anyone interested in entrepreneurship and development. (When you're done, read Carl Shramm's excellent essay in Foreign Affairs that provides the context for this study.)

Back in January I wrote a post titled "Afghanistan, Land of Opportunity." Drawing heavily upon the success of Roshan, the first and still the leading Afghan mobile phone company (more on Roshan here, here, and here), I made the following argument:

Roshan is an example of the sort of "positive insurgency" driven by entrepreneurship, technology, and innovation that is the real driver of development. Want to "help"? Provide local entrepreneurs with skills development, mentoring, and other essential support (yes, funding as necessary). 

The report by Cusack and Malmstrom takes this line of argument to another level, documenting that entrepreneurship is, indeed, alive and well in Afghanistan and clearly explaining why support for entrepreneurship must be the cornerstone of any coherent and potentially effective security strategy in that country.

But here's another question: Why did it take two Masters students to get these basic facts straight, and organize them in a manner that they could influence the design and implementation of policy, when the blue-ribbon task force recently assembled by the Council of Foreign Relations failed almost entirely to grasp or articulate them? Why is it that our security thought-leaders have such a difficult time getting past their fixation with the hardware of development to understand the software--entrepreneurship and business innovation in particular?

Granted, the (war) stories we hear about Afghanistan and the (entrepreneurship) stories we don't hear are linked. Entrepreneurs don't get very far under conditions of totalitarian repression, and the founding of Roshan was made possible by the ouster of the Taliban. But, there is a big difference between the systematic repression that existed under the Taliban (which is historically very rare) and the sort of everyday cronyism, neglect, or even anarchy that is far more typical of poor and poorly governed places around the world. Indeed, today's Afghan government ranks among the most corrupt in the world. However, it is precisely the failure of government to provide basic services, combined with a lack of formal regulatory constraints, that can create tremendous opportunities for entrepreneurs.

To claim, as many in development and security circles do, that an honest, stable government is a prerequisite for economic vitality is akin to claiming that a healthy, bountiful garden is a prerequisite for rainfall. 

Just ain't so. 

Give TODAY to Care Foundation Pakistan

Mosharraf Zaidi (@mosharrafzaidi) has a great op-ed in The International News (Pakistan) that quite incisively corrects for the overstatements in my previous post:

Zaidi starts with the following observation:

Casual observers could easily conclude that first, under the Musharraf regime, and now under the democratic government of the PPP, Pakistan has been reduced to a rentier or beggar state (or both). The country is incapable of meetings its own needs and constantly needs to seek help with the bills. Of course, this kind of an observation would have to be made by people who are either deliberately ignoring the circumstances that have produced the current situation, or who are plain, outright ignorant. Three very large and very important shocks have rocked the Pakistani economic system in recent years-natural catastrophes, violent conflict, and global price shocks. While most countries can claim to have been victimized by one of these, and perhaps some can claim to have been victimized by two, there is hardly any country on the planet that has had to take on all three kinds of shocks at the same time. Perhaps most crushingly, these challenges have been thrust on Pakistan in a global environment where the narrative of Pakistan is of a country that is fully responsible for every problem that afflicts it (true but only partly), and therefore deserves, deserves to be left to solve those problems itself (not true at all).

He then notes that aid comes in many forms, from many sources:

The most important division we need to understand is the division between humanitarian assistance and development assistance. For most practitioners, this distinction holds limited value in a country like Pakistan, where so much of the recent assistance to Pakistan has been humanitarian, and where a lot of the “development” assistance, has been supplanted, or replaced by humanitarian programmes.

The bottom line:

The most important distinction for a country that is the size of Pakistan, and with the kinds of problems Pakistan faces, is who the aid is being given to. Aid can be provided to governments, or it can be provided to non-state actors-such as contractors, firms, and civil society groups. Government aid itself can be of several kinds, including budget support, and project aid.

Without understanding these distinctions, and knowing who is giving what, and to whom, the national conversation about international aid or foreign assistance is largely a rhetorical jousting session, not serious policy discourse.

All of which is to say that being a critic of official development assistance (as I am!) is not inconsistent with getting online to give today to Care Foundation Pakistan or other effective organization working to assist the millions of victims of Pakistan's recent floods.

Time for Security Experts to Pak It In

[See follow-up post here.]

I recently found this excellent video clip of the talk that Pakistan’s Foreign Minister Shah Mahmood Qureshi's gave at the Brookings Institution last month:



Oh, wait... Wrong video! Sorry about that. This video here is of President Obama trying to get his G-20 buddies to buy into US monetary policy (..."What the world needs now is...more cheap credit!")  Anyhow, read the transcript of the Brookings event and you'll get the idea.

