The Official Site for the Book: In the River They Swim

A sense of the ancient surrounded me as I drove through the Khyber road. Despite its unsavory reputation as the cradle of Al-Qaeda – Bin Laden supposedly started his movement over tea at a local Bazaar – Peshawar used to be a city with a quiet charm, until terrorists bombed the Islamabad Marriott in the fall of 2008. The city is located between two hotbeds of insurgency, the Northwest Frontier Province (NWFP) and the Federally Administered Tribal Areas (FATA). I was back in Peshawar to develop a growth strategy for industries in the FATA region. A daunting task given the security risks besieging foreigners and locals alike. Everyone was on edge. As I introduced myself to my colleagues, many of them local Pashtuns, someone wondered aloud – half seriously – how much my contact information would be worth if auctioned at the Taliban e-bay. The joke dispelled the tension but not the key question: What can be done in conflict environments with seemingly impossible working conditions, never mind the unpredictable regulatory and macro-economic conditions?

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.