This is a question that I have been asking myself ever since. Much of the debate on policy and programmatic choices in Washington regarding “AfPak” – Afghanistan and Pakistan – has been about how to create stable conditions in which economic growth could occur and other programs could be carried out. Billions of dollars have been spent to stabilize AfPak, yielding a mixed record. An alternative, allowing instability, has serious, thoughtful adherents among opinion-shapers in Washington. My good friend Welby Leaman, who authored It’s Not Always Nice to Play Nice: Collusion, Competition, and Development, has argued that stability is not always a desirable goal. Instability can often create lasting changes in the long-run, while stability can hinder fundamental change. There are exceptions, of course. While this approach has had some success in Eastern Europe, the stakes in other regions such as Pakistan, in the form of nuclear weapons proliferation, are far too high. Variations of the stability vs. instability argument have been adapted to different countries with fragile environments, usually rogue states, such as applying sanctions in order to de-stabilize a regime versus engaging it through trade. “Containment” often end up as the most realistic, but hardly sufficient, consensus in dealing with difficult countries.

It is a stimulating debate, but the limited scope of actual choices between the stability vs. instability trade-offs often result in a messy situation of being stuck at an impasse, as is the case in today’s AfPak. While the debate goes on in Washington, neither development nor fundamental modernization is achieved in these countries. There is, however, a possible way out of this gridlock. The answer centers on an often under-estimated group, diluted into the vague mantra of “civil society,” overwhelmingly ignored as a force for change in fragile states and conflict zones: business entrepreneurs. Their experience demonstrates that, while stability is invaluable, it is not always a pre-condition for growth and development.

For example, when I met with the leaders of the marble industry in FATA, I was puzzled to see their industry thriving, employing tens of thousands of workers, despite dismal security, infrastructure, and regulatory conditions (FATA operates mostly under tribal laws). Their success was even more perplexing when compared to another mining sector (“Sector N”) in its neighboring region of NWFP. Although NWFP has a better regulatory environment than FATA, all previous formal investments in “Sector N” were shut down due to conflict with local communities. Today, only small, informal, and scattered miners remain, operating under dangerous conditions. So what explains the disparity between FATA and NWFP? The difference is FATA’s marble entrepreneurs. This group knew the local conditions, had the respect and trust of local communities, and was determined to create sustainable businesses despite formidable odds. They generated a powerful outlet for tens of thousands of (mostly) men who might otherwise have channeled their energies into more “exciting” activities.

The FATA story is not a trivial example nor is it unique. My experience and those of my colleagues have been that such entrepreneurs can be found in the most unstable and unimaginable conditions in the world. In post-genocide Rwanda, while aid agencies were slow to provide loans in early 2000s (partially because it wasn’t “stable” enough), private sector leaders catalyzed a structural modernization in the nation’s economy, increasing average farm incomes by 17% annually. Such phenomena, eloquently captured by President Kagame’s essay Backbone of a New Rwanda, suggest four important insights for policy-makers working with fragile states:

1. Businesses can promote development without needing to incur the costs and time required to achieve structural stability, if the right entrepreneurs are identified. The right entrepreneurs have the trust of the local community, run a medium to large business, and have the desire to look beyond their community (and local constraints) to connect with the outside world through trade.

2. Identifying and supporting entrepreneurs can serve as catalytical entry points in fragile states where policy-makers have difficulty gaining access. They can provide local knowledge, access, and serve as a trusted channel for programmatic activities around their businesses that would have been impossible or too costly otherwise. They can also be effective intermediaries (some times as the only channel) with local leaders. As non-political agents, entrepreneurs embody a common interest of all parties concerned with a focus on local development, reaching local suppliers, workers, and clients, while serving as a discreet bridge to the outside world.

