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The following article was written by Michael Young, Opinion Editor of The Daily Star newspaper in Beirut, and was published there. It is reprinted here with permission and thanks.
It is odd that Geneva counted among its admirers the Argentinean writer Jorge Luis Borges, an inveterate reader of Kipling, Lovecraft and Swift. That this consumer of adventure should have developed a fondness for that grand anesthetic among cities merely illustrates just how paradoxical, too, seemed the effort of Palestinians and Israelis on Monday to disarm the high passion of their struggle on the sedate shores of Lake Leman.
The Geneva Initiative will continue to arouse interest, even as Israelis and Palestinians sink further into obstinate conflict. However, what the unofficial plan has done is highlight a deeper Middle Eastern pathology: For all its centrality to the Arab experience during the past half-century; for all the legitimate grievances it has aroused, the Palestinian national struggle has figuratively rendered the Arab world impotent. In their devotion to their Palestinian brethren, the Arabs have catastrophically impeded much-needed progress in other domains, so that deliverance may require transcending this Palestinian neurosis.
Nowhere was this better illustrated recently than in the reaction of many Arabs to US President George W. Bush’s speech before the National Endowment for Democracy. Bush stated that the United States had for too long backed autocratic regimes in the Middle East, and defined a vision for the future where such habits would, presumably, be abandoned. Skepticism is reasonable when politicians make promises, and Bush merits his share. However, what mainly greeted the speech in the Arab world was resentment, as if it were preferable to disown the American president than to make him practice what he preached.
The main justification for the ambient derision was the fate of the Palestinians. “How can Bush be sincere on democracy,” went the standard template of reaction, “when he continues to sanction Israeli abuse of the Palestinians?” The question was, and is, a fair one. But those asking it miss a fundamental point that has also eluded them in Iraq: It is far more profitable for America’s Arab critics to demand that the Bush administration fulfill its pledges, and use this as leverage to bring about Palestinian (and Iraqi) self-determination and democracy, than to fall back on futile and perennial doubt.
The Palestinian problem has also allowed countless Arab regimes to validate despotism and the over-militarization of their societies. While some might argue that this is natural when facing the reality, or possibility, of direct Israeli attack, the explanation is insufficient. For one thing, representative governments are even more adept than dictatorships at defending themselves; for another, open-ended autocracy has usually been implicitly justified, and accepted by Arab citizens, not because of an imminent threat from Israel, but because the Palestinian problem has yet to be resolved.
In so many words, the conveniently open wound of the Palestinian tragedy has allowed Arab regimes to exploit the ensuing outrage felt by their peoples, and to transform this into tolerance for authoritarian, security-obsessed systems perceived as necessary to fight (without ever fighting) a militarily superior Israel.
Specific states have also paid a heavy price for the sanctity of the Palestinian struggle none more so than Lebanon. In fact, the country has had to cough up on two occasions: first, when the Lebanese were denied a chance to defend their sovereignty against the Palestinian national movement in the late 1960s and early 1970s, since the Arab world saw this as an affront to the holy cause; and second, today, because the region’s fixation on the Palestinians has taken the spotlight away from an issue that anywhere else would have provoked profound concern: Syria’s indefinite military presence in Lebanon.
So, Lebanon’s civil war began because the Arabs were too enraptured by Palestinian militancy to see the destructive impact this was having on the country’s society; and today the Lebanese are told that a Syrian departure must await a resolution of the Arab-Israeli, or, more specifically, the Palestinian-Israeli conflict.
The Palestinians themselves have fallen victim to the inviolability of their cause. Witness the reaction to the Geneva Initiative, as Palestinians have assailed the plan on the grounds that it sells the refugees down the river. Ultimately, any plan, to be endorsed by both Israelis and Palestinians, will have to at least partly do just that, and the Palestinian leadership knows this. Yet it has opted for vagueness, peddling the story that Palestinian leader Yasser Arafat rejected a deal at Camp David because the refugees would have been wronged. This has only raised expectations among refugees that they will someday return to Haifa and Jaffa expectations that will doubtless be dashed for a majority of them.
That the Israelis and Palestinians should be reduced to negotiating virtual agreements would seem as good a sign as any that it is time for the Arab world to get on with its other priorities democratization, a new, mutually-beneficial rapport with the United States, economic development, reasonable demilitarization, not to mention ending the glaring anomaly of Syria’s presence in Lebanon. The invitation is not to abandon the Palestinians, nor is this morally reasonable; it is to encourage Arabs to cease contemplating their region solely through a lens dating back to 1948.
Tuesday, December 09, 2003
Monday, December 08, 2003
MR. RENQUIST'S WHOLLY-OWNED SUBSIDIARY
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By William Fisher
There is a windowless room on the seventh floor of the US Department of Justice building in Washington. Very few Americans know it’s there or what happens within its walls. Outside the US, even fewer people know of its existence. This is the home of America’s most secretive court: the Foreign Intelligence Surveillance Act Court (FISAC). And we need to know about it because what it does or doesn’t do can have a huge impact on the War Against Terror – and, many complain, on US civil liberties.
Here’s the background: The Court was established by Congress in 1978 as a Cold War tool to conduct secret domestic investigations of alleged enemy agents. In those days, it had little to do. Today, it is a virtual hive of activity, one of the principal centers of the Government’s domestic counter-terrorist activity. It is the origination point for Justice Department requests for “warrantless warrants” authorizing the FBI to conduct secret domestic wiretaps and other forms of snooping. The Department of Justice obtained 113 secret emergency search or electronic-surveillance authorizations in the year after 9/11, compared with 47 in the 23 years since its founding.
The court was originally established by Congress as part of the Foreign Intelligence Surveillance Act, but is now incorporated into what has become known as the USA Patriot Act. The Patriot Act was rushed through Congress without hearings six weeks after 9/11. It is staunchly defended by the Justice Department, which would like to see it expanded, while civil libertarians on both the Left and the Right continue to raise legal, moral and ethical questions about many of its provisions.
The seven judges who preside over the FISAC are appointed by the Chief Justice of the US Supreme Court, William A. Renquist. All are semi-retired Federal Judges. Atop the FISAC is the previously unknown Foreign Intelligence Surveillance Act Court of Review. (FISACR). The Review Court adjudicates disputes between the FISAC and the Justice Department. Its three judges are also semi-retired Federal Judges appointed by the Chief Justice. All are conservatives named to the bench by President Reagan. Until recently, the Review Court had virtually nothing to do; it heard its very first appeal – regarding implementation of part of the Patriot Act -- in 2003.
Here’s how the FISAC works. When Congress passed the original FISA, it put a “wall” between intelligence and law enforcement agencies after domestic spying abuses in the 1960s and 1970s. Federal Intelligence agencies have traditionally been forbidden to conduct domestic investigations, and the FISA Act continued to require strict court supervision over domestic intelligence efforts.
But the USA Patriot Act broke down those barriers. Among other things, it loosened standards for obtaining warrants. Prior to the passage of the new law, government officials had to prove their “primary” purpose for monitoring was foreign intelligence. Prosecutors in criminal cases must meet higher legal standards to win approval for searches or wiretaps than in intelligence cases. The Patriot Act changed the surveillance law to permit its use when collecting information about foreign spies or terrorists is "a significant purpose," rather than "the purpose" of an investigation. Backed by the new provisions, US Attorney General John Ashcroft dispatched a memorandum to FBI Director Robert Mueller and senior Justice Department officials, outlining ways to make it easier for investigators in espionage and terrorism cases to share information from searches or wiretaps with FBI criminal investigators.
But FISAC found, unanimously, that Ashcroft had pushed the envelope too far. His proposed procedures had lowered the "wall" between criminal investigations and intelligence gathering too much, and its provisions for sharing information between the two sides were "not reasonably designed" to prevent misuse of information in criminal cases. The ruling by the court came in a case in which the Justice Department approached FISAC for approval of surveillance of a US citizen who was alleged to be "aiding, abetting or conspiring with others in international terrorism."
The Court also said it had been misled dozens of times by the FBI and Justice Department officials. Documents released at the time showed that the court, which had not publicly disclosed any of its rulings in nearly two decades, said FBI and Justice officials in pursuit of search warrants or wiretap authorizations to spy on suspected terrorists had supplied erroneous information to the court on 75 occasions. The information was made public only because powerful members of a US Senate Committee demanded the documentation. Some of what they received:
§ In March 2000, the government revealed to the Court "disseminations of FISA information to criminal squads in the FBI's New York field office, and to the U.S. attorney's office for the Southern District of New York, without the required authorization of the Court as the 'wall' in four or five FISA cases."
§ In September 2000, "the government came forward to confess error in some 75 FISA applications related to major terrorist attacks directed against the United States. These included: a) an erroneous statement in the FBI director's FISA certification that the target of the FISA was not under criminal investigation; b) erroneous statements in the FISA affidavit of FBI agents concerning the separation of the overlapping intelligence and criminal investigations, and the unauthorized sharing of FISA information with FBI criminal investigators and assistant U.S. attorneys; and c) omissions of material facts from FBI FISA affidavits relating to a prior relationship between the FBI and a FISA target, and the interview of a FISA target by an assistant U.S. attorney.
§ In November 2000, the Court convened a "special meeting to consider the troubling number of inaccurate FBI affidavits in so many FISA applications." The Court made clear it would not accept inaccurate applications and demanded an investigation.
§ In March 2001, the government had to reveal yet another series of mishaps; in a situation where a "wall" had supposedly existed between separate intelligence and criminal squads, it turned out that "in fact all of the FBI agents were on the same squad and all of the screening was done by the one supervisor overseeing both investigations."
The court also said that intelligence gathered about terror suspects had been improperly shared with prosecutors and FBI agents handling criminal investigations. Because of these alleged improprieties, FISAC imposed restrictions on the procedures formulated by Ashcroft. The court said the information-sharing proposal was "not reasonably designed" to safeguard the privacy of Americans. The Court modified the procedures to require that whenever law enforcement officials meet with intelligence officers, such consultations and coordination must always include someone from Justice's Office of Intelligence Policy and Review, the office that works most closely with the Court and presents to it all applications for warrants.
But Justice bristled at the requirement for a "chaperon" being present at all meetings between the two sides. A senior Justice official said that requirement was a "significant procedural impediment." It took the case to the FISA Review Court, which lifted some restrictions placed on wiretaps and the sharing of information between law enforcement and intelligence officials. Ashcroft said the ruling, the first ever by the US Foreign Intelligence Surveillance Review Court, "revolutionizes our ability to investigate terrorists and prosecute terrorist acts."
Others were not as pleased. "We're disappointed with the decision, which suggests that [the spy court] exists only to rubber-stamp government decisions," said the American Civil Liberties Union.
Congressman John Conyers, Jr., Ranking Member of the House Judiciary Committee and Dean of the Congressional Black Caucus, issued the following statement regarding the decision to give the Justice Department broad authority in conducting wiretaps and other surveillance on terrorism suspects within the United States:
"Not only is this a despicable ruling, it is a ruling that was decided in secret behind closed doors. What the public does not know is that the court heard only a one-sided argument by the Justice Department and FBI, which have repeatedly lied and misinformed the lower FISA court when seeking authorizations for secret wiretaps and physical searches…The Administration's race down the slippery slope of eroding constitutional safeguards seems to have no end in sight. Today's disappointing decision constitutes an embarrassing step backwards for civil liberties in this country. Piece by piece, this Administration is dismantling the basic rights afforded to every American under the Constitution….”
And just this week, the Inspector General of the Justice Department reported there is a double standard of discipline, a lenient one for management and a strict one for employees.
Despite the Justice Department’s having amended its guidelines to win the FISA court's approval, the Bush administration took its case to a Federal Appeals Court. It challenged the spy-court's restrictions on the sharing of information between terrorism investigators and criminal investigators. In the appeal, Ashcroft said the lower court failed to acknowledge that the new law, passed in response to the Sept. 11 attacks, altered the standard lawyers must meet when seeking to monitor a person and share information between criminal detectives and terrorism investigators. Under the act, Ashcroft argued, federal lawyers may share information and monitor people in cases in which law enforcement is the primary interest. Government lawyers need only show there is a ‘significant’ foreign intelligence purpose related to the activity, Ashcroft said.
The Appeals Court overturned the FISAC decision, and ruled that the Justice Department has broad discretion in the use of wiretaps and other surveillance techniques to track suspected terrorists and spies. The ruling allows the Justice Department to get wiretap authority in the FISA secret intelligence court, under more relaxed standards than used in a regular criminal court, even if the investigation is not exclusively concerned with terrorism.
The 56-page opinion by the three-judge appeals panel overturning the FISAC decision said the expanded wiretap guidelines sought by Attorney General John Ashcroft under the new USA Patriot Act law do not violate the Constitution.
Critics said they feared government might use the change to employ espionage wiretaps in common criminal investigations, and there is growing evidence that this has indeed happened. The American Civil Liberties Union and several other groups argued that Ashcroft's proposed guidelines would unfairly restrict free speech and due process protections by giving the government far greater ability to listen to telephone conversations and read e-mail.
Senators Patrick Leahy (D-Vt.), Charles Grassley (R-Iowa) and Arlen Specter (R-Penn.) released a report concluding that the same systemic problems facing the FBI that were highlighted by Judiciary Committee oversight hearings held during the 107th Congress also affected its ability to fight terrorism both before and after the attacks of September 11. The report also outlined those agencies’ lack of cooperation in Congressional efforts to oversee their performance. The Report underscored the need for openness and oversight of the Justice Department and FBI. It also called for increased Congressional oversight of FBI efforts to snoop on public, high schools and university library users.
“No one is questioning the government's authority to prosecute spies and terrorists,” said Ann Beeson, litigation director of the ACLU's Technology and Liberty program. “But we do not need to waive the Constitution to do so.”
And a New York Times editorial found “more disturbing” the court's “substantive decision and the way the Justice Department is interpreting it. The decision gives the government a green light to remove the separation that has long existed between officials conducting surveillance on suspected foreign agents and criminal prosecutors investigating crimes. Attorney General John Ashcroft has announced that he intends to use it to sharply increase the number of domestic wiretaps, and that he will add lawyers at the F.B.I. and at federal prosecutors' offices around the country to hurry the process along. The Supreme Court should step in to restore the lower court's ruling, and Congress should redraft its statutes to clear up any confusion about what the law requires. One of the biggest challenges the nation faces is fighting foreign enemies without sacrificing civil liberties at home. Yesterday's ruling failed to rise to that challenge.”
END
An edited version of this article appeared in The Daily Star newspaper, Beirut.
By William Fisher
There is a windowless room on the seventh floor of the US Department of Justice building in Washington. Very few Americans know it’s there or what happens within its walls. Outside the US, even fewer people know of its existence. This is the home of America’s most secretive court: the Foreign Intelligence Surveillance Act Court (FISAC). And we need to know about it because what it does or doesn’t do can have a huge impact on the War Against Terror – and, many complain, on US civil liberties.
