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Bactrian Gold: Challenges and Hope for Private Sector Development in Afghanistan

Author: Jake Cusack, Veteran of the U.S. Marine Corps, Current Master of Business Administration/Master of Public Policy (MBA/MPP) Student at Harvard University
Speaker: Erik Malmstrom, Veteran of the U.S. Army and Current MBA/MPP Student at Harvard University
Presider: Daniel S. Markey, Senior Fellow for India, Pakistan and South Asia, Council on Foreign Relations
November 1, 2010, Washington DC
Council on Foreign Relations


DANIEL MARKEY: My name is Dan Markey. I'm a senior fellow here for India, Pakistan and South Asia, for those of you I haven't had a chance to meet. And I normally run a regular South Asia roundtable series, which has a few events on the region, so for those of you who might not be receiving regular invitations to that, may be new to our list, please feel free to introduce yourselves afterwards or to contact Kunal Sharma, who's sitting over there in the corner, who's very helpfully involved in that, in -- organization.

We will have an event that's already oversubscribed, I think, coming up with David Rohde, The New York Times journalist. But we will have a number of other events in the near future, so please make yourselves known to us when you get a chance.

This -- today's event, for those of you who may not know, is on the record, which is somewhat unusual. Normally my roundtables are off the record. But this is on the record, with certain exceptions. For those of you who are working journalists, we'd appreciate it if you would not post audio recordings of the event onto the Web, but you should feel free to write about the content of what you've heard today. Audio recording of this will be made available, I think after the 22nd of the month, so we'll wait until after that to actually -- we don't want to scoop ourselves or scoop -- the authors don't want to scoop themselves. They'd like to be able to spread the word in the way that they see fit.

So today it is my pleasure to introduce Jake Cusack and Erik Malmstrom, who will be speaking to us on the topic of private-sector development in Afghanistan. Both of them are representative of, I think, a new and rising generation of American leaders, individuals who have had extensive military service, either in Iraq or in Afghanistan, and are now turning to related but somewhat different fields. Both of them are currently studying at Harvard in the MPP/MBA joint program there.

And so I think we are seeing a certain type of fruit of our national foreign and defense policy, somewhat different than what we normally think about, about the wars that we've engaged in over the past decade. But I think that this -- this is an important benefit that we will see.

But today they'll be speaking about Afghanistan, and I've had a chance to take a quick look at some of their -- at their document and get some idea as to the centrality that they perceive private-sector development to be.

If I could just take one more minute to make a plug, the Council on Foreign Relations will soon, on November 12th, be releasing a task force -- on Pakistan and Afghanistan. This is a project that's about 18 months in the making. I've been the project director for it. Sandy Berger and Rich Armitage at the co-chairs, so it's a bipartisan effort, with about 25 members. So I'd like it if -- and you know, keep an eye out for this, but I would be betraying to say that clearly, when you look at the challenge of Afghanistan, which is the central part of this task force, although we also work on Pakistan, you'll see that the military challenge looms large and is the most familiar to everyone. There is a political challenge that I believe is being overlooked all too -- too much.

But there's also an economic challenge and a business challenge and a development challenge. And that probably gets even less attention than the prior two. So it's a -- it's a great opportunity, I think, today to learn more about this. Both of them have spent time in Afghanistan over the summer, researching and now writing up their findings.

So, guys, thank you for coming, and the floor is yours.

JAKE CUSACK: Thank you. Thank you very much, Dan. And thanks to the council and thanks to everyone for attending.

We also wanted to thank the Kauffman Foundation, who financially supported us over the course of the summer in our research.

We thought it might be useful to start out by just saying a bit about who we are and our motivation for the project. I'm a former Marine Corps and infantry -- infantry and intelligence officer, and then Erik is a former Army infantry officer. We both had served multiple tours in Iraq and Afghanistan, respectively, and we met actually at Harvard when we started the joint degree program there. And we found that we shared a similar reason for departing the military to come to business school, and that's while we enjoyed working overseas and in pursuit of the national interest, we had found that the most promising solutions did not stem from exercising military skill. And we had seen indigenous leadership make their security decisions driven entirely by monetary factors, with military considerations only an afterthought. And we had seen subtle economic shifts yield more results than endless raids and captures of insurgents.

We had both spent months talking to Afghans and Iraqis, and we found out while security was mentioned in these conversations, the conversations usually centered around jobs and ways of achieving a better quality of life. We found people need hope; they need a stake in society, which means that they want jobs and tangible improvements before they can start buying in to a new order.

So these -- this interest and our concerns with effectiveness and sustainability of what we had done in the military led us to graduate school, and then our shared interests in exploring private-sector development led us to spend the summer -- this summer in Afghanistan.

And in going into Afghanistan, our primary focus was on collecting case studies, because we're frustrated with the lack of on-the-ground granular information on economic development and conflict, going deeper than the typical white papers.

We found that a lot of papers focused on the high level, on the environment, and are written from the perspectives of the donors. And that makes the discussions that we tend to have rapidly become abstract from reality.

So we hoped to go and spend a lot of time with the entrepreneurs themselves and the businesses themselves and see how they perceived their environment, even though that environment was inevitably shaped to a large degree by the Afghan government and international actors.

I also just want to say we're very aware that there are many in this room with infinitely more regional experience and expertise than us, and all that we hope to offer is some unique on-the-ground perspective.

We did try to do our best to do something unique in embedding with entrepreneurs as much as possible and trying to get an undistorted perspective. We both grew beards, wore local clothing, moved around without security throughout some reasonably dangerous areas of the country, including Jalalabad and Kandahar City.

So with that backdrop in mind, we'd like to just talk through some of our findings, which are also, I think, mentioned on the back page of the handout that you received, and then -- and then touch briefly on some of our recommendations, all of which we're laying out much more fully in two papers, which we're publishing at the end of this month, one of which -- through the Kauffman Foundation, the other one through the Center for a New American Security.

So I think the central finding that we would like to get out on the floor right away is that we found in Afghanistan Afghans continue to respond rationally to economic incentives, and businesses continue to exist and even thrive. We think that there's something of a Western perception of Afghanistan -- not necessarily in this room, but elsewhere -- that perceives Afghanistan as a near-wasteland. And beyond the nationally known companies, like Roshan Telecom or MOBY Group, which have powered thriving telecommunications and media sectors, a number of regional small and medium-sized enterprises have identified entrepreneurial opportunities and created profitable firms.

And so in Afghanistan, as in Iraq and other conflict zones, we find that the population can continue to respond to economic incentives, so long as violence remains below a certain threshold. And I think it's important to get that out there, because there's this perception that in conflict zones we have to throw out everything that we know about economic growth and business development. That's not the case. In many ways, the problems that businesses face in Afghanistan are very similar to the problems faced not only in developing countries but even in America.