I was reminded of PM Qureshi's talk this morning when I attended the release of Council of Foreign Relations Independent Task Force Report No. 65, "U.S. Strategy for Pakistan and Afghanistan." Scanning the text of the report and then scrutinizing the bios of task force members, I was not surprised to find that physicians and economists were in short supply. (It also appears that exactly one Pakistani & zero Afghans were on the Independent Task Force, but, hell, what do they know?)

Had physicians been present on the CFR task force they would have been able to identify drug-seeking and doctor-shopping behaviors evident in requests for escalated bilateral aid and military assistance commitments.

Had economists been present they would have been able to remind other task force members that no country in the world has ever developed successfully and sustainably as a consequence of military and official development assistance. Countries develop despite aid directed to national governments, not because of it.

Perhaps as a consequence of these absences, or otherwise due to reasoning-by-force-of-habit, the CFR has produced a report that completely misses the opportunity to fundamentally challenge the false premises of Af-Pak (or "Pak-Af") strategy, and, as a consequence, offers an implicit but nonetheless wholehearted endorsement of the ongoing co-dependency between Pakistan and the United States that...well, just might have something to do with that country's relatively disappointing pace of development and current security challenges. What's missing from the report is the one thing the the United States is best at, and the one thing that matters most to development in Pakistan as elsewhere: entrepreneurship and innovation.

Now, I know what you're thinking. Who is this moron? Was he hiding in some cave at George Mason University when 9/11 happened? Is he really suggesting that the Security Threat featured in the CFR report and at the center of the entire Af-Pak discussion is totally the invention of an aid-seeking client state (& the willing consumers of that narrative in the US)? Of course not! Pakistan is indeed a dangerous place. In the past three years as many as 5,000 people have died there in terrorist acts--large and small--including 18 just yesterday in a dramatic attack in Karachi just outside the Marriott where I stayed three weeks ago.

But let's get real here--5,000 fatalities is not even one-fifth the toll of Mexico's ongoing drug war, which is taking place less than an hour by black SUV from Disneyland. Pakistan--a country of 180 million people, covering an area twice the size of California--tends to rank below both Sri Lanka and India when it comes to terrorism incidence. Yet such a ranking--and a decades-long civil war--did not prevent Sri Lanka from making remarkable strides in its development--for example, achieving a plateauing of its population growth rates comparable to that achieved in China, but without a coercive "one-child" policy. And India...

As for the feasibility of entrepreneurial success in a country with a weak or a failed government--well, think about it, does a relative absence of regulatory hurdles and pockets to fill make it easier or harder for an entrepreneur to get started? Conditions for entrepreneurial entry into a market can quite easily be favorable even when conditions for established, large-scale business are not. If you're still not sure, read this story of the founding and dramatic growth of Roshan, the first and still the dominant mobile phone company in Afganistan; or watch this talk on entrepreneur-led development by the current head of Pakistan's planning commission; watch this video of Iqbal Quadir describing the role of entrepreneurship in development (start at 6:20); or browse through the Kauffman Foundation's growing set of resources on "expeditionary economics."

As for Al-Qaeda, what part of global terrorist network hasn't sunk in with the Af-Pak brain trust? Islamic Fundamentalist terrorism is a global phenomenon (Philippines anyone?) It's not going to be solved in the Swat Valley anymore than it is in Times Square. As I wrote three years ago:

In the long term, our counterterrorism policy should be more focused on addressing the profound shortcomings of the U.S. domestic response and recovery capability than on action in the Middle East. The countries most experienced in fighting terrorism (Israel, Spain and the United Kingdom, among others) learned long ago that resilience through well-developed response and recovery capabilities is a critical part of effective deterrence. The actions required to build such resilience are mostly taken at home, not abroad, and they involve deep collaboration between public and private actors. As Hurricane Katrina and its aftermath decisively demonstrated, many such actions have not yet been taken in the United States.

There is one way forward for the sort of Af-Pak policy represented in the CFR report released today, and in other Af-Pak reviews released in recent months. That way is the way to the door--out of Pakistan, and out of Afghanistan. We'll get there by working as equals with Pakistanis and others in the region who share our values and are doing things that make a positive difference (e.g. 1, 2, 3, 4, 5...).

As aid and military contractors gradually and gracefully exit, they will make room for members of the Pakistani diaspora seeking to reconnect with their country; investors from Dubai; deal-makers from Guangzhou; and, who knows, maybe a few regular-old Americans looking to make some money in a place that is poised for take-off.

Questions? Ask your doctor.

How (Yesterday's) Heroes Impede (Today's) Progress

Paul Polak isn't just one of America's most remarkable "ascending market"* entrepreneurs--having founded and built International Development Enterprises (IDE), the treadle pump design and marketing organization that has brought improved livelihoods to more than 2 million smallholder farmers.