Here’s the background: The Court was established by Congress in 1978 as a Cold War tool to conduct secret domestic investigations of alleged enemy agents. In those days, it had little to do. Today, it is a virtual hive of activity, one of the principal centers of the Government’s domestic counter-terrorist activity. It is the origination point for Justice Department requests for “warrantless warrants” authorizing the FBI to conduct secret domestic wiretaps and other forms of snooping. The Department of Justice obtained 113 secret emergency search or electronic-surveillance authorizations in the year after 9/11, compared with 47 in the 23 years since its founding.
The court was originally established by Congress as part of the Foreign Intelligence Surveillance Act, but is now incorporated into what has become known as the USA Patriot Act. The Patriot Act was rushed through Congress without hearings six weeks after 9/11. It is staunchly defended by the Justice Department, which would like to see it expanded, while civil libertarians on both the Left and the Right continue to raise legal, moral and ethical questions about many of its provisions.
The seven judges who preside over the FISAC are appointed by the Chief Justice of the US Supreme Court, William A. Renquist. All are semi-retired Federal Judges. Atop the FISAC is the previously unknown Foreign Intelligence Surveillance Act Court of Review. (FISACR). The Review Court adjudicates disputes between the FISAC and the Justice Department. Its three judges are also semi-retired Federal Judges appointed by the Chief Justice. All are conservatives named to the bench by President Reagan. Until recently, the Review Court had virtually nothing to do; it heard its very first appeal – regarding implementation of part of the Patriot Act -- in 2003.
Here’s how the FISAC works. When Congress passed the original FISA, it put a “wall” between intelligence and law enforcement agencies after domestic spying abuses in the 1960s and 1970s. Federal Intelligence agencies have traditionally been forbidden to conduct domestic investigations, and the FISA Act continued to require strict court supervision over domestic intelligence efforts.
But the USA Patriot Act broke down those barriers. Among other things, it loosened standards for obtaining warrants. Prior to the passage of the new law, government officials had to prove their “primary” purpose for monitoring was foreign intelligence. Prosecutors in criminal cases must meet higher legal standards to win approval for searches or wiretaps than in intelligence cases. The Patriot Act changed the surveillance law to permit its use when collecting information about foreign spies or terrorists is "a significant purpose," rather than "the purpose" of an investigation. Backed by the new provisions, US Attorney General John Ashcroft dispatched a memorandum to FBI Director Robert Mueller and senior Justice Department officials, outlining ways to make it easier for investigators in espionage and terrorism cases to share information from searches or wiretaps with FBI criminal investigators.
But FISAC found, unanimously, that Ashcroft had pushed the envelope too far. His proposed procedures had lowered the "wall" between criminal investigations and intelligence gathering too much, and its provisions for sharing information between the two sides were "not reasonably designed" to prevent misuse of information in criminal cases. The ruling by the court came in a case in which the Justice Department approached FISAC for approval of surveillance of a US citizen who was alleged to be "aiding, abetting or conspiring with others in international terrorism."
The Court also said it had been misled dozens of times by the FBI and Justice Department officials. Documents released at the time showed that the court, which had not publicly disclosed any of its rulings in nearly two decades, said FBI and Justice officials in pursuit of search warrants or wiretap authorizations to spy on suspected terrorists had supplied erroneous information to the court on 75 occasions. The information was made public only because powerful members of a US Senate Committee demanded the documentation. Some of what they received:
§ In March 2000, the government revealed to the Court "disseminations of FISA information to criminal squads in the FBI's New York field office, and to the U.S. attorney's office for the Southern District of New York, without the required authorization of the Court as the 'wall' in four or five FISA cases."
§ In September 2000, "the government came forward to confess error in some 75 FISA applications related to major terrorist attacks directed against the United States. These included: a) an erroneous statement in the FBI director's FISA certification that the target of the FISA was not under criminal investigation; b) erroneous statements in the FISA affidavit of FBI agents concerning the separation of the overlapping intelligence and criminal investigations, and the unauthorized sharing of FISA information with FBI criminal investigators and assistant U.S. attorneys; and c) omissions of material facts from FBI FISA affidavits relating to a prior relationship between the FBI and a FISA target, and the interview of a FISA target by an assistant U.S. attorney.
§ In November 2000, the Court convened a "special meeting to consider the troubling number of inaccurate FBI affidavits in so many FISA applications." The Court made clear it would not accept inaccurate applications and demanded an investigation.
§ In March 2001, the government had to reveal yet another series of mishaps; in a situation where a "wall" had supposedly existed between separate intelligence and criminal squads, it turned out that "in fact all of the FBI agents were on the same squad and all of the screening was done by the one supervisor overseeing both investigations."
The court also said that intelligence gathered about terror suspects had been improperly shared with prosecutors and FBI agents handling criminal investigations. Because of these alleged improprieties, FISAC imposed restrictions on the procedures formulated by Ashcroft. The court said the information-sharing proposal was "not reasonably designed" to safeguard the privacy of Americans. The Court modified the procedures to require that whenever law enforcement officials meet with intelligence officers, such consultations and coordination must always include someone from Justice's Office of Intelligence Policy and Review, the office that works most closely with the Court and presents to it all applications for warrants.
But Justice bristled at the requirement for a "chaperon" being present at all meetings between the two sides. A senior Justice official said that requirement was a "significant procedural impediment." It took the case to the FISA Review Court, which lifted some restrictions placed on wiretaps and the sharing of information between law enforcement and intelligence officials. Ashcroft said the ruling, the first ever by the US Foreign Intelligence Surveillance Review Court, "revolutionizes our ability to investigate terrorists and prosecute terrorist acts."
Others were not as pleased. "We're disappointed with the decision, which suggests that [the spy court] exists only to rubber-stamp government decisions," said the American Civil Liberties Union.
Congressman John Conyers, Jr., Ranking Member of the House Judiciary Committee and Dean of the Congressional Black Caucus, issued the following statement regarding the decision to give the Justice Department broad authority in conducting wiretaps and other surveillance on terrorism suspects within the United States:
"Not only is this a despicable ruling, it is a ruling that was decided in secret behind closed doors. What the public does not know is that the court heard only a one-sided argument by the Justice Department and FBI, which have repeatedly lied and misinformed the lower FISA court when seeking authorizations for secret wiretaps and physical searches…The Administration's race down the slippery slope of eroding constitutional safeguards seems to have no end in sight. Today's disappointing decision constitutes an embarrassing step backwards for civil liberties in this country. Piece by piece, this Administration is dismantling the basic rights afforded to every American under the Constitution….”
And just this week, the Inspector General of the Justice Department reported there is a double standard of discipline, a lenient one for management and a strict one for employees.
Despite the Justice Department’s having amended its guidelines to win the FISA court's approval, the Bush administration took its case to a Federal Appeals Court. It challenged the spy-court's restrictions on the sharing of information between terrorism investigators and criminal investigators. In the appeal, Ashcroft said the lower court failed to acknowledge that the new law, passed in response to the Sept. 11 attacks, altered the standard lawyers must meet when seeking to monitor a person and share information between criminal detectives and terrorism investigators. Under the act, Ashcroft argued, federal lawyers may share information and monitor people in cases in which law enforcement is the primary interest. Government lawyers need only show there is a ‘significant’ foreign intelligence purpose related to the activity, Ashcroft said.
The Appeals Court overturned the FISAC decision, and ruled that the Justice Department has broad discretion in the use of wiretaps and other surveillance techniques to track suspected terrorists and spies. The ruling allows the Justice Department to get wiretap authority in the FISA secret intelligence court, under more relaxed standards than used in a regular criminal court, even if the investigation is not exclusively concerned with terrorism.
The 56-page opinion by the three-judge appeals panel overturning the FISAC decision said the expanded wiretap guidelines sought by Attorney General John Ashcroft under the new USA Patriot Act law do not violate the Constitution.
Critics said they feared government might use the change to employ espionage wiretaps in common criminal investigations, and there is growing evidence that this has indeed happened. The American Civil Liberties Union and several other groups argued that Ashcroft's proposed guidelines would unfairly restrict free speech and due process protections by giving the government far greater ability to listen to telephone conversations and read e-mail.
Senators Patrick Leahy (D-Vt.), Charles Grassley (R-Iowa) and Arlen Specter (R-Penn.) released a report concluding that the same systemic problems facing the FBI that were highlighted by Judiciary Committee oversight hearings held during the 107th Congress also affected its ability to fight terrorism both before and after the attacks of September 11. The report also outlined those agencies’ lack of cooperation in Congressional efforts to oversee their performance. The Report underscored the need for openness and oversight of the Justice Department and FBI. It also called for increased Congressional oversight of FBI efforts to snoop on public, high schools and university library users.
“No one is questioning the government's authority to prosecute spies and terrorists,” said Ann Beeson, litigation director of the ACLU's Technology and Liberty program. “But we do not need to waive the Constitution to do so.”
And a New York Times editorial found “more disturbing” the court's “substantive decision and the way the Justice Department is interpreting it. The decision gives the government a green light to remove the separation that has long existed between officials conducting surveillance on suspected foreign agents and criminal prosecutors investigating crimes. Attorney General John Ashcroft has announced that he intends to use it to sharply increase the number of domestic wiretaps, and that he will add lawyers at the F.B.I. and at federal prosecutors' offices around the country to hurry the process along. The Supreme Court should step in to restore the lower court's ruling, and Congress should redraft its statutes to clear up any confusion about what the law requires. One of the biggest challenges the nation faces is fighting foreign enemies without sacrificing civil liberties at home. Yesterday's ruling failed to rise to that challenge.”
END
An edited version of this article appeared in The Daily Star newspaper, Beirut.
Saturday, November 22, 2003
VOLUNTERISM IN PRIVATE ENTERPRISE DEVELOPMENT UNDER USAID PROGRAMS
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The following article was written by Dr. Jack N. Behrman of the University of North Carolina. It is posted here with permission. Dr. Behrman is Luther Hodges Distinguished Professor Emeritus at the University of North Carolina's Kenan-Flagler Business School, having served from 1964 to 1991, directing the MBA Program for seven years and serving as Assoc. Dean for four. He is currently Chairman of the MBA Enterprise Corps, which was founded by a Consortium of the 16 leading graduate Business Schools in 1990, now having 52 member schools. It sends recently-graduated, but experienced MBAs on year-long assignments as consultants with private and privatizing companies in countries transforming from planned to market economies. Over 650 young men and women have served in 21 countries of Central Europe, Russia, Africa, Lain America, and Central and SE Asia.
Dr. Behrman's expertise lies in the areas of international economics & business, transnational corporations (TNCs), international business/government relations, ethics, comparative management, science & technology, and creativity and innovation. His teaching and research focused on these subjects, on which he testified before Congressional and UN Committees. He worked in over 75 countries, performing governmental duties, consulting, researching, lecturing, and establishing the Corps. He has published over 40 books and monographs and more than 140 professional articles and essays.
During 1961-1964, Dr. Behrman was Assistant Secretary of Commerce for Domestic and International Business, serving with Secretary Luther H. Hodges under Presidents Kennedy and Johnson. He was responsible for the Department's international trade and investment programs, trade with the Soviet-bloc countries, and domestic industrial promotion and mobilization.
The U.S. Agency for International Development (AID) has sought over the past decades to pursue specific strategic objectives related to socio-economic-political progress in countries receiving assistance. Its main resource has been capital contributions to projects approved by it and the host governments, supplemented by technical and other assistance supplied principally by contractors. American experts in many fields have been used successfully through private volunteer organizations (PVOs) under contracts directly with AID, as partners with other NGOs, or as sub-contractors with for-profit consultants.
The importance of volunteers was stressed by President Bush in a speech before the Coast Guard Academy (May 21, 2003) in his initiative to expand volunteerism: "For more than four decades, the volunteers of the Peace Corps have carried the good will of America into many parts of the world. Interest in this program is greater than ever before. I'm determined to double the size of the Peace Corps over five years. Today, I would like to announce a new USA Freedom Corps initiative called Volunteers for Prosperity, which will give America's highly skilled professionals new opportunities to serve abroad. The program will enlist American doctors and nurses and teachers and engineers and economists and computer specialists, and others to work on specific development initiatives, including those that I have discussed today. These volunteers will serve in the countries of their choice, for however long their project takes. Like generations before us, this generation of citizens will show the world the energy and idealism of the United States of America."
Coupling volunteerism with the objective of catalyzing a private enterprise system not only promotes growth directly but it also assists in the other major elements of development, including creating infrastructure, protection of the environment, enhancement of human resource capacity, stabilization of population growth, promotion of democracy through building a middle class, and even alleviation of humanitarian needs. Yet, over the five decades of foreign aid, assistance to the private sector has not been a top priority nor has the use of volunteers in private enterprise development. Support for establishment of private enterprise systems has been extended by AID since the mid-1960s, but AID-Washington and the various Missions have considered that the business sector could and should provide for its own development.
Programs for Afghanistan and Iraq reveal little attention to the private sector. Within the private sector, small and medium enterprises (SMEs) represent the most dynamic businesses and account for the majority of employment and growth opportunities. SMEs are the easiest to help and, in emerging economies and former socialist countries, still require technical and managerial assistance to grow and achieve sustainability. Technical and managerial assistance by professional volunteers funded by private foundations and corporations, and other international donor agencies provide a demonstration of the public-private partnership that is required to generate (a) solid and sustained economic growth; (b) greater cross–cultural understanding; and (c) closer commercial ties in an increasingly open world economy.
Neither AID nor its European counterparts have given the private enterprise system the priority it deserves in economic development, partly because of the need for basic infrastructure and governmental reform. But for these to be effective in promoting growth, they must be accompanied by the development of a dynamic private enterprise system. The best teachers for this are those who have managed such enterprises and the complementary institutions in the advanced countries. Volunteer Experts (VEs) are available in the various sectors involved.
Strategic Objectives
The fall of the Berlin Wall and the emergence into the world economy of formerly socialist or planned economies required new strategic objectives in AID programs facilitating the entry of these countries into a world characterized by democracy and capitalism. The primary objective of accelerating economic growth providing useful employment had now to be accompanied by assistance in the establishment of democratic institutions and development of a private enterprise system almost "de novo". These two systems had few (if any) historical roots in the countries of the Former Soviet Union, out of which most of the emerging economies were coming.
Programs
(1) Macro-programs
During the years since 1989, AID has instituted programs in these transitional countries at both the macro and micro-economic levels to catalyze growth and help prepare them to compete in a globalizing economy.
The macro programs focused principally on monetary and fiscal policies and the public and private institutions that would formulate and implement them.
Thus, assistance has been given to central banks, to state-owned and private commercial banks, to investment banks, stock exchanges, brokerages, and insurance companies. These are critical in mobilizing and investing the necessary capital for growth of the new enterprises, yet none had adequate experience with financing enterprises in a market economy.