And if we want to -- and the questions will get more into it, but maybe just one example: In Herat, out to the west, we found a company, Zarang motorcycles, which was running a very sophisticated motorcycle import and assembly business, with agents in China, offices across the country, started in around 2005, grown to be selling over 20,000 motorcycles a year that they were assembling throughout the country of Afghanistan.

This is, I think, a level of sophistication above what we generally perceive Afghan businessmen operating with -- printing promotional calendars in Dubai, having their own television advertising across the country, et cetera.

And even in Kandahar, which I think most people think is a very difficult area to work, we still found firms continue to exist, able to make a profit.

With that, I'll pass it to Erik and he'll cover the next couple findings.

ERIK MALMSTROM: Thanks very much.

So our second major finding relates to physical insecurity, and going into the study, we went in with the hypothesis that physical insecurity was the main challenge that many businesses in Afghanistan were facing. If you look at business surveys conducted by CIPE, the Center for International Private Enterprise, the World Bank, consistently businesses' top concerns are insecurity, corruption, and infrastructure, with access to capital also up there. But on the ground we found a slightly different story.

So in our discussions with businesses around the country, we found that these businesses were much more concerned about general uncertainty and unpredictability than they were in pure physical insecurity. For example, in Kandahar, considered one of the most dangerous parts of the country, businesses talked a lot about uncertainty relating to the quality and timing of the power supply, about the local and national government, about financing, about the American force posture, about the sanctity of obligations, should political power shift in the future. And they would also mention insecurity, but many times those things that I just mentioned came first.

And one of the key factors driving this uncertainty was the question mark surrounding July 2011, which I found to be the main takeaway by most Afghans from Obama's policy review last year. People were concerned about the resurgence of the Taliban; they were concerned about the sustainability of the current government. But mainly they were concerned about what was going to happen with ISAF come next summer, despite all the subsequent qualifications.

And so it really complicated their ability to think beyond kind of one-year planning horizons, their ability to think about long-term investments, and it drove this kind of very short-term trading economy, which I'll get into in my next point, where businesses wanted to be highly flexible, highly liquid, and highly diversified to kind of plan for multiple contingencies that could occur over the next year and into the next few years -- which, you know, complicated the role of the international community and all people working on business development because, for these efforts to be successful, they need some kind of long-term horizon, and that, you know, for the most part doesn't exist right now.

So our third point relates to how businesses adapted to this uncertain environment. So we found three kind of common themes that existed across multiple sectors of the economy and multiple regions of the country. The first one was the desire for businesses to vertically integrate. And by this I mean they wanted to minimize the reliance on this -- on an untrustworthy government, on untrustworthy business partners, and kind of maintain as much autonomy and control over their operations as possible.

So, for example, the head of a large, diversified trading conglomerate in northern Afghanistan said, "We have the most corrupt government and people in the world. I don't like relying on people outside of my family if I don't have to." And this was something that was echoed by many businesses, where, you know, if businesses weren't already vertically integrated, then the kind of growing business was also aspiring to this, trying to, you know -- often the process started off with someone entering business through becoming a small-scale trader, and then if that was successful, they'd look to incorporate the kind of support functions of a trading business, whether it be a transportation or logistics company. Or if they were trading in construction materials, the next step would be to start a construction company. And they would grow in this manner, in a very logical manner where they tried to cut out middlemen, tried to maintain as much power and control as possible.

The second finding was one that I mentioned in my last point, where there's a kind of focus on short-term trading at the expense of kind of long-term productive enterprises. And so in an uncertain environment, businesses, as I said, attempted to remain as flexible as possible. And a western official explained this kind of incentive for Afghans to trade saying, "Afghans go to the highest-margin businesses that require the least amount of capital and that produce benefits in the least amount of time. They often start in trade, then pick off productive opportunities in services, agriculture and construction. But even then, people are loath to invest in industry versus trade, because trade is easier and quicker." So this statement was kind of borne out by our visits to businesses across the country. And there's this recurring juxtaposition between the kind of successful importer/exporter and the failing small-scale producer.

Our third finding dealt with security, and we really tried to look at, you know, given our initial hypothesis about insecurity being one of the major challenges that businesses face, we were very interested to see how businesses were dealing with insecurity. And our main finding was that they were buying -- or paying for security in a variety of different ways. So one way was to beef up their security budget, which in some cases rose to about 20 percent of their costs within a given year, to provide for security guards and other, like, explicit security expenditures.

Another way that they provided for security was by paying informal taxes to insurgents if they were operating in an insurgent-dominated area, and also paying off the government as well, to -- you know, for the large-scale traders and other powerful people in the economy, there's kind of an implicit you know, paying government officials and the government officials looking out for their business interests.

Another strategy was the kind of community-based strategy where you'd go into a local area, deal with the local shura, hire local security guards and provide for your security this way. And then the final option for people with kind of low risk thresholds was just leaving an area and going and operating in a safer part of the country.

Our fourth finding related to the government -- and so there was this widespread perception of the national government being incompetent and corrupt, of officials buying their positions, of officials having affiliations with insurgents and the government just not really knowing the challenges that businesses are facing and not knowing how to develop the economy, not knowing how to provide basic services and not how to solve problems relating to business.

This varied at the subnational level, and much of this was dependent on the kind of personality of the provincial governor. So I spent my time in Balkh province in the north and then in Nangarhar in the east. Both provinces have warlord governors: Governor Atta in Balkh and Governor Sherzai in Nangarhar. And there's a complete -- completely different perception of these two governors. So in the north people were much more praising of Governor Atta, and they said, well, we kind of know that he's involved in his own business interests and he's slightly corrupt, but he's largely doing a good job developing the economy, keeping the province safe; whereas in Nangarhar, businesses were much more negative towards Governor Sherzai, who also had his own business interests, and they blamed him for security problems, they blamed him for stealing from the customs gate at Torkham, from kind of development money. And, you know, so that was one point.

Another point was also businesses based on the kind of -- the nature of the business and their size also varied significantly in terms of how critical they were of the government. So powerful traders who relied on the government much more were much more positive about the government, whereas small-scale traders and producers were much more negative. And so to kind of encapsulate the general cynicism towards the government, I'm going to quote an official from the Afghan Investment Support Authority, working in eastern Afghanistan, who, you know, echoed many comments -- (inaudible) -- from businesses, saying, "Our government doesn't know what a market economy is. It says slogans, but it does nothing practical. It has no strategy and no industrial policy. It doesn't have professional and technical people. Insecurity is caused by the government and the Taliban. They are the same. They act illegally. This creates a distance between the people and the government."