Paul also wins my vote--admittedly somewhat by default--as the country's leading development economist. (Sorry Jeff & Bill, but still more heat than light coming out of the ongoing Great Aid Debate. Not much of practical value emerging elsewhere in the academic literature on development, including RCT wave.) He recently authored a powerfully insightful post titled "The Birth and Death of Big Institutions." Here's how he starts:

The failure of development is closely tied to the ossification of big institutional structures.
The World Bank was born as a vehicle for reconstructing Europe after World War II, a task it carried out with amazing success. But when it morphed into a massive institution to address global poverty, it didn’t do so well. Schumacher launched a revolution in design with his admirable book, Small is Beautiful, but the appropriate technology institutions that emerged from it became ossified, failed to address market forces and died.

I'm about to walk over to the World Bank for the 2nd half of the Tech@State Civil Society 2.0 meeting. So I'll have an opportunity this afternoon to reflect on this specific observation. But the point Paul is making in this blog post is much bigger than the World Bank, and even much bigger than "development" as it is narrowly conceived.

What I understand Paul to be saying is that the core issue facing society is not more or less government control, or whether markets should have greater or lesser scope in the allocation of resources. What really drives societal change is the manner in which both political and economic incumbents establish and maintain advantage. That is the core point of Paul's blog post. It is why entrepreneurship matters.

Read this post twice, then reconsider your takeaways from developments of the last week, the last month, and the last year. Much about the change that surrounds us is not how it seems, or how it is sold. 

* Ascending markets are markets for the global majority--elsewhere sometimes referred to as "bottom of the pyramid" which is a term that does make any sense to me so I don't use it.

Why Democrats Lost and Republicans are Losers

Why Democrats lost:

For Democrats, the core challenge is not absence of principle but rather obsolescence of purpose. For at least three generations the Democratic Party has been, or at least has presented itself as, the party of countervailing power. Notwithstanding attempts at a course-change undertaken first by Bill Clinton and now by Barack Obama, the identity of the Democratic Party is still deeply tied to the tensions and triumphs that for decades characterized politics within the Iron Triangle: Big labor exists in opposition to large corporations, and government must be vigilant if it is to protect citizens and workers from abuses perpetrated by powerful private actors. In fact, big business and big labor are functional allies, and government isn’t protecting us from either one; rather, it is under pressure to prop both up without a justifiable economic rationale. This Democratic vision is to today’s reality what an AT&T rotary dial phone is to Gmail.

 Why Republicans are Losers:

Take the Republicans. Faced with a crisis of mammoth proportions, congressional Republicans closed ranks to reject a proposed economic stimulus package on the grounds that the bill contained, in the words of Senate Majority Leader Mitch McConnell, “unnecessary spending that doesn’t create jobs now.” This was a principled stand minus one critical element: principle. The travesty of “don’t-tax-but-spend-anyway” Republicans trying, once again, to portray themselves as advocates of fiscal discipline was actually exceeded in this case by the absurdity of their objecting to the composition of the largest economic stimulus program in history on the grounds that the money would not be spent quickly enough. At a time when we need thoughtful assessments attuned to the longer term, here were the Republicans complaining that policy was not short-term enough! Unable to make a credible case for either total inaction in the face of crisis or yet another round of broad-based tax cuts, congressional Republicans were effectively reduced to playing the role of arch Keynesians.

... from my 2009 essay with Zoltan Acs in The American Interest...

Will anti-immigration idiocy and empty blather about job-creation through budget cuts--the "NO everything" strategy absent any positive program of action--continue to be the order the day from the New Kings of the Hill? Or will Mitch & Co. see the light and decide that they are in Washington to do something other complain about people in Washington.

Will the genius trust that is still in place at the White House break free at last from the Ghost of Dems Past and craft a vision for the future that is really about creating the conditions for the "the risk-takers, the doers, the makers of things" to thrive?

Hold your breath America!
We'll first turn first BLUE
And then turn RED
If we keep it up this way
We'll all be ....

It's the Toilets

Not finding current data regarding global trade sufficiently depressing, a number of commentators on my weekend post sought discouragement closer to home. One impassioned observer noted that unemployment in the U.S. is now 20%; another got a bit closer to the truth by noting that the most recent broad-based unemployment number (U-6) is 16.5%. All of which seems like U.S. unemployment is getting in the vicinity of The Great Depression peak of 25%.

Well, it's not. The reason is that the 25% number is most closely comparable to today's U-3 unemployment number, which is 10%. If you apply U-6 methods to historical data, you will get an unemployment figure for the peak of The Great Depression much higher than 25%. (One attempt from the blogosphere here.) The conclusion being that...