3. Careful conversations with local entrepreneurs can provide strategic insights to inform policy choices, often with unexpected results. For example, discussions with business leaders in post-genocide Rwanda led to the decision to compete in a specialized coffee segment, instead of generic segments competing on price and cheap labor. This “high-value, high-spend” insight has been replicated across different Rwandan industries such as tourism, with policy implications in the form of infrastructure spending, regulation (e.g. national auctions), co-financing mechanisms, and public-private forums that are aligned with this strategy. This insight was a key contribution to what is emerging as one of the most spectacular successes in post-conflict recoveries in recent decades.

4. There is an important role for policy-makers in Washington to productively support local entrepreneurs as a major force for both change and stability. I have often heard that the major bottleneck facing these entrepreneurs is not in their countries, but in access to markets such as the U.S. These constraints include high tariffs, burdensome export requirements, and finding distribution channels. Certification schemes, such as Fair Trade, could be strategic, as a way to justify favorable treatment in the global trading system, and to gain access to specialized distribution channels willing to pay a premium for legitimate firms adhering to international labor and social standards.

Policy-makers often underestimate and overlook this important catalytical entry point in fragile states, reluctant to make sense and put hands on the greasy wheels of commerce, perhaps because of their specialized training in macroeconomics or geopolitics. Development interventions are often driven by macroeconomic stabilization schemes and an excessive use of hastily created project implementation units with questionable sustainability value. This approach is not working. Waiting for a regime to collapse is not a policy, either. It is time to unleash the potential of local entrepreneurs through a more deliberate policy approach. The stakes in fragile countries are simply too high to continue with business as usual.

There are probably more popular debates than the aid versus investment discussion raging in the media, but I can’t think of one at the moment. It has engulfed unlikely outlets from the Huffington Post to Foreign Policy. Both camps fire shots back and forth. The recent focus on this issue highlights the urgency facing developing nations in light of the current global economic crisis. Nowhere is this urgency clearer than Africa.

Recently, one of my clients looked me straight in the eyes and asked: “After oil, how will we survive?” Replacing oil with any other non-processed commodities shows us the predicament that most African nations face. In my experience working in over a dozen African countries from Angola to Rwanda to the Sudan, I have seen that many African nations specifically ignore the product[i] in productivity – at their own peril.

Harvard strategist Michael Porter suggests in his chapter in Culture Matters that a nation’s prosperity is determined by the efficiency with which it mobilizes its human, financial, and natural resources to drive productivity[ii]. However, most African countries have specialized in exporting the same undifferentiated commodities (e.g. iron ore, cocoa, cotton, wheat, etc.). This choice, conscious or not, has kept these nations poor.

The efforts of most African countries to escape their dependency on non-processed or low-value added commodities have been misdirected. Equating value addition to processing is not only simplistic but can also prove futile. Even with massive capital injections, notable attempts at processing have failed because countries ignored markets. Indiscriminate processing of commodities can actually destroy value.

Many African nations continue to export unsophisticated products, but not because they do not want to upgrade their products. Rather, these countries continue to take actions, hold beliefs, and operate in a context that undermines their stated objectives. What is clear is that African nations have not achieved the expected results when it comes to upgrading their product portfolios.

Why has this phenomenon persisted? The traditional way African nations approach their growth strategies is flawed. African leaders must fundamentally rethink their approaches to economic growth. But before Africa can embrace these new ways, African leaders must be ready to question the premises on which they have based their outlook, strategies, and actions to date.

While every African nation has faced unique challenges upgrading their product portfolios, similarities exist across countries. Several predominant barriers have emerged.  Below, I will consider three of these barriers:

1. 1. Failure to envision structural transformation and choose attractive products—this root cause is an omission. Very few countries proactively engage in strategic product selection. Even fewer seek to develop entirely new products. Instead, they focus on their natural or historical heritage, where it is thought comparative advantage lies, and assume that diversification into advanced products will happen spontaneously.

1. 2. Focus on making poverty history as opposed to making prosperity global—most interventions focus on poverty and its victim, the poor. Local entrepreneurs are often cast as “rich.” The poor are perceived to be unable to help themselves and requiring assistance through social programs. Yet, creating great products requires entrepreneurs to leverage skills and knowledge to transform natural resources The paradox lies in that helping entrepreneurs is often the best way to help the poor.