And so when looking at businesses and how they view the government and insurgents, often they viewed them as an added cost of operations. But in some cases they viewed insurgents as a much more manageable problem in the sense that they paid insurgents money and they were left alone, whereas the government was kind of extorting them at multiple levels, whether it be the low-level police officer, a customs official, to the kind of district governor, to the provincial governor. And so it never ended with the government.

And so now I'm going to pass it back off to Jake for a final point, leading to our recommendations.

CUSACK: So as we continue this uplifting discussion of -- (laughs) -- our fifth point has to do with international actors, which we also found to have a highly distorting effect on Afghans' economy. One of the senior Afghan officials in charge of business development described Afghanistan to us currently as donor-drunk, with easy money engendering dependence and rent-seeking.

And you can see that in Kabul, where locals game the system. They make up a nonprofit organization in order to obtain free laptops or other services. They refuse to take literacy classes unless they're going to be paid for it, unless they receive a salary for it. And we found that enterprising Afghans have rapidly adapted to the perceived priorities of international dollars. And the education program manager explained to us that Afghans were willing to pay to learn English and information-technology skills, but never pay for learning agriculture-related training or basic accounting or other business skills.

And the reason is that Western-friendly skills can land you a job at the U.N. or an international donor, which will pay $2,500 a month, versus $200 a month on the high end for an entry-level professional job in an Afghan firm. And even established multinational businesses operating in Kabul and elsewhere routinely lose their best Afghan talent to the better-paying NGOs or the U.N., et cetera.

Frequently, international plans backfire in their second-order economic effects and create further distortions. I'm sure as many of you know, Kabul real estate prices rival Manhattan. Inflated labor wages undercut any of these donor hopes that Afghans might be able to compete with Bangladesh or Pakistan in large-scale production of certain exports.

We found in particular that rent-seekers flourish in the security, construction and transportation sectors, which are primarily employed by the international community, and that the short time horizons of international donors have created a breed of cagey middlemen who specialize in manipulating both Westerners and Afghans in order to maximize opportunistic profits.

Rapid shifts in donor priorities and international priorities leave projects orphaned and without follow-up. Unclear American policy pronouncements, as Eric alluded to earlier, exacerbate this uncertainty.

So that being the end of our findings, and as we say, we did recommendations because we do want to offer something more -- something useful for the future. Additionally, this is probably a good point because we've listed off all the things that we found wrong or difficult about operating in Afghanistan.

I want to say nonetheless that both of us left Afghanistan more optimistic than we'd went there. And to contrast it with our previous experience in the military -- and I primarily did a lot of things in counterterrorism, a lot of raids and hunting of high-value individuals, and it was so refreshing to be with businessmen and -women who are actually -- have a stake in society, are naturally optimistic about the future because they are investing, to some degree or another, in that future.

So the -- and also, the other contrast I'll draw is between interacting with businesses and interacting with government. When you interact with businesses, they actually will give you straight answers to the questions. They'll say: We are making a profit, we're not making a profit. We are -- this is working for us, this isn't working for us. Whereas we found -- and we did talk to politicians and ministers around the country at every level -- that whenever we pressed them for specifics, with a few exceptions, they became very hazy and defensive. And we couldn't figure out, is this project actually working, is this initiative actually working, whereas the businessmen, to a certain extent, were accountable to a bottom line. So we knew if their business was failing, it wasn't working, but if it was succeeding to some degree -- (inaudible).

So into our recommendation. Our first recommendation is the infusion of private-sector talent. We find that there's little business expertise from the U.S. military, diplomatic and development elements. And while we can easily point to General Petraeus, Ambassador Eikenberry, Ambassador Holbrooke to -- as being charged with coordinating military and political efforts, there's no senior visible American representative tasked with economic growth. There is the relatively quiet Department of Defense Task Force for Business and Stability Operations, which does some work in this area and we thought was a step forward, but in general it would be better to have a senior public official appointed and given operational control of the disparate American stakeholders in this field.

Second, there needs to be a concentrated effort to attract and leverage private-sector talent. We believe that talent base exists; that there are people willing to commit and work, whether you can find them in American graduate schools and MBA programs, partnering with Afghan undergraduate and graduate institutions, and possibly even moving to a model something like the military transition teams, which we've both worked with and as a part of -- where you have private-sector expertise embedding with, partnering with specific businesses in order to grow them.

With that, I think, we're in -- right, sorry. So two more points on that. And I'm sorry I'm going to rush through the recommendations a little bit because I want to leave plenty of time for discussions, but another primary factor is the need to change the incentives, the accountability and ensure a focus on implementation within the development establishment, within the military.

When I was down in Kandahar, I had a great conversation with a senior American military official in charge of economic development down there. And he described his stories of going into the field to brief economic growth plans by an analogy. He said: It was as if Microsoft had a thousand people doing corporate strategy, but only two software engineers actually making a product. Reality is, there's a lot of people writing interesting white papers and saying the things that we need to do, and tasked at various levels above the base level, but when you actually go all the way out to the field to the guy who's actually supposed to be enabling cold storage in Kandahar, the guy who's actually supposed to be bringing infrastructure to this area or enabling a positive environment for small business development, there usually isn't a person there, number one, and if there is, it's a battalion executive officer who has many other things on his plate, or it's a PRT official who's tasked with that in addition to many other factors. We found a lack of accountability and personnel at the -- at the ground level. So that's something we can talk about a little bit more, if you want, as well.

Another suggestion is that there should be combined capital and advisory mechanisms. And when I mentioned earlier that some of the problems that businesses face are similar to those we face even here, a primary problem for business is access to capital, and along with that is the inability to develop a business plan, to articulate financials on paper. So it's not just an access to capital problem; it's also a business advisory deficit.

And then within access to capital, we can get into a lot of other issues, such as the lack of credit registries, the lack of collateral registries, the inability of the judiciary to actually prosecute anybody, or you're -- if somebody goes to bankruptcy, that -- the bank -- they'll just pay -- continue to pay off the judge small sums, and so the creditors will never be able to get their collateral back.

So a more effective model to us would rely on institutions that provide access to capital and shared equity and structured lending forums with an embedded advisory business development component. So the financing relationships between institution and business would be long-term and continuing, with incentives for sustained performance -- and we think this is as important on both sides -- so that the lending institutions, the development institutions, the personnel making the loans, advising the businesses are also incentivized to see that business do well over the long term and not just over six months until the next glossy report is written on what the burn rate was of money in that area.

And then with that, we'll move to the last two recommendations. Erik.

MALMSTROM: So the final two recommendations relate to trade and sector prioritization. So trade -- Afghanistan has a lot of problems with Pakistan and Iran dumping products, and Afghan producers and people involved in industry not really having a fighting chance to go up against these foreign companies.