Formation and conduct of enterprises was often blocked by tax laws and regulations held over from socialist-planning regimes. Authorities at all levels of government were counseled under AID programs on appropriate statutes and regulations, and provincial and municipal governments were assisted in budget and management. Counsel was also given to parliaments on appropriate legislation to guide and supervise policy implementation and to regulatory agencies responsible for local implementation.
In many of these programs, volunteer experts were used to assist in the formation and implementation of legislative and statutory aspects.
(2) Private Sector Assistance
At the micro level, assistance was given in the promotion of a private enterprise system and the controls necessary to guide and constrain it to fit with broad socio-economic-political objectives. One of these, of course, was the promotion of democratic institutions at all levels of government; assistance was given directly but also indirectly through the development of a market economy. The initial objective was that of removing the controls under the former planned economies so enterprise could flourish in a "free market". But this was soon seen as inadequate, for what quickly arose was a type of “cowboy capitalism” unfettered by either ethical or legal constraints as is required to serve the interests of consumers rather than producers.
The drive for quick profits by entrepreneurs moved these economics closer to an “acquisitive society”—draining the real and financial resources of the country through monopoly, corruption, and criminal activity--than to a “civil society”. Private entrepreneurs sought to control the politicians and government for their benefit; as one Russian entrepreneur was quoted: “Politics is the most profitable game in town”.
The entire statutory complex supporting the growth of private enterprise and constraining it had to be constructed. Assistance was needed by all levels of government from public policy and planning to formulating and implementing the promotion and regulation of private enterprise, including laws on formation and incorporation of enterprises, contract and regulatory law, accounting and auditing, means of gathering and disseminating information, advertising, securities markets, as well as means of fighting corruption in business and government. It was also needed by enterprises that were privatized out of state-owned enterprises, start-ups, and those entering joint-venture negotiations. Their needs covered the full range of managerial and enterprise functions—from organization and governance to marketing, accounting, inventory and quality controls, financial controls, supply chain management, personnel and worker training, and acquisition and application of new technologies. AID assistance was offered sporadically and unsystematically to various sectors of industry, finance, and services--from trade associations, to consulting firms, to NGOs supporting the commercial sector, to business education, and to the role of women in a market economy.
Business service organizations were notable by their scarcity—e.g., accounting firms, law firms versed in commercial law and governance, tax counsel, advertising firms, brokerages, trade and industry associations, and the various NGOs that, in the Western world, look after consumer, labor, community, or environmental interests. Nascent enterprises and existing small- and medium enterprises (SMEs) were without the varied supports provided or available in advanced countries.
Former state-owned enterprises that were recently privatized frequently were owned and managed by ex-employees of the state, having little understanding of a market economy and the requirements of competition. Management styles were authoritarian, rigid, and centralized with little delegation or even dissemination of information. Mutual funds were formed to own (and control?) multiple newly privatized enterprises, but their management also knew little of a market economy and the requirements for obtaining (long-term) equity financing or (short-term) working capital. The major scarce resources were capital, management, and technology—and remain so in the first years of the 21st century. But, emerging private enterprises (and governments) focused on the capital needs, not realizing sufficiently that private capital requires assurance of competent management and relevant (competitive) technology in the enterprise.
In pursuit of all of these strategic economic objectives, AID and its Missions relied on several PVOs—notably the merged Agriculture Cooperative Development Initiative and Volunteers for Overseas Cooperative Action (ACDI/VOCA), Citizens Democracy Corps (aka Citizens Development Corps – CDC), International Executive Service Corps (IESC), and MBA Enterprise Corps (MBAEC). They were given separate contracts, or in collaboration with each other or with private consulting firms. These volunteers were used successfully in almost every aspect of private sector development—mainly in direct firm-level assistance but including teaching in business schools and institutes and in programs to train future trainers.
At times, these organizations have collaborated in the field with volunteers from the Canadian Executive Service Organization (CESO), the British Executive Service Overseas (BESO), the British Know-How Fund, and the Senior Volunteer Service Corps (an amalgam of several national entities). Each of these has been involved for a number of years in providing the same types of assistance to developing countries and emerging-market economies around the world as the American PVOs but funded by their national governments, the EBRD, or the European Commission.
Roles of PVOs
The PVOs negotiated with AID Missions on the specifics of assistance programs to determine how they fit with the Strategic Objectives for a given country as stated in Requests for Proposals(RFPs) or Requests for Assistance (RFAs). Each PVOs responded individually or in conjunction with one or more of the others to create an appropriate proposal to the Mission. These responses were often made in competition or collaboration with U.S. consulting firms. The PVOs were, on many occasions, able to help design the programs to make them more effective in achieving the strategic objectives.
Once a contract was signed with an AID Mission, the PVO set about recruiting the specified experts, matching them to the client enterprises or organizations (public or private). Country directors or Chiefs of Party were posted in the host country to manage the PVO activities; they would find appropriate clients and diagnose their needs, support and monitor volunteer activity, and report to AID and PVO headquarters.
Volunteers to the several PVOs devoted to private sector development have come from a wide range of sources, bringing a variety of experiences. ACDI/VOCA and IESC are the oldest in the group and have the largest rosters of volunteers available for assignment abroad. ACDI/VOCA draws from the agricultural community in the main, including Schools of Agriculture in numerous universities in the U.S. and Extension Services. Its volunteers go on short and long-term tours, covering all aspects of agriculture and agri-business, including formation of cooperatives and financing of projects and equipment.
IESC has a roster of more than 11,000 senior-level U.S. business executives and professionals interested in assignments abroad as volunteers. These assignments are typically four to six weeks in length, although some last up to a year. Assignments may be "piggy backed" for a second or third client to reduce the costs of overseas travel. IESC volunteers are principally senior level executives, collectively, they have been involved in almost all of the sectors and activities noted above. In addition, its recently acquired affiliate, Geekcorps, has a database of younger volunteers who are experts in communications and information technology.
The CDC and the MBAEC were both instituted in 1990 and merged in 2001 to meld the more experienced managers on CDC’s 6,000 person roster and MBAEC’s recently minted MBAs from 50 of the leading U.S. graduate business schools.
On occasion, the AID Mission extended the contract for assistance to an American consulting firm, which in turn sub-contracted with a PVO, sometimes under instructions from the AID Mission to use their resources and expertise. The contract procedures adopted by most Missions results in placing the PVOs at a competitive disadvantage in bidding. For-profit firms are preferred since they offer greater control opportunities to the Mission through its use of Requests for Proposals (RFPs) rather than Requests for Applications (RFAs) in offering contracts. Missions prefer to deal with large-scale, multi-faceted consulting firms rather than PVOs. And, the former practice of accepting unsolicited proposals has virtually vanished, despite the fact they offered PVOs more opportunity to design programs in which they would be most effective.
While many USAID Missions have included some elements of private sector development in their Strategic Objectives, most have not recognized the value of or the best strategies for enterprise and economic growth - and their contract procedures tend to squeeze PVOs into a sub-contract position, making them subject to the dictates of for-profit organizations that have no incentive to use them as a major delivery mechanism, despite their effectiveness and their traditional creation and implementation of public-private partnerships. Time and again, business volunteers report that private sector development is the best kind of foreign aid. U.S. volunteers are welcomed and listened to in most developing countries, especially those that have grown wary or weary of high priced consultants.
The outcome of these procedures and preferences is to significantly favor the use of consulting firms - which cost more but can be more closely managed under contracts than PVOs under cooperative agreements. Yet, comparatively, PVOs have deeper and broader long-term impact, are more cost effective, and build the necessary bottom-up support for both economic and democratic development.
Country Programs
Despite the fact that many Missions have similar Strategic Objectives relative to private sector development, their programs have not been patterned after each other. In the early part of the 1990s, Missions contracted with each of the four PVOs separately and coordinated their activities within the Mission itself—if there was any coordination. Each was used in ways determined appropriate by the Mission, which has been the principal funding source. Private corporations and foundations have contributed funds, but always less than 30% during a budget year and usually less than 10%; these funds have been largely unrestricted as to country or type of assistance.
In order to offer an integrated package of assistance to the Mission in Ukraine, an Alliance of four PVOs was formed, which then negotiated with the Mission as to the program that would be most appropriate and effective. IESC was the lead organization, responsible for administering the contract and selecting and monitoring the Chief of Party. The budget was allocated among the four PVOs according to their ability to meet the specific terms of the contract, which was successfully extended over six years.
In Bulgaria, all private sector assistance was coordinated under an administrative coalition of seven PVOs and consultants. This Firm Level Assistance Group (FLAG) was under the supervision of a unit from the University of Delaware; it coordinated the selection of client organizations, monitored specific activities, and assessed results.
To enhance Sustainability of private sector development, several AID Missions decided that the best approach would be to develop Business Service Programs (BSPs) or –Organizations (BSOs) or –Centers (BSCs). These entities were established to provide management courses and seminars to local enterprises and to follow up with direct consultation as needed by those attending. Since the BSOs did not have sufficient local consultants to provide the courses or direct firm assistance, the PVOs were requested to send their volunteers.
Contributions of Volunteers
The impacts of the volunteers depended not only on their own experience, which was substantial because of their long tenure in responsible positions in industry, commerce, and finance, but also on the willingness of host management and public officials to respond, which was not always high. Volunteers were sometimes requested for what was later seen as a mere “showing off” of connections and prestige. An expert volunteer could work through or around such obstacles, if the time was available.
Another obstacle was a mis-diagnosis of the problems in the client enterprise. Volunteers frequently found that the major bottleneck to competitive success was some other problem—e.g., not the lack of funds, but the difficulty of collecting from buyers, or the low level of sales, or the poor quality of marketing or of the products themselves, or the failure to test materials, poor inventory control, or inadequate cost controls and accounting, or outdated manufacturing processes and technology, or low worker morale from rigid and authoritarian management. Volunteers spent initial weeks ferreting out the problems that needed solutions and convincing management that these were, in fact, the major problems.
For example, one volunteer saw that a strong marketing effort was needed with solid advertising, but on making his recommendation, the CEO replied that this was too costly; the volunteer argued that customers would not know of the product without such an effort. But the CEO replied that “No one wants our product anyway.” “How do you know?” “Because we have a large inventory outside and no one has come to get it!” This, of course, was the procedure under Communism, where the enterprises produced and the government picked up the products for delivery to the government stores.
Program Problems
Besides the management and enterprise problems met by the volunteers and consultants engaged in private sector development, AID Missions faced several problems in the conduct and assessment of the private-sector programs: time-frame, continuity, results assessment, bias against business, and sustainability.
1. Congressional support is required from year-to-year and budget allocations are made annually so that there is concern to demonstrate effectiveness on an annual basis, but private enterprise development is a long-term matter—on the order of decades, not years, when the transition of an entire economy and polity is involved. Yet, the career assignment of Mission officers is usually three years at any post, leaving the fruits of the assistance to be garnered by future personnel.
Unlike project assistance, one cannot point to new housing, dams, roads, or even new government agencies, for which there is physical evidence at least within three years. It requires strong dedication on the part of Mission officers to maintain private sector development as a part of their Strategic Objectives. Therefore, the support for private enterprise varies from Mission to Mission and within the same Mission as personnel are moved to new posts.
2. The continuity of assistance to the private sector is difficult to maintain also because of changes in budgetary priorities on the part of both the Executive Branch and Congress. Greater attention to Russia shifted funds from Central Europe during the last decade of the 20th century, and from the three Visegrad countries to the Baltics and Balkans as the former group was considered to have moved well into their transition despite the fact that there was much yet to be done. Programs that could have solidified the strategic objectives were terminated, leaving a weaker foundation for further development than had been anticipated initially.
3. Support for the private sector was difficult to maintain for lack of clear results on a cost/benefit basis. In dealing with enterprises seeking to succeed in a market economy, complex forces play on the competitive strength of the company or business service organization being assisted. In the case of enterprises, success of the volunteer expert depends on the willingness of management (and owners) to absorb and apply the counsel offered. Not only the attitude of management but also the structure of the organization and practices as to delegation and information dissemination affect the transmission and response to recommendations. Further, it is difficult to attribute a given success—e.g., reducing mobility of workers or managers, increasing exports, raising quality control, increases in productivity, improvement in sales organizations or marketing procedures and advertising, improved accounting, better data gathering, higher morale of workers, and so on—to the presence or advice of a single volunteer expert. Even if there is a specific recommendation and it is followed, the desired results may not be evident for a few years.
In attempting a cost/benefit analysis, it is not difficult to determine costs, but it is difficult to pinpoint results attributable to the volunteer. There are too many factors affecting success or failure of a firm—from attitudes and competence of personnel to environmental and market factors-- to calculate the "value" of a volunteer. Even if there is an apparent failure in assistance to a given enterprise, individual members of the company may gain substantial training from the volunteer, using it in subsequent positions.
4. A further problem faced in Mission programming is the historical priority within AID toward humanitarian, health, housing, and poverty programs as distinct from those aimed at the business community, against which there has been a long-standing bias. This was, certainly, the case within the European Recovery Program—though the Productivity Teams sent to the U.S. for training in the 1950s were quite successful—and the Alliance for Progress in Latin America in the 1960s.
But, in the transitional countries of the FSU from the 1990s-- the enterprises (management and owners) did and do not have the background of market systems that existed in Europe and Latin America. And, in many instances, Mission officers did not have experience or preparation in the institutional requisites for building a functioning private enterprise system, or in assessing the needs within companies. Thus, many Missions have given a priority to formation and development of business service organizations, which could only be useful if a critical mass of successful enterprises arose to require their services.
5. Building a private enterprise system requires the establishment of institutions (public and private) and support organizations that are sustainable over the long term so that businesses can determine their
strategies, product lines, markets, and financial needs with some certainty.
AID Missions have been insistent on leaving a “legacy” of a sustainable mix of enterprises and business support organizations. And both volunteer experts and contract consultants have been used to pursue this goal. However, the lack of adequate continuity of funding year-to-year plus the absence of local funding for NGOs and other service organizations means that U.S. assistance is not likely to achieve the sustainability objective in any country of the CEE or CAR regions. Rather, success is a matter of efforts by local enterprises, government agencies, and NGOs establishing the proper atmosphere ("favorable climate") and keeping their eyes on the goals of democracy and a private enterprise system. A higher probability of success would arise if the volunteer assistance were continued for a longer term—buying more time--which could be done at minimum cost compared to much concessional aid, which does not develop the commitment and responsibility necessary to buttress continued growth.
Cost-Benefit of Volunteers
The cost of the volunteers consisted of a recruitment process, orientation and preparation, travel (abroad and locally), per diem for meals and housing, and medical insurance. Normal practice is for the host enterprise or organization to pay the local costs of living for the volunteer plus a translator, if needed, with the donor organization paying all dollar costs. The value of a donated work-day varies among the PVOs, ranging from $200 to $500, depending on their experience. The dollar costs include recruitment and administration, airfare, insurance, orientation and training, and (for long-term volunteers) a resettlement stipend. Total per work-day costs paid by USAID have ranged from $125 to $1000, depending on the host country and project-year under consideration. Assignments are generally with one host organization, but piggy-backing and short-term instructional assignments are also made to reduce costs and spread the benefits.