1. 3. Failed collaboration amongst private, public and development partners— Trust is often a scare resource in African nations. Yet, great products require strong collaboration between stakeholders, which is often lacking. Failed collaboration occurs between, across, and within stakeholder groups. For instance, there is frequently tension between competition and cooperation within the private sector.

Instead, African nations must adopt a “product paradigm”. This paradigm refers to a nation’s explicit choice to manage its product portfolio away from commodities towards high value exports. Evidence suggests a strong correlation between the sophistication of Africa’s exports and its prosperity level.

To adopt the product paradigm, African nations must empower their entrepreneurs to trade high value products that meet customer needs, while simultaneously creating prosperity for their citizens. In the global economy, resolving this tension requires a fundamental rethink of a nation’s export product portfolio.  As they consider the aid vs. investment debate, leaders of African nations must avoid losing sight of their product portfolios. Strategically cultivating a base of sophisticated products that respond to the market represent the only survival insurance beyond unprocessed commodities.

A healthy fraction of Kiva’s vibrant community of micro-lenders is up in arms about the organization’s decision to begin facilitating loans to low-income borrowers in the U.S. The language these lenders are tossing around is angry and personal. They feel betrayed on behalf of entrepreneurs in developing countries, whose dreams may now be threatened by a diversion of capital to Miami, New York and San Francisco.

Kiva should be encouraged by the outrage. It speaks to the success of its model, which connects the rich and the poor with a mix of intimacy, dignity and scale that few other models have been able to achieve.

Kiva’s lenders are invested, literally and emotionally. Poverty is not a theoretical, if regrettable condition when you’re helping Busena buy a motorbike to expand her charcoal business in rural Sudan. Busena is not a lost cause or looking for a hand-out or not your problem once Kiva invites her into your living room with a humble request to borrow a few hundred dollars – a few hundred dollars she’ll give back to you, by the way, to lend to someone who’ll need it more once she grows her customer base.

At this point in your relationship, you’d do a lot for Busena. You’re in deep. The trust you’re building is high and rising, and you’ll let nothing get in her way, certainly not a homeowner in the Bay Area who wants 10k to upgrade the toys in her daycare center. How many motorbikes could that buy in Sudan? How many other Sudanese lives could be touched by broadly distributing US $10,000 of working capital? How are we even talking about these people in the same paragraph?

These are fair questions. Even if we accept the reality of poverty in America, the scale is different, often radically different. Income per capita in the United States today is more than 100 times larger than in Liberia, Burundi or the Democratic Republic of Congo. There is little room in those differentials for much of a debate. The planet has become a high-stakes economic lottery for its inhabitants, and the winning ticket is U.S citizenship.

But here’s the thing — Kiva’s success is tightly linked to the freedom it gives both lenders and borrowers. The model’s most important byproducts (that intimacy, dignity and scale) are all driven by the fact that both borrowers and lenders get to make their own choices. All stakeholders get to be powerful and sovereign and create value for each other based on very personal definitions of increased wellbeing.

Busena’s betting on a motorbike, and I’m betting on Busena. I think her success will have a disproportionate impact on women and girls in rural Sudan, a population that is among the poorest and most disenfranchised in the world, and I believe deeply in the transformative power of role models for marginalized groups. Those are my investment criteria, but it doesn’t compel me to design a system that others have to follow, even if I think my strategy for social change is better. And believe me, I do.

Too much would be lost by imposing those limits, including an erosion of the core value of self-determination that makes Kiva work. The decision to enter the U.S. market is an extension of that value. Kiva introduces the privileged to the not-so-privileged, and then gets out of their way. That’s the point. The organization is blowing up a model where I have to trust someone else in a large opaque bureaucracy to invest my philanthropic dollars wisely – and where Busena has to subject herself to someone presuming he knows better than she does how to improve her own life.