So I think any -- this summer, there is a trade agreement between Afghanistan and Pakistan that's a promising step, but in the future there needs to be protective measures for Afghan producers included in any type of trade agreements. And in addition to Afghanistan pursuing initiatives with Pakistan, which is by far its largest trading partner, it also needs to look at its other neighbors, including Iran and the Central Asian countries to the north.

And the final point in terms of our recommendation is looking at sectors. There's been a huge focus on agriculture and mining by the U.S., and, you know, deservedly so. Agriculture employs a majority of the Afghan population. Most of it occurs at the subsistence level. So there's huge gains to be made there. And mining -- ever since June's famous New York Times article detailing trillions of dollars of mineral wealth in Afghanistan, there really -- we showed up shortly after that article came out, and there is a tremendous amount of faith by the U.S. government in thinking that mining is going to be the solution to Afghanistan's future economic growth, and that it is a way to pay the bills, as one official said, once the donors leave. There are huge problems involved in mining. Some of them involve the kind of regulatory structure that surrounds mining, and the lack of infrastructure, and kind of outside multinational firms being very hesitant to enter into the Afghan market.

But aside from mining and agriculture, there are also huge opportunities in light manufacturing and in services that has -- that have the potential to employ more of the Afghan population and that have been kind of bypassed in past efforts. So, you know, in addition to addressing problems in mining and agriculture, you know, look at light manufacturing and services as additional areas for growth.

And in conclusion, before we open up to questions and discussion, we just want to reemphasize that while private-sector development offers tremendous hope for Afghanistan's future, we also realize that this is a long-term process, and everything right now is focused on what we can achieve in kind of six months, a year, two years. A private sector is not going to magically appear in Afghanistan in that type of time frame, but there are things that we can do in the near term, such as the recommendations that we've advocated, that can go a long way, but there needs to be a kind of reasonable timeline that goes along with our efforts there that need to go beyond, you know, just kind of short-year, multi-year to looking at possibly five, 10 years and beyond. And you know, the two things can't exist without each other.

So with that, I'd like to thank you again, open it up to your questions, and --

MARKEY: Great. Thank you to you both.

What I'm going to do is I'll open up with a question, but for those of you in the room that have questions, please just tip your placard up. I will write down your name, and then I will get to you as soon as I can, and we'll go through like that. And we've got until 1:30, so we have a little time for a back-and-forth.

But let me just kick things off with a few questions that came to my mind as you -- as you spoke, the first being sort of a more academic question, maybe something that you've confronted now that you're back in the States and have had a little time to puzzle over this a bit. But that would be, have you seen models employed by the United States or other countries of the sorts of things that you're looking to accomplish in Afghanistan? In other words, are there other places where this has actually been successful to your -- to your eye?

Do we have reason to believe that we, the United States, have the tools available to do this sort of thing, we simply aren't deploying them there in Afghanistan? So that would be the first question.

The second would be, you know, Andrew Wilder, who has recently joined the U.S. Institute of Peace and has conducted, I think, excellent research on Afghanistan, also on Pakistan, has for some time voiced extreme skepticism about our development efforts in Afghanistan, in particular our -- their link or lack thereof, he would say, between those development efforts and counterinsurgency efforts. So you're not alone. And of course, Ashraf Ghani and others have pointed to the -- this debilitating side effect of massive flows of assistance money.

But I wonder -- you're clearly critiquing it, but I wonder what you would do with all of that stuff. You know, it's clear that you'd like to focus more attention on the private sector, but what should we do about the distortions, as you put it, that are being caused by massive flows of assistance money? Do we turn it off? Or -- and assuming that that may not be the entire answer, what should we do?

And then, finally, since you did have the unusual opportunity to travel in parts of the country that most Americans are not able to do right now, or are not willing to do right now, over, I think, a particularly difficult period, over this summer, I wonder if you might share with us just a little bit more of your observation of the mood there not specifically with respect to the private sector and business, but more broadly with respect to the -- to the U.S. effort in Afghanistan, the military effort as well as the political and economic effort.

And with that, I will -- I will let the two respond. And then please just -- (inaudible) -- if you have questions. Thank you.

CUSACK: Okay. Thank a lot, Dan.

So, first, on the -- on the question of models that work or things that our countries have done that work. So there are some of these projects already existing in a small scale that we think are relatively useful. The SEAF funds, the Small Enterprise Assistance Funds, we spent some time with Mustafa Kazem, who runs that fund in Afghanistan. And that is a fund that's operating very much on the model that we suggested of providing capital but also providing long-term advisory services and actually producing positive, profitable returns by engaging with these companies.

And when thinking about the models that would or would not work, I think it's also important to say that as we've said, these problems are not entirely new or unrecognizable. So you can look at models that have worked at a small scale in Africa or other developing countries or areas, you can look at models that have even worked in portions of America, and those all have lessons, we believe, for Afghanistan.

And I think the key, when you talk about models that work, I mean, the question is always: Can you scale them? And I think they can scale, but that just requires a lot of different talented people implementing them.

And you're right, that there's a ton of money being poured into Afghanistan right now. And we found an overobsession with the burn rate of money -- just how much money can we spend by X deadline, often by July 2011, to generate some sort of result? And contractors usually are working on a timeframe where they understand that they're going to be reevaluated for this contract in six months or a year. So all they care about is, what results do I generate then?

And if the project actually causes a lot of distortions and collapses two years later, they don't really care. There's a problem, because nobody in a development project we found is incentivized to acknowledge failure. The donor doesn't want to acknowledge failure. The implementer doesn't want to acknowledge failure. The beneficiary, who is continuing to get money, doesn't want to acknowledge failure. So you have these artificial projects that aren't working that continue to get propped up.

And a lot of the success stories that we look at reported by the media aren't necessarily success stories. For example, there's been a lot of attention -- a focus on kind of the handicrafts or different projects to reviving Afghan art. Those are great projects. I think they're valuable as -- often as nonprofits and valuable for (culture/cultural ?) reasons. But a lot of those projects that are portrayed as making profits are actually not profitable. And so you're kind of encouraging people to go to a model that's not making money, even in the cases where those businesses are operating with powerful political allies.

(Cross talk.)

MALMSTROM: So on your second point about Andrew Wilder, he's actually someone that we both came in contact with last year, and share some of his skepticism about the connection between aid and security. I think that, you know, we both participated in this kind of military-driven model of development and saw some of its pros and its cons. But I think what we're advocating for and what Andrew and a lot of people who support Andrew advocate are just more modest expectations, longer timelines and a greater appreciation of the local context and working through local actors, which are all things that are consistent with what we're recommending.