These costs amounted to a fraction of the cost of personnel from consulting firms that were often contracted by AID. Preference for these contractors rested on the desire of Missions to deal with one (rather than several) sources and, more importantly, the lack of familiarity of the Missions with volunteers and how to fit them into the desired programs.
The benefits can be counted in terms of the contributions to national, regional, or local progress, to the productivity and competitiveness of the client enterprise, to management development, to worker morale, and to the volunteer as well, who gained knowledge, understanding, friends, and contacts that could develop into commercial ties. All of these benefits continued long past the period of the volunteer’s visit, for questions and answers were continuously communicated, return visits occurred, and managers became interested in further training or education or visits to the U.S. for “hands-on” observation of U.S. practices. These latter were promoted by East-West Management (a unit of Civil Society) and the Center for Citizens Initiative (CCI), which selected key managers in the CEE region to be hosted by volunteering companies in the U.S. Again, close contacts were made that often culminated in commercial ties or joint ventures. Thus, long-term bridges were built between the U.S. and host countries through greater cross-cultural understanding and mutual interests.
The success stories of these volunteers can be numbered by the hundreds over 50 or more emerging countries – whether or not transitioning from socialist or planned economies. They show the altruism and dedication of the volunteers themselves, the gratitude of the recipients, the pleasure of the AID Missions and U.S. Embassies, the welcome by the host governments; and they have contributed to the Strategic Objectives in each country. An AID survey of PVO contributions to development of private enterprise in Poland concluded as follows:
“There are numerous examples where the assistance provided made a significant and lasting contribution to the performance of an individual firm. Positive results were found across sectors, regions, and providers. Examples of this assistance range from the general, e.g., changing management style, to the specific, e.g., revising product lines, implementing new accounting procedures. One oft-repeated outcome of assistance, although difficult to quantify, is that the advisor’s assistance changed the management style and/or the way senior management looked at a problem.” (SME Field Survey of Poland, 1997, p.11)
The benefits to the client enterprises have been both immediate and long-term. For those managements that were responsive, improvements were noted in -
· business strategies and management skills;
· information gathering and dissemination within the firm;
· commercial contacts provided through direct introductions or through trade fairs and exhibits;
· mind-sets toward market-decisions and competition;
· international accounting and ISO-2000 quality standards;
· marketing skills and financial controls;
· enterprises qualifying for new financing;
· export marketing;
· advertising programs;
· establishment of stock markets and brokerage firms;
· establishment of business associations and advocacy roles;
· product analysis and rationalization of product lines;
· procedures for the conduct of business meetings internally and negotiations externally;
· methods for influencing policies toward business and its regulation;
· establishment of entities for continued consultation and training.
Governments at all levels, if responsive, improved their policies in support of private sector development, including more reasonable, simple, and certain taxation, regulations on consumer protection, corruption, transparency, corporate governance, auditing. property rights, incorporation law, and commercial regulations.
Recommendations
Several recommendations for policy improvement arise from AID's experience with PVOs in private sector development:
1) A much higher priority should be given by AID-Washington and the Missions to the firm establishment of private enterprise systems in recipient countries. It is through such a system that a middle class is formed that supports democracy and spreads the wealth of the nation, both of which increase the stability of the country. To raise the priority will require that AID and Mission personnel be given instruction in the critical roles of private enterprise and the means of supporting the private sector.
2) Mission programming should give a high priority to use of PVOs. Volunteer experts are the most appropriate means of assisting the development of a private enterprise system in transitioning economies. They are the prototypical American method of mutual assistance by business managers, as is reflected in the programs of the American Management Association, U.S. Chamber of Commerce and its affiliates, and the multiple Executive Programs provided by graduate business schools across the United States in which managers exchange experiences and assess management techniques collectively. These exchanges are a “least-cost” way of spreading learning from practice and building long-term relationships. The volunteers take “best practices” to the client companies, adapting them to the local situation and capabilities. They establish long-term relations with foreign personnel and organizations, developing cross-cultural sensitivity and mutual understanding—in support of long-term commercial interests, democratic orientations, and continued progress toward civil society and peace. Finally, volunteers represent the "American Way" of altruistically helping others to stand on their own feet and thereby contribute to the welfare of all.
3) Private sector development should be seen as a "systems problem", requiring inputs from a variety of sources to establish the various entities and institutions that comprise a "civil society". Such a society is characterized by freedom and democracy, by the "rule of law", by adequate education, by altruistic organizations and philanthropic foundations, by appropriate government regulations and stimulus, and grounded on a set of ethical values leading to proper rules of governance, the avoidance of corruption, and the transparency of decision-making that permits citizens and clients to have adequate information. A systems approach would integrate agricultural development with agri-business—transport, storage, processing, and retailing—and this, in turn, with other firms and educational institutions to make possible a fully competitive economy.
Each of these aspects is necessary to buttress and constrain a private enterprise system. They can be assisted through the combining of volunteers and experts from the many NGOs and PVOs in the U.S. that are available. But it will require a more informed and longer-term approach than hitherto evidenced within AID and its Missions.
4) To implement a systemic approach, the principal PVOs should be encouraged to present (under a Request for Application or Unsolicited Proposal) more comprehensive and integrated programs for assistance. They are capable of spanning much of the needs for private sector development, and their collaboration would produce greater benefits at less cost than presently.
5) If AID cannot make the policy and structural adjustments necessary to implement the above recommendations, Congress should institute and fund an independent entity directed to provide the systemic assistance needed. It should also instruct this entity to draw on the various volunteer organizations dedicated to private sector development so as to maintain the critical volunteer resources available.
Precedent for withdrawing elements of AID and instituting the services in an independent agency is found in the formation of the Overseas Private Investment Corporation (OPIC) when the need for guarantees against various risks of private foreign direct investment was recognized but AID refused to offer them. A formal institution would them be established by Congress to coalesce existing PVOs or induce their collaboration for contracting with Missions on a number of Strategic Objectives. It is conceivable that this approach will be necessary to raise the priority of the private sector, removing it from competition for funds within the multiple goals of AID.
The following article was written by Dr. Jack N. Behrman of the University of North Carolina. It is posted here with permission. Dr. Behrman is Luther Hodges Distinguished Professor Emeritus at the University of North Carolina's Kenan-Flagler Business School, having served from 1964 to 1991, directing the MBA Program for seven years and serving as Assoc. Dean for four. He is currently Chairman of the MBA Enterprise Corps, which was founded by a Consortium of the 16 leading graduate Business Schools in 1990, now having 52 member schools. It sends recently-graduated, but experienced MBAs on year-long assignments as consultants with private and privatizing companies in countries transforming from planned to market economies. Over 650 young men and women have served in 21 countries of Central Europe, Russia, Africa, Lain America, and Central and SE Asia.
Dr. Behrman's expertise lies in the areas of international economics & business, transnational corporations (TNCs), international business/government relations, ethics, comparative management, science & technology, and creativity and innovation. His teaching and research focused on these subjects, on which he testified before Congressional and UN Committees. He worked in over 75 countries, performing governmental duties, consulting, researching, lecturing, and establishing the Corps. He has published over 40 books and monographs and more than 140 professional articles and essays.
During 1961-1964, Dr. Behrman was Assistant Secretary of Commerce for Domestic and International Business, serving with Secretary Luther H. Hodges under Presidents Kennedy and Johnson. He was responsible for the Department's international trade and investment programs, trade with the Soviet-bloc countries, and domestic industrial promotion and mobilization.
The U.S. Agency for International Development (AID) has sought over the past decades to pursue specific strategic objectives related to socio-economic-political progress in countries receiving assistance. Its main resource has been capital contributions to projects approved by it and the host governments, supplemented by technical and other assistance supplied principally by contractors. American experts in many fields have been used successfully through private volunteer organizations (PVOs) under contracts directly with AID, as partners with other NGOs, or as sub-contractors with for-profit consultants.
The importance of volunteers was stressed by President Bush in a speech before the Coast Guard Academy (May 21, 2003) in his initiative to expand volunteerism: "For more than four decades, the volunteers of the Peace Corps have carried the good will of America into many parts of the world. Interest in this program is greater than ever before. I'm determined to double the size of the Peace Corps over five years. Today, I would like to announce a new USA Freedom Corps initiative called Volunteers for Prosperity, which will give America's highly skilled professionals new opportunities to serve abroad. The program will enlist American doctors and nurses and teachers and engineers and economists and computer specialists, and others to work on specific development initiatives, including those that I have discussed today. These volunteers will serve in the countries of their choice, for however long their project takes. Like generations before us, this generation of citizens will show the world the energy and idealism of the United States of America."
Coupling volunteerism with the objective of catalyzing a private enterprise system not only promotes growth directly but it also assists in the other major elements of development, including creating infrastructure, protection of the environment, enhancement of human resource capacity, stabilization of population growth, promotion of democracy through building a middle class, and even alleviation of humanitarian needs. Yet, over the five decades of foreign aid, assistance to the private sector has not been a top priority nor has the use of volunteers in private enterprise development. Support for establishment of private enterprise systems has been extended by AID since the mid-1960s, but AID-Washington and the various Missions have considered that the business sector could and should provide for its own development.
Programs for Afghanistan and Iraq reveal little attention to the private sector. Within the private sector, small and medium enterprises (SMEs) represent the most dynamic businesses and account for the majority of employment and growth opportunities. SMEs are the easiest to help and, in emerging economies and former socialist countries, still require technical and managerial assistance to grow and achieve sustainability. Technical and managerial assistance by professional volunteers funded by private foundations and corporations, and other international donor agencies provide a demonstration of the public-private partnership that is required to generate (a) solid and sustained economic growth; (b) greater cross–cultural understanding; and (c) closer commercial ties in an increasingly open world economy.
Neither AID nor its European counterparts have given the private enterprise system the priority it deserves in economic development, partly because of the need for basic infrastructure and governmental reform. But for these to be effective in promoting growth, they must be accompanied by the development of a dynamic private enterprise system. The best teachers for this are those who have managed such enterprises and the complementary institutions in the advanced countries. Volunteer Experts (VEs) are available in the various sectors involved.
Strategic Objectives
The fall of the Berlin Wall and the emergence into the world economy of formerly socialist or planned economies required new strategic objectives in AID programs facilitating the entry of these countries into a world characterized by democracy and capitalism. The primary objective of accelerating economic growth providing useful employment had now to be accompanied by assistance in the establishment of democratic institutions and development of a private enterprise system almost "de novo". These two systems had few (if any) historical roots in the countries of the Former Soviet Union, out of which most of the emerging economies were coming.
Programs
(1) Macro-programs
During the years since 1989, AID has instituted programs in these transitional countries at both the macro and micro-economic levels to catalyze growth and help prepare them to compete in a globalizing economy.
The macro programs focused principally on monetary and fiscal policies and the public and private institutions that would formulate and implement them.
Thus, assistance has been given to central banks, to state-owned and private commercial banks, to investment banks, stock exchanges, brokerages, and insurance companies. These are critical in mobilizing and investing the necessary capital for growth of the new enterprises, yet none had adequate experience with financing enterprises in a market economy.
Formation and conduct of enterprises was often blocked by tax laws and regulations held over from socialist-planning regimes. Authorities at all levels of government were counseled under AID programs on appropriate statutes and regulations, and provincial and municipal governments were assisted in budget and management. Counsel was also given to parliaments on appropriate legislation to guide and supervise policy implementation and to regulatory agencies responsible for local implementation.
In many of these programs, volunteer experts were used to assist in the formation and implementation of legislative and statutory aspects.
(2) Private Sector Assistance
At the micro level, assistance was given in the promotion of a private enterprise system and the controls necessary to guide and constrain it to fit with broad socio-economic-political objectives. One of these, of course, was the promotion of democratic institutions at all levels of government; assistance was given directly but also indirectly through the development of a market economy. The initial objective was that of removing the controls under the former planned economies so enterprise could flourish in a "free market". But this was soon seen as inadequate, for what quickly arose was a type of “cowboy capitalism” unfettered by either ethical or legal constraints as is required to serve the interests of consumers rather than producers.
The drive for quick profits by entrepreneurs moved these economics closer to an “acquisitive society”—draining the real and financial resources of the country through monopoly, corruption, and criminal activity--than to a “civil society”. Private entrepreneurs sought to control the politicians and government for their benefit; as one Russian entrepreneur was quoted: “Politics is the most profitable game in town”.
The entire statutory complex supporting the growth of private enterprise and constraining it had to be constructed. Assistance was needed by all levels of government from public policy and planning to formulating and implementing the promotion and regulation of private enterprise, including laws on formation and incorporation of enterprises, contract and regulatory law, accounting and auditing, means of gathering and disseminating information, advertising, securities markets, as well as means of fighting corruption in business and government. It was also needed by enterprises that were privatized out of state-owned enterprises, start-ups, and those entering joint-venture negotiations. Their needs covered the full range of managerial and enterprise functions—from organization and governance to marketing, accounting, inventory and quality controls, financial controls, supply chain management, personnel and worker training, and acquisition and application of new technologies. AID assistance was offered sporadically and unsystematically to various sectors of industry, finance, and services--from trade associations, to consulting firms, to NGOs supporting the commercial sector, to business education, and to the role of women in a market economy.
Business service organizations were notable by their scarcity—e.g., accounting firms, law firms versed in commercial law and governance, tax counsel, advertising firms, brokerages, trade and industry associations, and the various NGOs that, in the Western world, look after consumer, labor, community, or environmental interests. Nascent enterprises and existing small- and medium enterprises (SMEs) were without the varied supports provided or available in advanced countries.
Former state-owned enterprises that were recently privatized frequently were owned and managed by ex-employees of the state, having little understanding of a market economy and the requirements of competition. Management styles were authoritarian, rigid, and centralized with little delegation or even dissemination of information. Mutual funds were formed to own (and control?) multiple newly privatized enterprises, but their management also knew little of a market economy and the requirements for obtaining (long-term) equity financing or (short-term) working capital. The major scarce resources were capital, management, and technology—and remain so in the first years of the 21st century. But, emerging private enterprises (and governments) focused on the capital needs, not realizing sufficiently that private capital requires assurance of competent management and relevant (competitive) technology in the enterprise.
In pursuit of all of these strategic economic objectives, AID and its Missions relied on several PVOs—notably the merged Agriculture Cooperative Development Initiative and Volunteers for Overseas Cooperative Action (ACDI/VOCA), Citizens Democracy Corps (aka Citizens Development Corps – CDC), International Executive Service Corps (IESC), and MBA Enterprise Corps (MBAEC). They were given separate contracts, or in collaboration with each other or with private consulting firms. These volunteers were used successfully in almost every aspect of private sector development—mainly in direct firm-level assistance but including teaching in business schools and institutes and in programs to train future trainers.