This debate touches on other, less personal issues, like whether the emphasis of microfinance is on helping people to manage poverty or escape it. I think it’s the former, which doesn’t mean it’s less important. A hard truth is that only a tiny minority of new businesses – what are sometimes called dynamic enterprises – scale to the point where they have a meaningful impact on economic growth and its ability to create widespread prosperity.

I would argue that enterprise-based solutions to poverty should focus disproportionately on finding and supporting these dynamic businesses, but there is a whole range of enterprise-based responses to poverty that are vital complements to these initiatives. They help the poor and the very poor to meet basic needs and raise their incomes in sustainable ways, without undermining their dignity and humanity along the way.

Kiva is among the most influential players in this arena because of its commitment to empowering individuals on both sides of the microloan. Capping that power by limiting lenders’ ability to decide who is worthy will not advance Kiva’s mission. In fact, it’s precisely the type of top-down, paternalistic approach to philanthropy that Busena and I are both trying to avoid.

In her chapter, Nature is Destiny from “In The River They Swim,” Sallie Christie discusses the notion of personal contribution as a key component of prosperity at the country level. From her travels, she believes that people she met in Gabon did not believe in personal contribution, while she observed that the late-night, working man in Korea embodied it. She also outlines the seven forms of capital that contribute to a country’s assets, with tangible items such as roads and nature being easy to measure lower forms, and items such as institutions and culture being the more difficult to measure higher forms of capital. In the same book, Elizabeth Hooper mentions in Entire, Unto Himself that there are three levels of culture, with the deepest level being mental models. This is the level that includes Sallie’s notion of personal contribution.

Psychologist Kenneth Craik introduced the term mental model in 1943, and attached the meaning that it is an explanation of someone’s thought process for how something works in the real world. It consists of beliefs, inferences and goals that are first person, concrete and specific. It can be defined, informed and tested around a specific, well-defined objective. Additionally it can be said that mental models are either pro-innovation and create conditions for prosperity, or anti-innovation, and importantly, they can change. Elizabeth would like to answer the question, “can mental models drive prosperity, and suggests that there is more to be done with an anthropologist mindset to find the answer. Another way to pose the question is to determine what obstacles to prosperity exist and how do leaders address those obstacles. Can leaders enable everyone’s personal contribution?

Of all the chapters in the book, “In The River They Swim,” Diego Etcheto’s description of the Afghan marble industry, The Afghan Method, provides the best review of the types of obstacles that exist in developing a prosperous society. Why do fairly wealthy and crafty Afghan business people use dynamite to extract marble, while it fractures the quality, and provides a fraction of the revenue gained by neighbors south of the Afghan border? The answer does not just impact the wealthy investor, but everyone in the village. Near Indian quarries, villages of artisans, machinery builders and a host of marble related businesses have sprouted, and provide above average wages as well as a sense of self-worth for the locals. There is nothing of that sort near the Afghan quarries.

Is the Afghan method due to just bad circumstances and corruption (more than 90% of 200 Afghan leaders in a 2005 study believed corruption was the number one impediment to prosperity), or is it something else? According to Diego, the Afghans were suffering from all seven patterns of uncompetitive behavior as identified by the main author of the book, Michael Fairbanks. This means that Afghans sold mostly raw natural resources, didn’t truly understand customer needs, had a weak knowledge of competitors, did not move towards end users, didn’t cooperate on group initiatives, were not prone to take full responsibility for their position, and looked for government solutions.

Several of these patterns can be considered to be a lack of more intricate business skills, but the last three deal quite a bit with how people in this industry think about the world. Are they self-deterministic or fatalistic? Do they look to others to solve their problems? Do they believe both in competition, and in targeted collaboration as a means to compete in larger arenas?