On to your third point, so I served in Afghanistan in 2006, 2007, in Kunar and Nuristan province -- provinces in the Korengal/Pech (ph) -- (inaudible) -- valleys. I was back in eastern Afghanistan this summer and spoke with some of the people that I had worked with before. I think there is a lot of concern. They definitely thought that things were deteriorating, the places that I had served in before. So Nuristan has become a Taliban stronghold, and the U.S. has largely withdrawn from there. Kunar had been worsening. And even in Jalalabad, which was pretty safe when I was there before, the Taliban were blowing up music and cassette shops in the evening. There are suicide bombers going off every few weeks. And I think there was a lot of concern that things were getting worse, and it combined with the kind of uncertainty about how long ISAF and the U.S. were going to be there.

Now, in the north, which has been one of the more stable parts of Afghanistan since 2001, there is also concern about provinces in the north, like Kunduz and Baghlan, that were worsening, and that U.S. were -- was starting to send in troops to replace the Germans and Norwegians and other NATO allies who had been serving in there. And in Mazar, which is considered the commercial hub of northern Afghanistan, one of the main ones in Afghanistan, people were really concerned -- this insecurity was kind of creeping inwards towards Mazar -- and, you know, were at the point where they were just -- or waiting to see what was going to happen. But it definitely was in their kind of consciousness that things were not looking that good.

CUSACK: One other thing I just want to throw out real quick on the -- on the models that work, because this deserves a little bit of attention, is the move towards Afghan First programs, which try and procure as much goods and services as possible from local Afghan companies.

I think these are great initiatives, so long as they're constructed with somewhat of an eye towards sustainability. You don't want Afghans to create a business that you -- is only being propped up by your national dollars. But the beverage industry, for example, in Afghanistan, has had a lot of success, both because of favorable regulatory environment and trade protections, but also because the U.S. now primarily procures, at least outside of Kandahar, all of their beverages from local Afghan companies.

But the tension here -- and I think the tension has been pulled the wrong way -- is that you have logistics officers and procurement officers, both military and development, who usually are answering to a boss who only cares about: I want the stuff, like, when I want it, and I want it the way I want it. You know, and this is in tension with the fact that if you're going to procure locally, it's going to be more difficult; it's not going to be as simple -- though it's ultimately more cost effective, generally, in my opinion.

But in the short run, when all you care about is, do we have enough water tomorrow, do we have -- can we build this building, you know, 30 days from now, that naturally begins to favor the international contractors, who ironically often are usually subcontracting, subcontracting down to ultimately Afghan companies, but along the way a lot of that money and value is being taken out of the process. So I think, in general, there's an opportunity to improve that process.

And I think the website, which was recently launched in August, is a great step to allowing Afghans to see the tenders that are out there, the opportunities to provide business to the international community. Because in the past the problem was, for example, in Kandahar, the request for tender, the request for proposals were posted on the base. So if an Afghan -- the only way an Afghan could get on the base was if they already had an existing contract with the military. So effectively, you'd already narrowed the spectrum to kind of the people who were already grandfathered in, who had somehow had a political connection before to provide services to the international community. And so this is only exacerbating the corruption that exists within international-to-Afghan contracting relationships, as opposed to providing tenders where everybody can see them and apply for them.

MARKEY: Great.

(Greg ?).

QUESTIONER: Oh, yeah. Well, first of all, thanks very much for a really great brief.

Could you expand a little on your impressions and analysis with regard to the economic activity of the regional neighbors -- you touched upon this as a problem -- but if you could expand on that, and where you see particular trends in this phenomenon?

Secondly, could you also be a little bit more specific in terms of your recommendation vis-a-vis trade? It wasn't quite clear how you -- what you saw as necessary to protect these Afghan industries, if you will.

And what sort of strategies did you see Afghan entrepreneurs beginning to pursue in dealing with their Pakistani, Iranian competitors?

MALMSTROM: Okay. So regarding your first question, the regional neighbors. So the trade agreement in July between Afghanistan and Pakistan included provisions to give Afghanistan sea access in Karachi, for Pakistan to have more direct routes to Central Asia through Afghanistan and then a joint Afghan-Pakistani chamber of commerce. And proponents were hoping that the deal would reduce transit costs, lower import costs, make exports more competitive for both countries.

So in terms of -- so the problem from the Afghan firm perspective is that they are not even able to get a foothold a lot of times when they're doing up, you know, for example in Jalalabad, you know, anecdotally. I met with a box manufacturer who was able to secure funding from a donor, saw an opportunity and set up a factory and pretty soon after he started his company, he was being undercut immediately by Pakistani competitors who had flood the market, cut prices, put someone out of business and then the guy, the Afghan producer would be out of business and the Pakistani competitor would float the prices back high.

So that's one problem. Another problem is that there are higher imports on raw materials than there are oftentimes for end products. And so in terms of --

MARKEY: Import tariffs.

MALMSTROM: Import tariffs. Sorry. So those types of things to give Afghan producers a fighting chance, I think, you need to kind of equalize the tariffs so that raw materials are, you know, the same, if not cheaper, than end products. Additionally, there needs to be more border control provisions to make sure so like, you know, the border between Afghanistan and Pakistan, it's very easy to smuggle across that border and additionally, customs officials can be paid off. So I think, you know, making sure that customs are more honest and efficient and securing more border control can be productive. And then, finally, in terms of the other neighbors, right now, up in Mazar-e-Sharif, for example, there's a railway that's being built from Mazar to Hairatan, the port of entry that borders Uzbekistan, Tajikistan. And you know, that border in contrast to the Pakistani border is much better regulated, and there isn't the same type of negative impact for Afghan producers in the north that the producers in the east are experiencing.

So I think that is part of the way forward.

In terms of -- so the second part of your question was our recommendations? So I think one other area that brings with it a kind of loaded political context is getting Afghanistan access to the Indian market. There is a strong desire for a lot of Afghan agricultural products, ranging from pomegranates and other perishable food products in India, but it's very difficult when you're dealing with Pakistan in between for Afghanistan to get into that market. And I think future trade agreements should really, you know, you're not going to make a big leap in that all of a sudden. But I think, you know, pushing incrementally for increased Afghan access to that market could be very beneficial for Afghan producers.

CUSACK: I think it's important to touch on the trade note. As Erik mentioned, you see really instead of regional -- or trade ties within the country, what's actually developed is these economies are attaching to their neighbors. So Herat, for example, is very much attached to Iran; Mazar is very much attached to Uzbekistan in the north. And Jalalabad in the south is very much attached to Pakistan.