At times, these organizations have collaborated in the field with volunteers from the Canadian Executive Service Organization (CESO), the British Executive Service Overseas (BESO), the British Know-How Fund, and the Senior Volunteer Service Corps (an amalgam of several national entities). Each of these has been involved for a number of years in providing the same types of assistance to developing countries and emerging-market economies around the world as the American PVOs but funded by their national governments, the EBRD, or the European Commission.
Roles of PVOs
The PVOs negotiated with AID Missions on the specifics of assistance programs to determine how they fit with the Strategic Objectives for a given country as stated in Requests for Proposals(RFPs) or Requests for Assistance (RFAs). Each PVOs responded individually or in conjunction with one or more of the others to create an appropriate proposal to the Mission. These responses were often made in competition or collaboration with U.S. consulting firms. The PVOs were, on many occasions, able to help design the programs to make them more effective in achieving the strategic objectives.
Once a contract was signed with an AID Mission, the PVO set about recruiting the specified experts, matching them to the client enterprises or organizations (public or private). Country directors or Chiefs of Party were posted in the host country to manage the PVO activities; they would find appropriate clients and diagnose their needs, support and monitor volunteer activity, and report to AID and PVO headquarters.
Volunteers to the several PVOs devoted to private sector development have come from a wide range of sources, bringing a variety of experiences. ACDI/VOCA and IESC are the oldest in the group and have the largest rosters of volunteers available for assignment abroad. ACDI/VOCA draws from the agricultural community in the main, including Schools of Agriculture in numerous universities in the U.S. and Extension Services. Its volunteers go on short and long-term tours, covering all aspects of agriculture and agri-business, including formation of cooperatives and financing of projects and equipment.
IESC has a roster of more than 11,000 senior-level U.S. business executives and professionals interested in assignments abroad as volunteers. These assignments are typically four to six weeks in length, although some last up to a year. Assignments may be "piggy backed" for a second or third client to reduce the costs of overseas travel. IESC volunteers are principally senior level executives, collectively, they have been involved in almost all of the sectors and activities noted above. In addition, its recently acquired affiliate, Geekcorps, has a database of younger volunteers who are experts in communications and information technology.
The CDC and the MBAEC were both instituted in 1990 and merged in 2001 to meld the more experienced managers on CDC’s 6,000 person roster and MBAEC’s recently minted MBAs from 50 of the leading U.S. graduate business schools.
On occasion, the AID Mission extended the contract for assistance to an American consulting firm, which in turn sub-contracted with a PVO, sometimes under instructions from the AID Mission to use their resources and expertise. The contract procedures adopted by most Missions results in placing the PVOs at a competitive disadvantage in bidding. For-profit firms are preferred since they offer greater control opportunities to the Mission through its use of Requests for Proposals (RFPs) rather than Requests for Applications (RFAs) in offering contracts. Missions prefer to deal with large-scale, multi-faceted consulting firms rather than PVOs. And, the former practice of accepting unsolicited proposals has virtually vanished, despite the fact they offered PVOs more opportunity to design programs in which they would be most effective.
While many USAID Missions have included some elements of private sector development in their Strategic Objectives, most have not recognized the value of or the best strategies for enterprise and economic growth - and their contract procedures tend to squeeze PVOs into a sub-contract position, making them subject to the dictates of for-profit organizations that have no incentive to use them as a major delivery mechanism, despite their effectiveness and their traditional creation and implementation of public-private partnerships. Time and again, business volunteers report that private sector development is the best kind of foreign aid. U.S. volunteers are welcomed and listened to in most developing countries, especially those that have grown wary or weary of high priced consultants.
The outcome of these procedures and preferences is to significantly favor the use of consulting firms - which cost more but can be more closely managed under contracts than PVOs under cooperative agreements. Yet, comparatively, PVOs have deeper and broader long-term impact, are more cost effective, and build the necessary bottom-up support for both economic and democratic development.
Country Programs
Despite the fact that many Missions have similar Strategic Objectives relative to private sector development, their programs have not been patterned after each other. In the early part of the 1990s, Missions contracted with each of the four PVOs separately and coordinated their activities within the Mission itself—if there was any coordination. Each was used in ways determined appropriate by the Mission, which has been the principal funding source. Private corporations and foundations have contributed funds, but always less than 30% during a budget year and usually less than 10%; these funds have been largely unrestricted as to country or type of assistance.
In order to offer an integrated package of assistance to the Mission in Ukraine, an Alliance of four PVOs was formed, which then negotiated with the Mission as to the program that would be most appropriate and effective. IESC was the lead organization, responsible for administering the contract and selecting and monitoring the Chief of Party. The budget was allocated among the four PVOs according to their ability to meet the specific terms of the contract, which was successfully extended over six years.
In Bulgaria, all private sector assistance was coordinated under an administrative coalition of seven PVOs and consultants. This Firm Level Assistance Group (FLAG) was under the supervision of a unit from the University of Delaware; it coordinated the selection of client organizations, monitored specific activities, and assessed results.
To enhance Sustainability of private sector development, several AID Missions decided that the best approach would be to develop Business Service Programs (BSPs) or –Organizations (BSOs) or –Centers (BSCs). These entities were established to provide management courses and seminars to local enterprises and to follow up with direct consultation as needed by those attending. Since the BSOs did not have sufficient local consultants to provide the courses or direct firm assistance, the PVOs were requested to send their volunteers.
Contributions of Volunteers
The impacts of the volunteers depended not only on their own experience, which was substantial because of their long tenure in responsible positions in industry, commerce, and finance, but also on the willingness of host management and public officials to respond, which was not always high. Volunteers were sometimes requested for what was later seen as a mere “showing off” of connections and prestige. An expert volunteer could work through or around such obstacles, if the time was available.
Another obstacle was a mis-diagnosis of the problems in the client enterprise. Volunteers frequently found that the major bottleneck to competitive success was some other problem—e.g., not the lack of funds, but the difficulty of collecting from buyers, or the low level of sales, or the poor quality of marketing or of the products themselves, or the failure to test materials, poor inventory control, or inadequate cost controls and accounting, or outdated manufacturing processes and technology, or low worker morale from rigid and authoritarian management. Volunteers spent initial weeks ferreting out the problems that needed solutions and convincing management that these were, in fact, the major problems.
For example, one volunteer saw that a strong marketing effort was needed with solid advertising, but on making his recommendation, the CEO replied that this was too costly; the volunteer argued that customers would not know of the product without such an effort. But the CEO replied that “No one wants our product anyway.” “How do you know?” “Because we have a large inventory outside and no one has come to get it!” This, of course, was the procedure under Communism, where the enterprises produced and the government picked up the products for delivery to the government stores.
Program Problems
Besides the management and enterprise problems met by the volunteers and consultants engaged in private sector development, AID Missions faced several problems in the conduct and assessment of the private-sector programs: time-frame, continuity, results assessment, bias against business, and sustainability.
1. Congressional support is required from year-to-year and budget allocations are made annually so that there is concern to demonstrate effectiveness on an annual basis, but private enterprise development is a long-term matter—on the order of decades, not years, when the transition of an entire economy and polity is involved. Yet, the career assignment of Mission officers is usually three years at any post, leaving the fruits of the assistance to be garnered by future personnel.
Unlike project assistance, one cannot point to new housing, dams, roads, or even new government agencies, for which there is physical evidence at least within three years. It requires strong dedication on the part of Mission officers to maintain private sector development as a part of their Strategic Objectives. Therefore, the support for private enterprise varies from Mission to Mission and within the same Mission as personnel are moved to new posts.
2. The continuity of assistance to the private sector is difficult to maintain also because of changes in budgetary priorities on the part of both the Executive Branch and Congress. Greater attention to Russia shifted funds from Central Europe during the last decade of the 20th century, and from the three Visegrad countries to the Baltics and Balkans as the former group was considered to have moved well into their transition despite the fact that there was much yet to be done. Programs that could have solidified the strategic objectives were terminated, leaving a weaker foundation for further development than had been anticipated initially.
3. Support for the private sector was difficult to maintain for lack of clear results on a cost/benefit basis. In dealing with enterprises seeking to succeed in a market economy, complex forces play on the competitive strength of the company or business service organization being assisted. In the case of enterprises, success of the volunteer expert depends on the willingness of management (and owners) to absorb and apply the counsel offered. Not only the attitude of management but also the structure of the organization and practices as to delegation and information dissemination affect the transmission and response to recommendations. Further, it is difficult to attribute a given success—e.g., reducing mobility of workers or managers, increasing exports, raising quality control, increases in productivity, improvement in sales organizations or marketing procedures and advertising, improved accounting, better data gathering, higher morale of workers, and so on—to the presence or advice of a single volunteer expert. Even if there is a specific recommendation and it is followed, the desired results may not be evident for a few years.
In attempting a cost/benefit analysis, it is not difficult to determine costs, but it is difficult to pinpoint results attributable to the volunteer. There are too many factors affecting success or failure of a firm—from attitudes and competence of personnel to environmental and market factors-- to calculate the "value" of a volunteer. Even if there is an apparent failure in assistance to a given enterprise, individual members of the company may gain substantial training from the volunteer, using it in subsequent positions.
4. A further problem faced in Mission programming is the historical priority within AID toward humanitarian, health, housing, and poverty programs as distinct from those aimed at the business community, against which there has been a long-standing bias. This was, certainly, the case within the European Recovery Program—though the Productivity Teams sent to the U.S. for training in the 1950s were quite successful—and the Alliance for Progress in Latin America in the 1960s.
But, in the transitional countries of the FSU from the 1990s-- the enterprises (management and owners) did and do not have the background of market systems that existed in Europe and Latin America. And, in many instances, Mission officers did not have experience or preparation in the institutional requisites for building a functioning private enterprise system, or in assessing the needs within companies. Thus, many Missions have given a priority to formation and development of business service organizations, which could only be useful if a critical mass of successful enterprises arose to require their services.
5. Building a private enterprise system requires the establishment of institutions (public and private) and support organizations that are sustainable over the long term so that businesses can determine their
strategies, product lines, markets, and financial needs with some certainty.
AID Missions have been insistent on leaving a “legacy” of a sustainable mix of enterprises and business support organizations. And both volunteer experts and contract consultants have been used to pursue this goal. However, the lack of adequate continuity of funding year-to-year plus the absence of local funding for NGOs and other service organizations means that U.S. assistance is not likely to achieve the sustainability objective in any country of the CEE or CAR regions. Rather, success is a matter of efforts by local enterprises, government agencies, and NGOs establishing the proper atmosphere ("favorable climate") and keeping their eyes on the goals of democracy and a private enterprise system. A higher probability of success would arise if the volunteer assistance were continued for a longer term—buying more time--which could be done at minimum cost compared to much concessional aid, which does not develop the commitment and responsibility necessary to buttress continued growth.
Cost-Benefit of Volunteers
The cost of the volunteers consisted of a recruitment process, orientation and preparation, travel (abroad and locally), per diem for meals and housing, and medical insurance. Normal practice is for the host enterprise or organization to pay the local costs of living for the volunteer plus a translator, if needed, with the donor organization paying all dollar costs. The value of a donated work-day varies among the PVOs, ranging from $200 to $500, depending on their experience. The dollar costs include recruitment and administration, airfare, insurance, orientation and training, and (for long-term volunteers) a resettlement stipend. Total per work-day costs paid by USAID have ranged from $125 to $1000, depending on the host country and project-year under consideration. Assignments are generally with one host organization, but piggy-backing and short-term instructional assignments are also made to reduce costs and spread the benefits.
These costs amounted to a fraction of the cost of personnel from consulting firms that were often contracted by AID. Preference for these contractors rested on the desire of Missions to deal with one (rather than several) sources and, more importantly, the lack of familiarity of the Missions with volunteers and how to fit them into the desired programs.
The benefits can be counted in terms of the contributions to national, regional, or local progress, to the productivity and competitiveness of the client enterprise, to management development, to worker morale, and to the volunteer as well, who gained knowledge, understanding, friends, and contacts that could develop into commercial ties. All of these benefits continued long past the period of the volunteer’s visit, for questions and answers were continuously communicated, return visits occurred, and managers became interested in further training or education or visits to the U.S. for “hands-on” observation of U.S. practices. These latter were promoted by East-West Management (a unit of Civil Society) and the Center for Citizens Initiative (CCI), which selected key managers in the CEE region to be hosted by volunteering companies in the U.S. Again, close contacts were made that often culminated in commercial ties or joint ventures. Thus, long-term bridges were built between the U.S. and host countries through greater cross-cultural understanding and mutual interests.
The success stories of these volunteers can be numbered by the hundreds over 50 or more emerging countries – whether or not transitioning from socialist or planned economies. They show the altruism and dedication of the volunteers themselves, the gratitude of the recipients, the pleasure of the AID Missions and U.S. Embassies, the welcome by the host governments; and they have contributed to the Strategic Objectives in each country. An AID survey of PVO contributions to development of private enterprise in Poland concluded as follows:
“There are numerous examples where the assistance provided made a significant and lasting contribution to the performance of an individual firm. Positive results were found across sectors, regions, and providers. Examples of this assistance range from the general, e.g., changing management style, to the specific, e.g., revising product lines, implementing new accounting procedures. One oft-repeated outcome of assistance, although difficult to quantify, is that the advisor’s assistance changed the management style and/or the way senior management looked at a problem.” (SME Field Survey of Poland, 1997, p.11)
The benefits to the client enterprises have been both immediate and long-term. For those managements that were responsive, improvements were noted in -
· business strategies and management skills;
· information gathering and dissemination within the firm;
· commercial contacts provided through direct introductions or through trade fairs and exhibits;
· mind-sets toward market-decisions and competition;
· international accounting and ISO-2000 quality standards;
· marketing skills and financial controls;
· enterprises qualifying for new financing;
· export marketing;
· advertising programs;
· establishment of stock markets and brokerage firms;
· establishment of business associations and advocacy roles;
· product analysis and rationalization of product lines;
· procedures for the conduct of business meetings internally and negotiations externally;
· methods for influencing policies toward business and its regulation;
· establishment of entities for continued consultation and training.
Governments at all levels, if responsive, improved their policies in support of private sector development, including more reasonable, simple, and certain taxation, regulations on consumer protection, corruption, transparency, corporate governance, auditing. property rights, incorporation law, and commercial regulations.
Recommendations
Several recommendations for policy improvement arise from AID's experience with PVOs in private sector development:
1) A much higher priority should be given by AID-Washington and the Missions to the firm establishment of private enterprise systems in recipient countries. It is through such a system that a middle class is formed that supports democracy and spreads the wealth of the nation, both of which increase the stability of the country. To raise the priority will require that AID and Mission personnel be given instruction in the critical roles of private enterprise and the means of supporting the private sector.