But the picture for the present--as opposed to 1930s--is even better than would be suggested by looking at the above chart. Recapping earlier blog posts of mine, I added in a comment to my own post:

In the 1930s 1/3 of Americans didn't have a toilet, unemployment peaked at 25% (not 10%, where we are today), and the average life expectancy was about the same as it is in Ghana today. The current recession is not comparable to The Great Depression. Period.

One well-informed reader (thank you dwg) offered this response:

And your statement as regards toilets... I'm not quite sure how to address it. An apples-to-apples comparison is evaluating the drop in real standard of living; no one is saying we've moved back to the income levels of the Great Depression; your argument there would appear either a gross misunderstanding of the terms of the debate or a straw man. Even those of the Great Depression era were better off than a peasant in the Middle Ages by many terms of reference. The issue here is: how many people are suffering a diminishing of their quality of life, proportional to their baseline expectation prior to the downturn?

So to be very clear, the toilet comment isn't a straw man, it's actually a core point here. And that point is that absolute levels do matter.

Look at it this way: Is (evil, Greenwich-CT-dwelling, CDO-trading) hedge fund manager whose income drops from $2 mil/year to $200K really in the same position as the owner of a shuttered auto dealership who was making $200K/year and now is bringing home $20K? I'm sure you'd agree--No. Well, you know what fraction of the world's population makes over $20K/year? In terms of individual-wage earners, about 2%. That's us. We are to the rest of the world what hedge-fund-guy is to us.

These absolutes may not have mattered much in the 20th century but in the 21th century, they do. All those poor schmucks out there in the "developing world" who are still pissing into open sewers are--surprise!--the people who are going to be driving global growth for the next 50 years. That because growth happens where there are unrealized gains to productivity. And those people--people who matter a lot both to America's future and to its recent past (ref. Greenspan's "conundrum")--aren't taking toilets for granted.

So the really big thing Krugman's missing isn't the trend in the global trade data after all. It's the toilets.

Krugman vs. Reality (Reality Wins)

Here's what Paul Krugman had to say about the Great Recession a year ago: “When it comes to international trade, actually it’s not the Great Depression, it’s worse." Yes, he said that.

Krugman's attempt on that occasion, in his column, and elsewhere to draw comparisons between the magnitude of the Great Depression and the recent recession and were absurd for myriad reasons then as they are now, as I noted at the time here, also more recently here and here.

Now the speculation is over and the extent of Krugman's misread is evident. As The Economist reports this week, global trade and global manufacturing are surging back:

At first, the recession did hit trade hard. Global GDP fell by 0.6% in 2009 while the volume of world exports dropped by 12.2%. But whereas the Depression saw trade decline for at least four years, this time the rebound has been quick, and sharp. By May this year, emerging-economy members of the G20 were importing and exporting around 10% more than their pre-crisis peaks (see chart). Rich-world trade has recovered from the trough too, though it has not yet made up all the ground lost since the credit crunch began.

As it turns out, there is nothing Depressing about current prospects in the global economy...unless, of course, you happen to be Paul Krugman.

At least he's still got his Nobel Prize to keep him company while the rest of us enjoy the good (if not unexpected) news.

ADDENDUM: An response to all the praise for agreeement with comments on this posts.

First, Hooray for Paul Krugman. He is an elegant theoretician of international trade. Hooray again for Paul Krugman.

Now that were done with the hero worship, two additional points:

• Yes, the quote in the first line above came from remarks Krugman delivered a year ago. My question is this: How many times does Krugman have to compare the current recession to The Great Depression before he becomes accountable for having made that claim? It is clear why Krugman wants to advance this argument ("What Paul? The stimulus package might not have been big enough? You don't say..."). But at some point, if the sky doesn't fall, it is fair to say--sky's not falling, Paul.
• Along the same lines, but from an analytic vantage point: My 5-year old daughter can look at a chart and say "that line is pointing downwards." My 12-year old daughter can look a chart with two lines and say "Line A is more steeply sloped than Line B." Neither of them has a Nobel Prize (yet). So to say, as David more or less does (below), "He made that statement a year ago. How was he to know that the trend would reverse itself...completely. Invalidating his comparison...entirely." Indeed, how was he to know? Well that is exactly why he is paid the big bucks. That is why he has the big reputation. Because we expect that he can do more than just compare the slopes of two lines.

In scholarship, it's not what you know, it's how you know. Krugman is in a category with other macroeconomists whose projection of certainty goes far beyond the knowledge base on which such certainty can possibly be based. When events point out alleged experts' (potential, conditional even!) deficiencies in fundamental insight, it is worth noting. That is the point of this post.

(And by the way: I am not fundamentally opposed to analytically-based extrapolation based on trends. You just have be straight about what you really know with confidence, and be prepared to accept responsibility for your claims when any speculations made turn out to be wrong.)