There are opportunities for better trading within Afghanistan for these producers if they're able to produce. And we know that, you know, protectionism is kind of a dirty word and you don't want to prop up industries that really shouldn't be there, but at the same time I talk about the success of the beverage industry. Most the beverage manufacturers attributed that to the raise in the tariff on bottled water and Coke coming in, Coca-Cola coming in. They attribute that success to raising of the tariff from 2.5 percent to 20 percent, which I think happened in 2006. Maybe its gone a little too far now. There's a lot of beverage manufacturers in Afghanistan, but that was the most the successful business that we found in Kandahar was a beverage manufacturer.

So I think to some degree, greater protectionism is warranted of these infant industries.

MARKEY: Right. We have a question over here. Is it Viola -- (inaudible).

QUESTIONER: I wanted to ask you a couple of things. One is -- you touched on it a little bit, but I wonder if you could elaborate a little bit more. How much do you think U.S. assistance efforts, especially economic development assistance efforts in Afghanistan are hindered by this sort of fatalistic view that Afghanistan is a tribal, backwards, mud hut kind of country that's never -- and it's never going to change? How much of that sort of perception hindering U.S. efforts? Or is it really not an issue on the ground?

And the other thing, I lived in Belarus for a couple of years and one of the strange things that struck me there -- this was in the late '90s -- and there were like six McDonald's restaurants in Minsk, and as dysfunctional as so much of the economy was in Belarus, it really struck me on how you could walk into a McDonald's and you'd see the very same sort of -- although mostly much younger generation -- of service employees that had been trained within an inch of their lives through this very specific system that major corporations like them use, providing a level of service that you could only dream about in a small shop somewhere else in Belarus. And I wonder how much emphasis there is, if any, or how much is lacking an emphasis on training and specific skills that are needed? If you can elaborate on that one a bit more in a place like Afghanistan.

CUSACK: So, first, just touch on the, you know, fatalistic view. I think there is certainly a degree of fatalistic view. I think that ties directly into the short time horizons of most people in Afghanistan.

I think the idea that we fought nine one-year wars in Afghanistan applies even more so to our development efforts where the rotations are even frequent, more frequent sometimes and the priorities shift rapidly between what a donor's favorite project or sector might be.

So I think that's always a hindrance if you think that you're leaving soon and you think that what you're doing doesn't matter, because as you all point out soon anyway, that's going to affect the kinds of things -- how involved you get in trying to spur the economy forward.

I'll touch on the McDonald's point and then let Erik talk. I think, I mean, the thing that I was thinking about of McDonald's in the context of Afghanistan is there's a lot of value to having big firm-small firm linkages into Afghanistan where you have the bigger, multinational companies that are playing a role or developing subsidiaries or developing their own companies inside of Afghanistan.

I spent some time with a raisin producer who had secured a contract to export raisins to Russia and was working on a contract to export to Europe and U.K., and ultimately to the American market. What happens when you get those big firm linkages is they come in and say, this is a standard that raisins have to be at to be accepted in Russia or accepted in the international market. And then they provide some of that technical expertise and quality assurance that raises the standard of performance in Afghanistan and then shows other Afghan producers what is possible. And I think a big thing is for Afghans, once they've seen an example of somebody making money of something working, they flock to that. For instance, somebody started producing sandals in Afghanistan, so now, I'm not sure what the numbers are now, but then 10 different manufacturers start producing sandals. A lot of them have to shut down because there's not that much of a market for sandals in Afghanistan, but a similar thing happened in beverages. As soon as people saw producers making money in beverages, Afghans flocked to that.

I found that there's much more an entrepreneurial spirit in Afghanistan than -- I don't want to say much more -- there's more of an entrepreneurial spirit in Afghanistan than I found in Iraq. And I think that if you show Afghans an opportunity and a way ahead that they'll take it, and if they can see that in front of their eyes. And I'll let Erik talk.

MALMSTROM: So I think, to your first question, I think it's less a hindrance of this backwards view of Afghanistan, and more, at least from the perspective of the international community, not wanting to get involved in all the kind of nonmilitary aspects of Afghanistan. So, you know, there is this whole debate about counterterrorism versus counterinsurgency, and counterinsurgency implying, you know, a greater emphasis on nonmilitary factors.

And I think that the point of what we're trying to say is that it doesn't necessarily take a lot more money, more people. It takes, in many cases, just smarter policies. And it takes, you know, recognition, too, that regardless if we want to be involved developing the private sector in Afghanistan, to a certain extent, that's going to be inevitable. You know, we're not going to -- given how connected military problems are to all the other problems in Afghanistan, we have to be involved. But I think, you know, to Jake's point, when you have a very short-term planning horizon, it really impacts your ability to make progress in this area.

And I guess, to the second point about, you know, the kind of impact of training, or the benefit of training, I heard people say, you know, we've never had a market economy in Afghanistan before, so this is completely new to us. But, you know, to Jake's point, I mean, there is this very vibrant entrepreneurial spirit within Afghanistan that often is driven by kind of survival, of just not being able to rely on your government or anyone else within the society. And people are very entrepreneurial. So I think if you nurture that in the right way, you know, that can be very powerful.

And I think, you know, one kind of caution about training is a lot of donor programs are focused on these kind of fuzzy training programs and capacity-building programs, where it's very difficult to monitor like how effective something has been. And so, you know, I wouldn't say completely neglect training and capacity building, but I would be much more favorable to something where you can actually see some demonstrable progress.

MARKEY: Great. We've got a lot of questions, so what I'm going to do is take two at a time. And then you can split them up as we go.

We've got Maliki (sp) and Molly (sp).

QUESTIONER: I was just hoping that you could talk a little bit more -- we've touched on this in a couple of the responses already, but just a little bit more on sort of the channels that are available for delivering on some of these recommendations that you guys are making. You know, there's always a tension between trying to do too much and not doing enough. And certainly, we hear a lot about the fact that the donor community and these huge influxes of donor cash are distorting economic development in Afghanistan. But then when you try to scale some of that back, you're left with the question of: Well, what exactly do you cut? And when you start cutting things out, after a while you reach a point where you start to say: But you can't just focus on one thing; you have to focus on this other thing as well, because it is all interconnected. You can't just focus on small business if you're not also building the infrastructure, you know, the transportation infrastructure, the energy and, you know, the power infrastructure. And you can't -- you can't develop the private sector unless you're also dealing with sort of the macro issues of corruption and institutional development sort of at the national level. It's all interconnected, it's all interrelated.

And so some of what I'm hearing you say is we need to focus on entrepreneurial -- the entrepreneurial spirit, and sort of facilitating development of that, maybe by having Western companies go in and partner. And so maybe that's the right channel. Maybe there are other things that you guys have thought about that you're going to recommend in your final report. So I was just wondering if you could expand on that a little bit more.

MARKEY: Yes. Let's take Molly.

MR. : Oh, sorry.