2) Mission programming should give a high priority to use of PVOs. Volunteer experts are the most appropriate means of assisting the development of a private enterprise system in transitioning economies. They are the prototypical American method of mutual assistance by business managers, as is reflected in the programs of the American Management Association, U.S. Chamber of Commerce and its affiliates, and the multiple Executive Programs provided by graduate business schools across the United States in which managers exchange experiences and assess management techniques collectively. These exchanges are a “least-cost” way of spreading learning from practice and building long-term relationships. The volunteers take “best practices” to the client companies, adapting them to the local situation and capabilities. They establish long-term relations with foreign personnel and organizations, developing cross-cultural sensitivity and mutual understanding—in support of long-term commercial interests, democratic orientations, and continued progress toward civil society and peace. Finally, volunteers represent the "American Way" of altruistically helping others to stand on their own feet and thereby contribute to the welfare of all.
3) Private sector development should be seen as a "systems problem", requiring inputs from a variety of sources to establish the various entities and institutions that comprise a "civil society". Such a society is characterized by freedom and democracy, by the "rule of law", by adequate education, by altruistic organizations and philanthropic foundations, by appropriate government regulations and stimulus, and grounded on a set of ethical values leading to proper rules of governance, the avoidance of corruption, and the transparency of decision-making that permits citizens and clients to have adequate information. A systems approach would integrate agricultural development with agri-business—transport, storage, processing, and retailing—and this, in turn, with other firms and educational institutions to make possible a fully competitive economy.
Each of these aspects is necessary to buttress and constrain a private enterprise system. They can be assisted through the combining of volunteers and experts from the many NGOs and PVOs in the U.S. that are available. But it will require a more informed and longer-term approach than hitherto evidenced within AID and its Missions.
4) To implement a systemic approach, the principal PVOs should be encouraged to present (under a Request for Application or Unsolicited Proposal) more comprehensive and integrated programs for assistance. They are capable of spanning much of the needs for private sector development, and their collaboration would produce greater benefits at less cost than presently.
5) If AID cannot make the policy and structural adjustments necessary to implement the above recommendations, Congress should institute and fund an independent entity directed to provide the systemic assistance needed. It should also instruct this entity to draw on the various volunteer organizations dedicated to private sector development so as to maintain the critical volunteer resources available.
Precedent for withdrawing elements of AID and instituting the services in an independent agency is found in the formation of the Overseas Private Investment Corporation (OPIC) when the need for guarantees against various risks of private foreign direct investment was recognized but AID refused to offer them. A formal institution would them be established by Congress to coalesce existing PVOs or induce their collaboration for contracting with Missions on a number of Strategic Objectives. It is conceivable that this approach will be necessary to raise the priority of the private sector, removing it from competition for funds within the multiple goals of AID.
THOMAS JEFFERSON ON THE TIGRIS
Feedback to: wfisher206@aol.com
The following article was written by Rami Khouri, Executive Editor of the Daily Star newspaper in Beirut. It is posted here with permission.
The “Agreement on Political Process” that was signed days ago by the US occupation authority in Iraq and the American-appointed Iraqi Governing Council is an important document that will be interpreted in different ways. It is idealistic, bold and ambitious in its stated quest to define a transition from American-occupied Iraq to a situation of full Iraqi sovereignty in a free and democratic country.
The agreement embodies powerful principles of democratic pluralism, equality before the law, representational federalism and the consent of the governed. It is audacious in the sweep, speed and clarity of the proposed democratic transition (the text is available at the Coalition Provisional Authority website: http://www.cpa-iraq.org). In just 66 lines it offers a blueprint to wipe out three decades of Iraqi-engineered Baathist tyranny and the previous five decades of British-made post-colonial incoherence, and replace them with an American-inspired Thomas Jefferson on the Tigris.
The specifics are impressive, and hard to argue with. The document drips with references to “freedom,” “equality,” “rights,” “due process,” “independence of the judiciary,” “transparency” and other such fine political values. Its democratization procedures include selection of representative individuals to regional bodies that will ultimately draft a national constitution, ratification of the constitution by the citizenry, caucuses at governorate level to select individuals who will collectively form a transitional national assembly, a constitutional convention of directly elected Iraqis, and other such ringing aspects of accountable democratic governance as it has been successfully practiced for many decades in … Iowa and Idaho.
This document encapsulates the best and worst of America today. It spells out and offers others the finest American governance traditions. If this were a commercial website, I would want to put all these democratic values in my shopping cart. The US gets an A+ for intent. But it gets a D- for implementation. For the manner of Washington’s attempt to transform Iraqi despotism into Iraqi democracy is naive and unrealistic, and its realization will be bumpy for at least four main reasons:
l It totally ignores the points of tension, even incompatibility, that will surface during the meeting of American and indigenous Iraqi-Arab-tribal-Islamic-Kurdish-etc. cultural values (these tensions will be resolved over time by Iraqis, just as they were resolved in the European and American transitions from feudalism-and-slavery to democracy from the 16th to the mid-20th centuries). Forging a new Iraqi nationalism and democracy with the crucible and moulds of American republicanism is as unrealistic as it is noble.
l This agreement is fundamentally imposed by the US, and includes numerous explicit American veto powers over implementation; this “democratization” process is also peculiarly undemocratic, and at second glance seems more colonial than collegiate.
l The Governing Council itself was appointed by the US occupation authority. Many of its members are credible national or tribal leaders, but the council collectively enjoys very mixed legitimacy and credibility among Iraqis (flashback to the Israeli occupation of Palestinian lands: Two decades ago, the Israeli occupation authority created Palestinian “village leagues,” tried to reach political accords with them and failed miserably and predictably. Why? Because political bodies appointed by an occupying military power and designed to achieve the occupier’s strategic goals enjoy no indigenous legitimacy or credibility, whether in Palestine, Iraq, South Vietnam, Afghanistan or 18th-century Virginia.)
l This agreement reflects American policymaking by panic, which is dangerous for all concerned. The agreement’s content, power balance and hasty promulgation suggest that it aims more to get the US out of Iraq than to allow Iraq to define itself. Intent and credibility usually drive implementation in the adult world, and Washington’s intent and credibility here just as before its war on Iraq remain culturally confused, politically simplistic, motivationally suspect and diplomatically hasty. Washington has taken a good idea transforming tyranny into democracy and implemented it badly, because it largely acts unilaterally, militarily and through narrow American worldviews.
This agreement to turn over sovereignty to Iraqis is flawed but fascinating, and imposed but important. It mirrors a deeper history of how power and culture are exercised in the world how the strong influence the weak and try to reshape them in their own image, and how colonial adventures end.
This process in Iraq today is sad and ugly on two counts: The United States embarrasses itself as an incompetent and dizzy colonial power, as it changes governments and tries to reshape the entire Middle East; but also the Arab governments and peoples throughout the Middle East embarrass themselves even worse, as they prove to be incompetent and docile spectators, passively watching their own post-colonial history of autocracy, passivity and powerlessness replayed over and over again.
The antidote must include a more realistic, humble and multilateral American policy, along with a more profound, activist, honest and credible policy from the Arab countries. Iowa and Idaho became prosperous and democratic because their people demanded, and forged, good governance. America offers us ennobling lessons, along with ugly, imposed colonial treaties. We should beware of, renegotiate and improve the bad treaties, but embrace and achieve the promise of good governance.
The following article was written by Rami Khouri, Executive Editor of the Daily Star newspaper in Beirut. It is posted here with permission.
The “Agreement on Political Process” that was signed days ago by the US occupation authority in Iraq and the American-appointed Iraqi Governing Council is an important document that will be interpreted in different ways. It is idealistic, bold and ambitious in its stated quest to define a transition from American-occupied Iraq to a situation of full Iraqi sovereignty in a free and democratic country.
The agreement embodies powerful principles of democratic pluralism, equality before the law, representational federalism and the consent of the governed. It is audacious in the sweep, speed and clarity of the proposed democratic transition (the text is available at the Coalition Provisional Authority website: http://www.cpa-iraq.org). In just 66 lines it offers a blueprint to wipe out three decades of Iraqi-engineered Baathist tyranny and the previous five decades of British-made post-colonial incoherence, and replace them with an American-inspired Thomas Jefferson on the Tigris.
The specifics are impressive, and hard to argue with. The document drips with references to “freedom,” “equality,” “rights,” “due process,” “independence of the judiciary,” “transparency” and other such fine political values. Its democratization procedures include selection of representative individuals to regional bodies that will ultimately draft a national constitution, ratification of the constitution by the citizenry, caucuses at governorate level to select individuals who will collectively form a transitional national assembly, a constitutional convention of directly elected Iraqis, and other such ringing aspects of accountable democratic governance as it has been successfully practiced for many decades in … Iowa and Idaho.
This document encapsulates the best and worst of America today. It spells out and offers others the finest American governance traditions. If this were a commercial website, I would want to put all these democratic values in my shopping cart. The US gets an A+ for intent. But it gets a D- for implementation. For the manner of Washington’s attempt to transform Iraqi despotism into Iraqi democracy is naive and unrealistic, and its realization will be bumpy for at least four main reasons:
l It totally ignores the points of tension, even incompatibility, that will surface during the meeting of American and indigenous Iraqi-Arab-tribal-Islamic-Kurdish-etc. cultural values (these tensions will be resolved over time by Iraqis, just as they were resolved in the European and American transitions from feudalism-and-slavery to democracy from the 16th to the mid-20th centuries). Forging a new Iraqi nationalism and democracy with the crucible and moulds of American republicanism is as unrealistic as it is noble.
l This agreement is fundamentally imposed by the US, and includes numerous explicit American veto powers over implementation; this “democratization” process is also peculiarly undemocratic, and at second glance seems more colonial than collegiate.
l The Governing Council itself was appointed by the US occupation authority. Many of its members are credible national or tribal leaders, but the council collectively enjoys very mixed legitimacy and credibility among Iraqis (flashback to the Israeli occupation of Palestinian lands: Two decades ago, the Israeli occupation authority created Palestinian “village leagues,” tried to reach political accords with them and failed miserably and predictably. Why? Because political bodies appointed by an occupying military power and designed to achieve the occupier’s strategic goals enjoy no indigenous legitimacy or credibility, whether in Palestine, Iraq, South Vietnam, Afghanistan or 18th-century Virginia.)
l This agreement reflects American policymaking by panic, which is dangerous for all concerned. The agreement’s content, power balance and hasty promulgation suggest that it aims more to get the US out of Iraq than to allow Iraq to define itself. Intent and credibility usually drive implementation in the adult world, and Washington’s intent and credibility here just as before its war on Iraq remain culturally confused, politically simplistic, motivationally suspect and diplomatically hasty. Washington has taken a good idea transforming tyranny into democracy and implemented it badly, because it largely acts unilaterally, militarily and through narrow American worldviews.
This agreement to turn over sovereignty to Iraqis is flawed but fascinating, and imposed but important. It mirrors a deeper history of how power and culture are exercised in the world how the strong influence the weak and try to reshape them in their own image, and how colonial adventures end.
This process in Iraq today is sad and ugly on two counts: The United States embarrasses itself as an incompetent and dizzy colonial power, as it changes governments and tries to reshape the entire Middle East; but also the Arab governments and peoples throughout the Middle East embarrass themselves even worse, as they prove to be incompetent and docile spectators, passively watching their own post-colonial history of autocracy, passivity and powerlessness replayed over and over again.
The antidote must include a more realistic, humble and multilateral American policy, along with a more profound, activist, honest and credible policy from the Arab countries. Iowa and Idaho became prosperous and democratic because their people demanded, and forged, good governance. America offers us ennobling lessons, along with ugly, imposed colonial treaties. We should beware of, renegotiate and improve the bad treaties, but embrace and achieve the promise of good governance.
Tuesday, November 11, 2003
WHY ARE THE RICH JUST GETTING RICHER?
Feedback to: wfisher206@aol.com
By William Fisher
Donor governments and institutions worldwide have long recognized that the private sector is the engine for economic growth, job-creation and poverty reduction in poor countries. It is private sector growth that attracts foreign investment and the transfer of technology and know-how. It is the private sector that provides productive employment. And it is the private sector that gives rise to a middle-class -- historically the catalyst for social reforms and political stability.
The most dynamic and potentially promising part of the private sector in poor countries consists of millions of small and medium-sized companies (SMEs). Yet only a relatively small proportion of foreign aid has been directed toward this part of the private sector. While World Bank assistance to this sector has increased by dramatically over the past few years, individual country donors have traditionally paid relatively little attention to SMEs. One of the results is that, in poor countries, the rich are getting richer while the gulf between luxury and poverty is widening. Yet, even given the enormous challenges these small companies face, they provide more jobs in most developing countries than all the (few) large companies combined!
Why then are aid agencies so reluctant to devote more resources to this part of the private sector? The reasons are many.
Donors: In the US, as in most other donor countries, foreign aid needs to show quick success, principally because of Congressional requirements and the very short time horizons of most members of both houses. Working with large companies – those who need aid least – is most likely to produce these kinds of results (and even this effort has been far from a roaring success). Both Congress and our aid agency, the U.S. Agency for International Development (USAID), are fond of programs that lend themselves to cost/benefit analyses. In working with small and medium-sized companies, the benefits are often not measurable for considerable periods after the work ends. USAID officers in the field move frequently from one country to another; they tend to favor those programs that can show positive results – the more dramatic, the better – on their watch. USAID is a multi-mission agency, handling everything from humanitarian assistance to democratization; it is unreasonable to expect that it give top priority to all these tasks. Because USAID is a relatively small agency, it uses contractors to implement most its programs. This contractor-driven approach has produced some outstanding results, but contractors tend to ignore or to place in subsidiary sub-contractor positions one of our most powerful resources: non-governmental organizations who frequently do their work with all-volunteer personnel. Finally, within the US aid agency, there is little private sector experience in general, even less with small and medium-sized companies.
Recipients: In poor countries, smaller companies rarely have access to credit; banks tend to lend to those they know, who are usually least in need of working capital. Child labor and unhealthy working conditions are the norm. Small companies – in fact, the entire private sector – usually operate in a policy and regulatory environment that places incredible obstacles in the path of private sector growth. Much of this attitude springs from rampant corruption and a tradition of ‘crony democracy’; as one Egyptian tycoon said to me, “Only small companies have problems. Big ones don’t, because we can go talk to the decision-makers or pay someone to fix our problem.” When I worked in Jamaica as a USAID consultant back in the 1980s, large and small companies like – and potential foreign investors – had to visit more than 50 different offices to obtain permission to set up and begin running a business. The so-called ‘one-stop-shop’ we persuaded the Jamaican government to establish promised to reduce these bureaucratic obstacles substantially, but it soon became apparent that those staffing the one-stop-shop had neither the skills nor the motivation to take their mission seriously. While one-stop-shops became the flavor of the day in many developing countries, few worked efficiently. Ludwig Rudel, a veteran of more than 20 years in USAID and countless consulting assignments thereafter, points out that today it still takes an average of 66 days to form a new business in a developing country; in Canada, the time required is two days.
Moreover, in many of the countries where we provide aid, for example, the former Soviet Union and its satellite states, as well as in many other countries, economies based on free markets are a new experience. Governments have traditionally been the country’s principal employers and owners/operators of most of its basic industries, and tradition dies slowly.