While working in Afghanistan in 2004, I posed the question to more than 200 Afghan leaders, “can individual companies be competitive in regional and global markets under poor national economic conditions?” One in ten respondents said no. That view likely removes quite a bit of responsibility, and places the locus of action on someone else. As a point of reference, the same question was asked in Rwanda, where two in five said no, and in Serbia, where it was one in two. Further we asked a question concerning the ability to collaborate, focusing on trust among people from different tribes, where less than one in five Afghan leaders felt others could be trusted. Simply stated, when trust is low, the ability to collaborate on key initiatives to compete globally is diminished. Again, as a point of reference, in Serbia, which is a region where the term Balkanized developed, one in three felt that people could be trusted. However, nine in ten Serbian respondents believed that strong companies need to collaborate to succeed, and that collaboration could help lead to prosperity.

Getting back to Diego’s chapter, where local businessmen used dynamite to extract marble from quarries and then shipped the fractured rock to Pakistan, how relevant is it that nine in ten Afghan leaders felt that, “for countries in the developing world, access to natural resources and cheap labor are the most important determinants of their international competitiveness?” The first point we can glean from this data is that mental models may have some impact on how economies are operating. As Elizabeth mentioned, perhaps anthropologists can throw further light on this subject.

The second point is to determine what can be done with these findings. The stakes are very high. The well-known psychologist, B.F. Skinner, believed that a potent form of behavior modification involved using a stimulus to elicit a response. If a reward could be visualized, then it could help alter behavior, and ultimately, help a subject change the way he or she views the impact of their behavior. Essentially, that is changing a mental model. If people can first understand the rewards and the impact of their behavior, perhaps they can change the way they think about their accountability and self-reliance. As shown above, despite the Serbs’ low trust levels, almost all saw the benefit of trust and collaboration at the industry level after glimpsing some future economic reward. Therefore this might not be that far-fetched.

I began this blog with the question of why certain economies languish, despite mass infusions of aid. Diego’s synopsis of Afghan marble certainly explains the real problems at the industry level. But it is by addressing the root causes that we can provide the best solutions. Therefore, we need to get better at asking the right questions, as well as giving the right answers. As Sallie would say, the goal is to have more people think about personal contribution, which leads to accountability and self-reliance. We have asked, “can mental models drive prosperity?” Perhaps another question is, “how can more people believe in themselves?” Elizabeth would like anthropologists to help with the answers to these and related questions. I’d like to see if any psychologists would join in as well.

Each of these individuals – whether President Kagame who is a valued client and collaborator; Michael Fairbanks, our founder and current Chairman Emeritus; Ashraf Ghani, a former client and a great advocate of enterprise solutions in Afghanistan; Rob Henning, a current consultant who leads our work in Haiti- is connected by a common thread; they are part of the history and on-going work of on the FRONTIER (OTF Group).  OTF is a consulting firm dedicated to economic development work around the globe. We’ve had the privilege of working in more than 35 countries over the past twelve years.  Today, OTF “swims” alongside a select group of committed country leaders.  Some of our current projects include:

• The Pioneers of Prosperity Awards program, a global awards program that showcases role model entrepreneurs in emerging markets. The program now covers 24 countries across Africa, the Caribbean and Central America.
• The development of a shared public-private sector vision for Haiti;
• An economic competitiveness program for Southern Sudan;
• A sustainable development program for the Cabinda Region of Angola.

These programs reinforce two points to us: the struggle for prosperity continues, and the cause for hope is great.  Practical programs focused on private sector competitiveness, such as the model in Rwanda discussed by President Kagame in his essay, show compelling models where sustainable solutions to poverty are being implemented now. In the book, and in this blog, our authors explore some key questions including:

How do we give entrepreneurs center stage in the struggle for prosperity in developing countries?

How do regions and countries mainstream the environment in their struggle for prosperity?

How do we cement peace with economic dividends in post-conflict nations?

Every day we’re working with our clients and partners to address these questions. This book captures the learning and the questions coming out of that struggle.

We appreciate your interest in the book and this blog.  We invite you to share your thoughts with us. Please email us, or any of the authors, at ideas@otfgroup.com

Ken Hynes and Eric Kacou
Managing Directors
OTF Group