QUESTIONER: Well, I first wanted to thank both Jake and Erik. I'm a Kennedy School alum, and I was really pleased to see that you not only did this work, but you took the initiative to bring it to us in Washington. So thanks for doing that.

I have two really quick questions. First, a lot of what you were talking about, about criticisms of development assistance, rings true I think in a lot of contexts, not just in Afghanistan. But I was specifically interested in your point about private-sector expertise being needed amongst the U.S. government officials. And I wondered if you can expand on that, and if you mean by that people with private-sector background, or more sort of a donor-type person who works in fragile states focused specifically on private sector; someone with -- the MBA type, or someone like from the IFC at the World Bank.

And the second question I have is, you mentioned trade, and I didn't hear you talk anything about U.S. trade access. And I wonder if you had opinions on this reconstruction opportunity zone legislation. And actually, I'm curious to hear if -- when you were traveling and talking to entrepreneurs, if there was any discussion amongst Afghans about access to U.S. markets and any of that legislation?

CUSACK: Thanks. And so, first to touch on, I guess, the channels question, one thing we -- distinction we should draw is, we really focused a lot of our time on -- with Afghan businesses. So we didn't try and get a kind of comprehensive sweep of what all the donors were doing and what they were up to. The only comment that I'd make is interesting is -- I mean, Erik and I, I think, you know, are -- I mean, of at least, hopefully, average intelligence, and have the benefit of being in the military for four or five years before. And I spent quite a bit of time in intelligence as well. I found trying to figure out who was doing what in the development community to be tougher than figuring out who the insurgents were in Iraq. (Laughter.)

I mean, it's -- it really is -- it's amazing. And they don't know what each other are doing. And we would routinely go to different meetings in the same city and tell people who had both been there working on projects for the 12 months that, "Do you know that what they were doing was, you know, similar to what you're trying to do?", or "the opposite of what you're trying to do?" And when there are success stories, it doesn't seem like -- they're often not, you know, propagated enough, followed through on, they're not offered up to scale.

So I think one key -- and this gets to appointing one high-profile American person to unify some of these economic development efforts -- is to simplify and unify the efforts. I think they go through too many channels, particularly when you talk about trying to channel the aid and development through the Afghan government; which only worsens the effect that we were talking about earlier, where now you have entrepreneurs entering the Afghan government to make money because that's their best entrepreneurial opportunity, because they get into Afghan government where they can then direct the international dollars to themselves, to their brother, to their son, as opposed to actually developing a competitive private sector. I think to some degree sometimes the Afghan government -- and probably because of this kind of crony capitalism -- sees a strong private sector almost as a rival, as opposed to a valuable ally in moving forward.

I'll touch on Molly's (sp) question, and then Erik can just go ahead from there. On private-sector expertise, we're talking like private-sector expertise in terms of MBA types, people who have worked in similar businesses -- maybe not necessarily in Afghanistan. There's a big difference between bringing in a couple of different agricultural experts to help advise, and somebody who can get you, this raisin producer, a deal to sell raisins to Europe, or sell raisins to any given market. And a lot of times, I think there's a -- there's a lot of development officials who are good in that world, but a lot of what these businesses are looking for is just basic business expertise relative to their kind of business, and focused on achieving profitability, not in reporting to more intangible metrics.

I think, in general, there -- I mean, development private-sector expertise is needed, too, but there isn't a shortage of people with interesting development ideas working in Afghanistan. The issue is at the implementation level; like actually taking the idea and following it through all the way to the end.

The last question, on the American market, I mean, I -- it didn't really come up that often, because I think that was just so far beyond what they can imagine. They were just thinking: Can we, you know, regain export market to Russia, to India? I think they'd certainly be interested in the potential of exporting to America. But the only businesses that I really talked to doing that were some of these kind of niche handicraft businesses that had secured, through political means or otherwise, the ability to move freight at discounted rates over here to sell, because it's not competitive right now on an actual freight basis.

Though I would add that there's an opportunity: There's a lot of cargo planes that fly into Afghanistan and then fly back to Dubai or wherever empty. And if Afghan goods could be placed on those planes, which they're not doing right now, then you could reduce kind of that export barrier and make them potentially more competitive on the world market.

MALMSTROM: Yeah, the only things I would add are, in terms of the trade opportunities with the U.S., the carpet industry and the gemstone industry is very interested in opening up these markets to the U.S. And in some cases, they had. They had dispatched their management over here, and were working deals. So other than that, I think that it was much more original focused, or within Afghanistan.

In terms of the channels, and also getting onto the private-sector expertise, I think that what's lost is that there's a lot of Afghan talent, whether it be in the diaspora or amongst young educated Afghans who currently are working for the international community. There are people right now, they're Afghans who understand the cultural context and, you know, understand business very well. And I feel like they are not as involved as they could be. And I think if we identify those people and work through them, they could be, you know, some of the most powerful advocates of what we're, you know, advocating. So --

CUSACK: I mean, and I think what Erik touched on there kind of -- we call them like the category of the hyphens -- of Afghan-Americans, Afghan-Brits. They are a potentially -- I mean -- huge resource for Afghanistan. They also -- I mean, it's not without its downfall. Those are also some of the people who are most expert at manipulating the system in order to maximize their own profits from international contracts.

But the key is, if you find the right entrepreneur, if you find the right Afghan-American, Afghan-German, wherever they were raised, I mean, really try to empower that individual. It seems like a lot of times they find one entrepreneur, he's being successful, and they think, okay, he's already successful, so let's not help him anymore, let's try and find a new person. That's the hardest part, is finding the person. If you find a good entrepreneur in Afghanistan, you should just continue to provide him or her with as many resources as possible -- you know, within reason, and being aware of the fact that can create a distortion in itself. But the idea of trying to evenly distribute the benefits of donor largesse for everyone, is -- often backfires, in my opinion.

MARKEY: General Nash (sp), and then Siri (sp).

QUESTIONER: Guys, well done. This is very important work.

Dan, your question about, you know, other examples -- we've seen this -- and I'll just -- a few words about the Balkans, if I may. The best example we had in the Balkans, and -- I was wearing a uniform as we stumbled across a free-market opportunity, and some of their -- Erik and Jake's predecessors at the business school did the Arizona market study, I don't know if you guys have come across that, but you should check it out. Bruce Scott (sp) was the professor up there that did it, but -- and it was just -- we made room for people to trade, and now it's a very big -- (audio break) -- tried to recreate it other places around Bosnia, without success. It was just -- (audio break) -- variety of factors that came together more through Bosnian efforts than anything the American military or the American embassy did. We just kind of reinforced -- (audio break). But there's a valuable lesson in looking for those opportunities.