As a result of all of the above, most aid recipient countries lack any semblance of pro-growth physical and intellectual infrastructure. Even the few institutions purportedly dedicated to business – chambers of commerce, trade associations, etc. – often tend to be elitist, excluding all but the most powerful commercial interests. A further complication is that recipient governments are often reluctant to take advice from donor governments or their contractors. To this daunting array of constraints, add the fact that small and medium-sized companies usually lack the most basic ingredients of management, technology, marketing and sales, human resources development, performance monitoring and accountability. About the only thing they do not lack is the entrepreneurial will to improve their lives.
Technology transfer provides a microcosmic example of the kinds of problems faced by both SMEs and larger companies. In this area, there have been some outstanding successes; for example, ACDI/VOCA, an NGO, has successfully transferred simple technologies to small farmers in a host of countries by working with cooperatives and one-on-one with growers. But there have been numerous disasters as well. Ludwig Rudel points out that “multinational companies have shown that they will not transfer the latest technologies. They will provide the last generation while they develop the next one so that they keep one leg up over their foreign partners. The Japanese overcame the problem in the 1950s by picking sectors including textiles, optics, steel, and ship building and sending a steady flow of their best young minds to study abroad for long periods. They brought them back to be embedded into local research institutions and companies and then to keep abreast of the state of the art as it matured. Once they got these sectors going, they chose additional ones. Now they operate on a par with many western countries.”
Rudel adds: “The United Nations Development Programme (UNDP) tried to do this with integrated circuits in India. They trained about 50 scientists, tried to get them to return to India (most did) and built an excellent R&D institution at Pilani. It was first class but maybe a half generation behind the rest of the world. Then two problems arose. The institution did not find it in its interest to share the technology with the industry on acceptable terms. And when they went to the Ministry of Finance for funding to attend conferences to keep abreast of the field, they got cut out. "You chaps got lots of assistance in the past while the project was building. Now let others have their turn!" was the reaction from the bureaucrats. The whole thing is in the doldrums now.”
There are other major obstacles. For example, according to Ludwig Rudel: “We are clueless how to foster transition to open market economies in formerly totalitarian societies, much less help SMEs. In these countries, the transition from command economies to free markets has provided a fertile field for organized crime – whose membership now comprises most of these countries’ new-rich. Liberia may be an African example but there are others in lily-white societies that are every bit as bad. In the Baltic states the mafia was (is) a part of (or consequence of) the open markets fostered by our efforts; extortion (protection) runs rampant. In Latvia, the links to the Russian mafia overlay the entire private sector operation and abuses are growing. I know of one case where those resisting illegal pay offs were hounded by former KGB agents who became hit men after being laid off by the KGB.”
The relationship between donor and host government is yet another problem. Before any donor can initiate a new program, it must first obtain the agreement and cooperation of the host government. Private sector development can be particularly problematic. Says Wallace E. Tyner of Purdue University’s Department of Agricultural Economics, a veteran of many consulting assignments for USAID and other donors: “Most of these governments also are trying to retain their power over the economy, so private sector development is not necessarily a priority.”
Yet another problem is endemic to foreign aid generically: There is little or no cooperation or coordination among donors. When I was managing a USAID program in Egypt a few years ago, my team produced an annual review of all donors programs. It was widely distributed, but most of the interest in it came from the donors themselves, many of whom were unaware of the complimentary – or duplicative – programs of other donors. As with most USAID Missions, the Egypt Mission participated in a donor committee, which met monthly. But the information gathered by its senior-level members rarely trickled down to program officers or contractors ‘in the trenches’, where genuine cooperation would need to begin.
Given all these constraints, it is not rocket science to understand why the ‘government should just get out of the way’ dictum so often falls on deaf ears, or to appreciate why aid agencies have not been eager to embrace the SME challenge. The ongoing result is been that the rich have been getting richer while the gulf between rich and poor has been getting bigger.
Is there a solution? There is no one-liner to answer this question. But there are many innovative ideas that are being tried and others that deserve to be tried. And there is enough anecdotal evidence of ’success’ with SMEs to believe that some of these ideas – given more resources, and the right kinds of resources – can help these little enterprises grow larger, employ more people, and help narrow the gulf between opulence and poverty.
What might work?
Dr. Jack N. Behrman of the University of North Carolina – founder of the MBA Enterprise Corps and former Assistant Secretary of Commerce for International Business – finds that host governments may be reluctant to take advice from donor governments or aid agencies, but will frequently listen to private sector volunteers. “NGOs and PVOs have been sending volunteers overseas for many years, but generally they have not been made an integral or large part of the overall effort, mainly because USAID has never given high priority to business or private sector development. “
Behrman adds: “In Eastern Europe, however, USAID and its Missions relied on several PVOs -- notably the merged Agriculture Cooperative Development Initiative and Volunteers for Overseas Cooperative Action (ACDI/VOCA), Citizens Democracy Corps (aka Citizens Development Corps – CDC), International Executive Service Corps (IESC), and MBA Enterprise Corps (MBAEC). These groups were given separate contracts, or worked in collaboration with each other or with private consulting firms. Their volunteers were used successfully in almost every aspect of private sector development -- mainly in direct firm-level assistance, but including teaching in business schools and institutes and in programs to train future
trainers. “
Says Behrman: “In Russia, which initially followed some very irresponsible advice for transforming itself to a market economy overnight, private sector volunteers have recently concentrated on strengthening associations representing SMEs. As a result, President Putin is listening to these small companies for the first time. This also demonstrates that this kind of pressure comes best when it is generated from within -- from SMEs and their associations. The advice of NGO and PVO volunteers is being appreciated, understood, and accepted.”
However, Behrman points out, this process is lengthy and does not fit with the ‘quantifiable goals’ sought by USAID and Congress.” So, first, he contends, there needs to be an ongoing educational process within the US Government. We should be able to learn new approaches, since we now have nearly 60 years of experience with inadequate results. SMEs will arise when there is income to be earned and the policy and physical infrastructure is adequate. Policies are needed to remove obstacles, ease company formation, provide for and protect private property, maintain competitive markets, and establish fair and reasonable regulations on business to protect the consumer and environment. “And these,” he says, “are all areas where knowledgeable volunteers can become credible players – and produce better results at less cost.”
Dr. Wallace E. Tyner of the Department of Agricultural Economics at Purdue University – and a veteran of dozens of overseas development projects for USAID and other donor agencies – suggests another approach. Says Dr. Tyner: “The reality is that we carry out development projects in ‘rent seeking’ (rather than profit seeking) economies. That is, people in both the public and private sectors are accustomed to earning and increasing incomes through favors from the public sector. Instead of trying to become more efficient or effective at what they do or produce, businesses invest more in seeking rent. When a donor project comes along, it is usually the established or well connected that have access to the donor(s). Smaller businesses get left out of the process altogether. Thus, the relatively rich get richer.”
Moreover, Tyner notes, “USAID and other donor organization find it difficult to work directly with the private sector. For better or worse, most aid is channeled through governments. And even if the host government is cooperative, it is still difficult to find mechanisms to aid SMEs directly with donor funds. That is why the indirect mechanisms are so important - infrastructure (to lower business costs), training (to increase business efficiency), and policy reform (to enable the private sector to function to its potential).”
Tyner recommends: “Do everything possible to change the rules of the game towards profit seeking instead of rent seeking”. He suggests investing more in social and physical infrastructure, adding: “This is definitely out of vogue, and that is unfortunate because good roads, electricity, education, etc. create the possibility for people at lower levels to become more productive. Infrastructure is more enabling across a broader segment of the economy than a lot of things we do.”
Perhaps, he adds, “we could do a combination of these things. For example, we might make it clear to citizens and government in X country that the US is prepared to build a road from A to B, if high transport costs are a major barrier to trade, but that this will happen only if regulations x, y, and z are changed. Then those who would benefit from the road would become a domestic lobby to get those regulations changed.”
Part of the reason why the really poor cannot often benefit directly, Tyner says, is that “they are uneducated or relatively less well educated, and thus, their absorptive capacity for assistance is lower than that of the relatively well off. They have to be concerned more with day-to-day survival and cannot afford entrepreneurial endeavors. So we need to invest more resources in basic business education. Entrepreneurship will emerge when social and physical infrastructure creates conditions conducive to change.”
The World Bank Group, which for many years virtually ignored the private sector in favor of government-to-government initiatives, has recently demonstrated a new awareness of the role of business in promoting economic growth and poverty reduction. It has focused much of its effort on the potential of SMEs and has identified lack of access to credit as perhaps the single largest problem facing this group.
Says Harold Rosen, Director of the World Bank Group’s SME Department: “One of the first steps toward a vibrant SME sector is the opening of more financing channels, and ensuring that they are focused on building strong partnerships and trust between SMEs and their local banks. This would have lasting impacts in helping local entrepreneurs obtain the capital they need to build their businesses and create more jobs in economies that sorely need new employment opportunities…The entrepreneurs behind SMEs could -- and should -- play a much larger role in development, but too often are held back by a lack of ready access to financing from local formal sector financial institutions. Viewing these smaller firms as costly, high-risk credits, many commercial banks avoid lending to them, concentrating instead on ‘safer’ options such as financing larger local or multinational corporations, or holding high-yield government bonds….”
The SME Department, a joint effort of the World Bank and International Finance Corporation (IFC), is taking on this agenda, using several strategies to increase SME access to capital.
Rosen explains: “This involves not only supporting the traditional WBG product of channeling of medium-term hard currency loans channeled through local banks, but also several newer capacity building initiatives started by our multi-donor Project Development Facilities (PDFs) to improve commercial banks’ SME lending skills and thus help tap into a potentially large and lucrative domestic markets.”
The IFC currently manages nine multi-donor IFC-managed SME facilities around the world. These facilities, typically funded 20 percent by IFC and 80 percent by our donor partners, are building the capacity of SME lenders in their target regions as part of a broader service package that also includes management training, technical assistance (TA) to businesses and business associations, and helping create greater employment opportunities through large company/small company linkages programs.
In Vietnam, for example, the Mekong Project Development Facility (MPDF) is working to improve SMEs’ access to finance through a Ho Chi Minh City-based commercial Bank Training Center (BTC) it launched in 2001. This initiative began with MPDF analysis that identified internal obstacles keeping Vietnam’s banks from doing more profitable SME lending, leading to a BTC business plan that attracted seed capital of $100,000 from 10 private local banks serving mainly SMEs. These small banks lacked the resources to organize in-house training programs, but have now come together to create a for-profit solution that will provide fee-based training courses to themselves, their competitors, and similar banks in Cambodia and Laos. In its first year, the BTC provided top-quality commercial training courses to more than 2,700 local bankers, offering 30 different courses covering such important areas as Customer Focus and Service Quality, Credit Risk and Lending to the Household and SME Sectors, Risk Management in Banking, and others.
Similar objectives are being met in other countries as well. PDFs have also recently held seminars to introduce local bankers in Bangladesh, China, India, Indonesia and Nigeria to successful foreign models of SME lending. This, says Rosen, “creates new opportunities for knowledge transfers that will enable them to take advantage of the vast underserved ‘middle’ market represented by SMEs in their region. “
In western China’s Sichuan province, where incomes lag far behind those of the more prosperous coastal regions, the China Project Development Facility (CPDF) organized a lending workshop for the management of Chengdu City Commercial Bank. This institution has a solid track record in SME lending with 80 percent of its loanable funds concentrated in financing over 3,000 local SMEs. For a city like Chengdu that is home to more than 129,000 SMEs accounting for 99 percent of the total number of firms, the "Best International SME Lending Practices" conference was an important means by which Chengdu’s bankers and entrepreneurs could learn about successful SME lending models in other parts of the world, to help overcome the "access to knowledge" problem faced in many frontier markets.
A similar approach is being taken by the South Asia Enterprise Development Facility (SEDF). This newly launched initiative, funded by the IFC and other donors, has targeted its efforts towards greater SME financing from local Bangladeshi banks. The Africa Project Development Facility (APDF) is pursuing this agenda as well. In Francophone West and Central Africa, in cooperation with the European Union, it has recently provided training in SME Credit Risk assessment to 241 loan officers from 66 different local and regional financial institutions spanning 13 different countries.
However, increasing credit flows to SMEs is not without its catalog of horror stories. Ludwig Rudel recalls: “ I once evaluated a couple of loans made by USAID in 1982 to The Siam Commercial Bank and the Kenya Commercial Bank. In Thailand, the bankers assured AID that the money would be safely invested. They had some good projects that fit the criteria (rice mills) and they were owned by relatives of the bankers who were excellent credit risks. No danger of loss there. It would all be repaid… In Kenya, the bankers said they would have to find borrowers of Indian origin because the Africans would not repay. Nor could most Africans raise the required 200% collateral required by the banks. The Dutch aid program tried to beat this system by offering tractor loans with no collateral. The farmers ran the tractors until they gave out, then cannibalized them to sell the working parts on the cash market and left the frame in the field.”
So the road to SME growth is, at best, a minefield. Yet, as Harold Rosen says, “No effort toward poverty reduction in developing nations is sustainable without growth of SMEs.” Let us hope that both donors and beneficiaries are getting the message.
* * *
The writer is a specialist in international private sector growth issues, and has managed or participated in dozens of overseas assignments for the US Agency for International Development and other donor organizations.
By William Fisher
Donor governments and institutions worldwide have long recognized that the private sector is the engine for economic growth, job-creation and poverty reduction in poor countries. It is private sector growth that attracts foreign investment and the transfer of technology and know-how. It is the private sector that provides productive employment. And it is the private sector that gives rise to a middle-class -- historically the catalyst for social reforms and political stability.
The most dynamic and potentially promising part of the private sector in poor countries consists of millions of small and medium-sized companies (SMEs). Yet only a relatively small proportion of foreign aid has been directed toward this part of the private sector. While World Bank assistance to this sector has increased by dramatically over the past few years, individual country donors have traditionally paid relatively little attention to SMEs. One of the results is that, in poor countries, the rich are getting richer while the gulf between luxury and poverty is widening. Yet, even given the enormous challenges these small companies face, they provide more jobs in most developing countries than all the (few) large companies combined!
Why then are aid agencies so reluctant to devote more resources to this part of the private sector? The reasons are many.
Donors: In the US, as in most other donor countries, foreign aid needs to show quick success, principally because of Congressional requirements and the very short time horizons of most members of both houses. Working with large companies – those who need aid least – is most likely to produce these kinds of results (and even this effort has been far from a roaring success). Both Congress and our aid agency, the U.S. Agency for International Development (USAID), are fond of programs that lend themselves to cost/benefit analyses. In working with small and medium-sized companies, the benefits are often not measurable for considerable periods after the work ends. USAID officers in the field move frequently from one country to another; they tend to favor those programs that can show positive results – the more dramatic, the better – on their watch. USAID is a multi-mission agency, handling everything from humanitarian assistance to democratization; it is unreasonable to expect that it give top priority to all these tasks. Because USAID is a relatively small agency, it uses contractors to implement most its programs. This contractor-driven approach has produced some outstanding results, but contractors tend to ignore or to place in subsidiary sub-contractor positions one of our most powerful resources: non-governmental organizations who frequently do their work with all-volunteer personnel. Finally, within the US aid agency, there is little private sector experience in general, even less with small and medium-sized companies.
Recipients: In poor countries, smaller companies rarely have access to credit; banks tend to lend to those they know, who are usually least in need of working capital. Child labor and unhealthy working conditions are the norm. Small companies – in fact, the entire private sector – usually operate in a policy and regulatory environment that places incredible obstacles in the path of private sector growth. Much of this attitude springs from rampant corruption and a tradition of ‘crony democracy’; as one Egyptian tycoon said to me, “Only small companies have problems. Big ones don’t, because we can go talk to the decision-makers or pay someone to fix our problem.” When I worked in Jamaica as a USAID consultant back in the 1980s, large and small companies like – and potential foreign investors – had to visit more than 50 different offices to obtain permission to set up and begin running a business. The so-called ‘one-stop-shop’ we persuaded the Jamaican government to establish promised to reduce these bureaucratic obstacles substantially, but it soon became apparent that those staffing the one-stop-shop had neither the skills nor the motivation to take their mission seriously. While one-stop-shops became the flavor of the day in many developing countries, few worked efficiently. Ludwig Rudel, a veteran of more than 20 years in USAID and countless consulting assignments thereafter, points out that today it still takes an average of 66 days to form a new business in a developing country; in Canada, the time required is two days.
Moreover, in many of the countries where we provide aid, for example, the former Soviet Union and its satellite states, as well as in many other countries, economies based on free markets are a new experience. Governments have traditionally been the country’s principal employers and owners/operators of most of its basic industries, and tradition dies slowly.
As a result of all of the above, most aid recipient countries lack any semblance of pro-growth physical and intellectual infrastructure. Even the few institutions purportedly dedicated to business – chambers of commerce, trade associations, etc. – often tend to be elitist, excluding all but the most powerful commercial interests. A further complication is that recipient governments are often reluctant to take advice from donor governments or their contractors. To this daunting array of constraints, add the fact that small and medium-sized companies usually lack the most basic ingredients of management, technology, marketing and sales, human resources development, performance monitoring and accountability. About the only thing they do not lack is the entrepreneurial will to improve their lives.
Technology transfer provides a microcosmic example of the kinds of problems faced by both SMEs and larger companies. In this area, there have been some outstanding successes; for example, ACDI/VOCA, an NGO, has successfully transferred simple technologies to small farmers in a host of countries by working with cooperatives and one-on-one with growers. But there have been numerous disasters as well. Ludwig Rudel points out that “multinational companies have shown that they will not transfer the latest technologies. They will provide the last generation while they develop the next one so that they keep one leg up over their foreign partners. The Japanese overcame the problem in the 1950s by picking sectors including textiles, optics, steel, and ship building and sending a steady flow of their best young minds to study abroad for long periods. They brought them back to be embedded into local research institutions and companies and then to keep abreast of the state of the art as it matured. Once they got these sectors going, they chose additional ones. Now they operate on a par with many western countries.”
Rudel adds: “The United Nations Development Programme (UNDP) tried to do this with integrated circuits in India. They trained about 50 scientists, tried to get them to return to India (most did) and built an excellent R&D institution at Pilani. It was first class but maybe a half generation behind the rest of the world. Then two problems arose. The institution did not find it in its interest to share the technology with the industry on acceptable terms. And when they went to the Ministry of Finance for funding to attend conferences to keep abreast of the field, they got cut out. "You chaps got lots of assistance in the past while the project was building. Now let others have their turn!" was the reaction from the bureaucrats. The whole thing is in the doldrums now.”
There are other major obstacles. For example, according to Ludwig Rudel: “We are clueless how to foster transition to open market economies in formerly totalitarian societies, much less help SMEs. In these countries, the transition from command economies to free markets has provided a fertile field for organized crime – whose membership now comprises most of these countries’ new-rich. Liberia may be an African example but there are others in lily-white societies that are every bit as bad. In the Baltic states the mafia was (is) a part of (or consequence of) the open markets fostered by our efforts; extortion (protection) runs rampant. In Latvia, the links to the Russian mafia overlay the entire private sector operation and abuses are growing. I know of one case where those resisting illegal pay offs were hounded by former KGB agents who became hit men after being laid off by the KGB.”
The relationship between donor and host government is yet another problem. Before any donor can initiate a new program, it must first obtain the agreement and cooperation of the host government. Private sector development can be particularly problematic. Says Wallace E. Tyner of Purdue University’s Department of Agricultural Economics, a veteran of many consulting assignments for USAID and other donors: “Most of these governments also are trying to retain their power over the economy, so private sector development is not necessarily a priority.”
Yet another problem is endemic to foreign aid generically: There is little or no cooperation or coordination among donors. When I was managing a USAID program in Egypt a few years ago, my team produced an annual review of all donors programs. It was widely distributed, but most of the interest in it came from the donors themselves, many of whom were unaware of the complimentary – or duplicative – programs of other donors. As with most USAID Missions, the Egypt Mission participated in a donor committee, which met monthly. But the information gathered by its senior-level members rarely trickled down to program officers or contractors ‘in the trenches’, where genuine cooperation would need to begin.
Given all these constraints, it is not rocket science to understand why the ‘government should just get out of the way’ dictum so often falls on deaf ears, or to appreciate why aid agencies have not been eager to embrace the SME challenge. The ongoing result is been that the rich have been getting richer while the gulf between rich and poor has been getting bigger.
Is there a solution? There is no one-liner to answer this question. But there are many innovative ideas that are being tried and others that deserve to be tried. And there is enough anecdotal evidence of ’success’ with SMEs to believe that some of these ideas – given more resources, and the right kinds of resources – can help these little enterprises grow larger, employ more people, and help narrow the gulf between opulence and poverty.
What might work?
Dr. Jack N. Behrman of the University of North Carolina – founder of the MBA Enterprise Corps and former Assistant Secretary of Commerce for International Business – finds that host governments may be reluctant to take advice from donor governments or aid agencies, but will frequently listen to private sector volunteers. “NGOs and PVOs have been sending volunteers overseas for many years, but generally they have not been made an integral or large part of the overall effort, mainly because USAID has never given high priority to business or private sector development. “
Behrman adds: “In Eastern Europe, however, USAID and its Missions relied on several PVOs -- notably the merged Agriculture Cooperative Development Initiative and Volunteers for Overseas Cooperative Action (ACDI/VOCA), Citizens Democracy Corps (aka Citizens Development Corps – CDC), International Executive Service Corps (IESC), and MBA Enterprise Corps (MBAEC). These groups were given separate contracts, or worked in collaboration with each other or with private consulting firms. Their volunteers were used successfully in almost every aspect of private sector development -- mainly in direct firm-level assistance, but including teaching in business schools and institutes and in programs to train future
trainers. “
Says Behrman: “In Russia, which initially followed some very irresponsible advice for transforming itself to a market economy overnight, private sector volunteers have recently concentrated on strengthening associations representing SMEs. As a result, President Putin is listening to these small companies for the first time. This also demonstrates that this kind of pressure comes best when it is generated from within -- from SMEs and their associations. The advice of NGO and PVO volunteers is being appreciated, understood, and accepted.”
However, Behrman points out, this process is lengthy and does not fit with the ‘quantifiable goals’ sought by USAID and Congress.” So, first, he contends, there needs to be an ongoing educational process within the US Government. We should be able to learn new approaches, since we now have nearly 60 years of experience with inadequate results. SMEs will arise when there is income to be earned and the policy and physical infrastructure is adequate. Policies are needed to remove obstacles, ease company formation, provide for and protect private property, maintain competitive markets, and establish fair and reasonable regulations on business to protect the consumer and environment. “And these,” he says, “are all areas where knowledgeable volunteers can become credible players – and produce better results at less cost.”
Dr. Wallace E. Tyner of the Department of Agricultural Economics at Purdue University – and a veteran of dozens of overseas development projects for USAID and other donor agencies – suggests another approach. Says Dr. Tyner: “The reality is that we carry out development projects in ‘rent seeking’ (rather than profit seeking) economies. That is, people in both the public and private sectors are accustomed to earning and increasing incomes through favors from the public sector. Instead of trying to become more efficient or effective at what they do or produce, businesses invest more in seeking rent. When a donor project comes along, it is usually the established or well connected that have access to the donor(s). Smaller businesses get left out of the process altogether. Thus, the relatively rich get richer.”
Moreover, Tyner notes, “USAID and other donor organization find it difficult to work directly with the private sector. For better or worse, most aid is channeled through governments. And even if the host government is cooperative, it is still difficult to find mechanisms to aid SMEs directly with donor funds. That is why the indirect mechanisms are so important - infrastructure (to lower business costs), training (to increase business efficiency), and policy reform (to enable the private sector to function to its potential).”
Tyner recommends: “Do everything possible to change the rules of the game towards profit seeking instead of rent seeking”. He suggests investing more in social and physical infrastructure, adding: “This is definitely out of vogue, and that is unfortunate because good roads, electricity, education, etc. create the possibility for people at lower levels to become more productive. Infrastructure is more enabling across a broader segment of the economy than a lot of things we do.”
Perhaps, he adds, “we could do a combination of these things. For example, we might make it clear to citizens and government in X country that the US is prepared to build a road from A to B, if high transport costs are a major barrier to trade, but that this will happen only if regulations x, y, and z are changed. Then those who would benefit from the road would become a domestic lobby to get those regulations changed.”
Part of the reason why the really poor cannot often benefit directly, Tyner says, is that “they are uneducated or relatively less well educated, and thus, their absorptive capacity for assistance is lower than that of the relatively well off. They have to be concerned more with day-to-day survival and cannot afford entrepreneurial endeavors. So we need to invest more resources in basic business education. Entrepreneurship will emerge when social and physical infrastructure creates conditions conducive to change.”
The World Bank Group, which for many years virtually ignored the private sector in favor of government-to-government initiatives, has recently demonstrated a new awareness of the role of business in promoting economic growth and poverty reduction. It has focused much of its effort on the potential of SMEs and has identified lack of access to credit as perhaps the single largest problem facing this group.
Says Harold Rosen, Director of the World Bank Group’s SME Department: “One of the first steps toward a vibrant SME sector is the opening of more financing channels, and ensuring that they are focused on building strong partnerships and trust between SMEs and their local banks. This would have lasting impacts in helping local entrepreneurs obtain the capital they need to build their businesses and create more jobs in economies that sorely need new employment opportunities…The entrepreneurs behind SMEs could -- and should -- play a much larger role in development, but too often are held back by a lack of ready access to financing from local formal sector financial institutions. Viewing these smaller firms as costly, high-risk credits, many commercial banks avoid lending to them, concentrating instead on ‘safer’ options such as financing larger local or multinational corporations, or holding high-yield government bonds….”
The SME Department, a joint effort of the World Bank and International Finance Corporation (IFC), is taking on this agenda, using several strategies to increase SME access to capital.
Rosen explains: “This involves not only supporting the traditional WBG product of channeling of medium-term hard currency loans channeled through local banks, but also several newer capacity building initiatives started by our multi-donor Project Development Facilities (PDFs) to improve commercial banks’ SME lending skills and thus help tap into a potentially large and lucrative domestic markets.”
The IFC currently manages nine multi-donor IFC-managed SME facilities around the world. These facilities, typically funded 20 percent by IFC and 80 percent by our donor partners, are building the capacity of SME lenders in their target regions as part of a broader service package that also includes management training, technical assistance (TA) to businesses and business associations, and helping create greater employment opportunities through large company/small company linkages programs.
In Vietnam, for example, the Mekong Project Development Facility (MPDF) is working to improve SMEs’ access to finance through a Ho Chi Minh City-based commercial Bank Training Center (BTC) it launched in 2001. This initiative began with MPDF analysis that identified internal obstacles keeping Vietnam’s banks from doing more profitable SME lending, leading to a BTC business plan that attracted seed capital of $100,000 from 10 private local banks serving mainly SMEs. These small banks lacked the resources to organize in-house training programs, but have now come together to create a for-profit solution that will provide fee-based training courses to themselves, their competitors, and similar banks in Cambodia and Laos. In its first year, the BTC provided top-quality commercial training courses to more than 2,700 local bankers, offering 30 different courses covering such important areas as Customer Focus and Service Quality, Credit Risk and Lending to the Household and SME Sectors, Risk Management in Banking, and others.
Similar objectives are being met in other countries as well. PDFs have also recently held seminars to introduce local bankers in Bangladesh, China, India, Indonesia and Nigeria to successful foreign models of SME lending. This, says Rosen, “creates new opportunities for knowledge transfers that will enable them to take advantage of the vast underserved ‘middle’ market represented by SMEs in their region. “
In western China’s Sichuan province, where incomes lag far behind those of the more prosperous coastal regions, the China Project Development Facility (CPDF) organized a lending workshop for the management of Chengdu City Commercial Bank. This institution has a solid track record in SME lending with 80 percent of its loanable funds concentrated in financing over 3,000 local SMEs. For a city like Chengdu that is home to more than 129,000 SMEs accounting for 99 percent of the total number of firms, the "Best International SME Lending Practices" conference was an important means by which Chengdu’s bankers and entrepreneurs could learn about successful SME lending models in other parts of the world, to help overcome the "access to knowledge" problem faced in many frontier markets.
A similar approach is being taken by the South Asia Enterprise Development Facility (SEDF). This newly launched initiative, funded by the IFC and other donors, has targeted its efforts towards greater SME financing from local Bangladeshi banks. The Africa Project Development Facility (APDF) is pursuing this agenda as well. In Francophone West and Central Africa, in cooperation with the European Union, it has recently provided training in SME Credit Risk assessment to 241 loan officers from 66 different local and regional financial institutions spanning 13 different countries.
However, increasing credit flows to SMEs is not without its catalog of horror stories. Ludwig Rudel recalls: “ I once evaluated a couple of loans made by USAID in 1982 to The Siam Commercial Bank and the Kenya Commercial Bank. In Thailand, the bankers assured AID that the money would be safely invested. They had some good projects that fit the criteria (rice mills) and they were owned by relatives of the bankers who were excellent credit risks. No danger of loss there. It would all be repaid… In Kenya, the bankers said they would have to find borrowers of Indian origin because the Africans would not repay. Nor could most Africans raise the required 200% collateral required by the banks. The Dutch aid program tried to beat this system by offering tractor loans with no collateral. The farmers ran the tractors until they gave out, then cannibalized them to sell the working parts on the cash market and left the frame in the field.”
So the road to SME growth is, at best, a minefield. Yet, as Harold Rosen says, “No effort toward poverty reduction in developing nations is sustainable without growth of SMEs.” Let us hope that both donors and beneficiaries are getting the message.
* * *
The writer is a specialist in international private sector growth issues, and has managed or participated in dozens of overseas assignments for the US Agency for International Development and other donor organizations.
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