In Kosovo, every -- so much of what they talked about was -- amd now I'm wearing a -- not a blue helmet, but a blue baseball cap, a -- (audio break) -- U.N. civilian -- trying to promote business development. And it was extremely frustrating, because you couldn't get the expertise necessary to do things, and we were importing concrete products and storing them at a concrete -- an unused concrete factory, because we couldn't get it running. We couldn't -- we couldn't get the expertise necessary to manage it.

And then we tried to get some mining development taking place. But the -- but the Swedish miners that came in to do the economic analysis found it unprofitable to start up again. And I -- it always seemed to me it would have been better to subsidize their starting the product, starting the factory, starting the smeltering (sic) activities again, just to get the process going, and we pay the investment cost -- the donors pay the investment costs, so it does become a profitable thing over time.

So you get thinking about franchise, and I put "franchise" in quotes -- franchise -- subsidising franchise development. And I don't mean -- I don't mean necessarily McDonald's, but I don't exclude the McDonald's (sic/McDonald'ses) of the world, but a lot of other business development. But it all comes down -- and then I was in Afghanistan a couple of years ago, went down to Jalalabab (sic) and got -- Jalalabad, and got the Nangarhar Incorporated briefing from the Army colonel that was trying to get business going in Nangarhar.

And the New York businessmen that were with us on -- (inaudible) -- it was a CFR trip, they all jumped up and said, "Son, I've been trying to do that crap in New York City for 30 years, it doesn't work like" -- you know. (Laughter.) And I can't think of anybody worse than an infantry colonel trying to, you know, develop business. I mean, no offense to infantry colonels, but that's not the business they do. And the Dick Holbrookes of the world don't do a lot of business development. He does a little rain-making for big business, but he's not a businessman -- type thing.

So kind of my -- taking all that together, how do we do this? How do we -- how does -- we as a government, okay -- because it's not the Petraeuses of the world. Because Petraeus and Holbrooke are trying to build institutions. They're trying to build governance. They're not trying to build free markets. The -- you understand what the -- and you need an entirely different person and an entirely different set of skills necessary to promote business and promote -- not AID development, but promote entrepreneurial business.

How do we -- have you guys had a chance to think through how you'd reorganize the government to do all this?

MARKEY: Here, hold that, and I'll take another. Yeah. Go ahead.

QUESTIONER: Okay. First question, I know a young entrepreneur in Afghanistan who has -- I wouldn't consider him in the donor-drunk category. He delivers housing modules from containers; he adapts containers. Now, his middleman is a European. That's how he's gotten the deal. What happens to a guy like this, who is very entrepreneurial and who is really the manager of the business, but he still has, you know, relied on the European, the foreigner, to get the foreign contract?

Second question, getting back to the mining. Is there any hope that the mining potential in Afghanistan will bring profit, not just government-to-government, minister-to-minister, but actually filter down to a level where there can be local entrepreneurship to serve -- to build an industry or serve it, and provide jobs that -- so that the country is not just exploited, where the people and the resources are not just carried out?

Thank you.

CUSACK: Thanks.

So, on how to reorganize government to do this, I agree that the military's not the right organization or organization naturally suited to do it. I mean, the military is the most socialist organization that the United States has in terms of how it operates. (Laughs.)

MR. : And we want it to be.

CUSACK: Right. So that's not the idea. And they're usually rotating frequently and they have other priorities, and so they're not well suited to produce sustainable development.

I mean, I think to say, "How should we reorganize the government?" would be too bold. I think the core of what we're seeing is that you really have to get to the ground level and nuance your strategy based on the region and allow people the freedom and resources to actually make that effective.

One of the things that -- and it's interesting to talk about cement, because nine years in Afghanistan, there's still no functioning cement factory. I mean, you -- that's the number-one most profitable opportunity in a place where the transport costs are so high. And there's a whole -- I mean, that's a whole -- we have a whole separate piece on that. There's a lot of reasons why that has happened. I would say -- you have to be careful doing joint investment projects. You always want to make sure that the Afghan has just as much at stake as the donor does; otherwise, they'll just take the money and go. And I don't really fault them that much for that.

So they need to make sure they have a lot of stakes. I think on the subsidy side, another different way to subsidize would be to say, we guarantee that a year from now or two years from now that the U.S. will buy X amount of product from you at X price if it meets this standard. And so then the market -- then the business owners themselves can figure out where to get the capital from, the necessary steps to do to produce that. But the problem is right now that nobody looks that far in advance. So it's either, can you provide this product for me next week? Oh, you can't? Okay, we're going to have to go with the international contract.

I think that there is a lot of private-sector expertise that's unused in the reserves of kind of America's human capital. I think -- (inaudible) -- you find a lot of our peers in business school unaware or intimidated by a conflict zone. But given the opportunity, they have a lot of valuable expertise that is needed in Afghanistan. And because of the way the media distorts risk assessment, they think that they could never work in Afghanistan.

I mean, obviously Afghanistan's very dangerous, but -- I mean, we did travel around without security. In Kabul, it's -- is relatively permissive to move around. West and the north, it's very permissive to move around, so long as you're smart and not high-profile and not actively associated with international presence. There's a big difference in the security threat to an Afghan business that works in any way with a known international organization and one that's just independent, to the point where we found that the Taliban targets bottled-water shipments in Afghanistan because those must be going to internationals, but they don't target Coca-Cola moving around the country, because Afghans drink Coca-Cola.

I'll let you pick up there now.

MALMSTROM: So just one other point on how do we do this. I think it's a mistake, too, to think that just the government is like the main -- like, there's ways of facilitating, like, business-to-business exchanges. And from -- not necessarily just Western business to Afghan or Iraqi business, but looking at the regional actors and saying -- who have a much better understanding and much higher appetite probably to get involved in places like Afghanistan, and look at ways of facilitating those types of exchanges rather than looking at the U.S. government going in and trying to create a private sector. So I think there's potential there.

To the mining question, there is -- so as soon as that New York Times article came out, immediately we heard the retort about resource curse, and Afghanistan becoming another Congo. And I think that risk is certainly there. I think the problem at this point is -- so shortly after that article came out, there is a conference in London where the Afghan minister of mines brought in a bunch of potential investors in mining in Afghanistan. And there is a lot of trepidation by these companies to get involved in Afghanistan not only due to concerns about insecurity and corruption, but also about, you know, the potential nationalization of any contract that they enter into, and a lack of incentives in the sense that right now, for -- so the -- I think in the right to explore regulations, that person doesn't have priority in the bidding process. So someone who incurs the risk of going to explore these possibly reputable surveys or possibly not don't have the upside of saying, "Okay, well, I found something, and then I can sell this off to a big multi-national company."

And so you're not even getting these guys in the door who should be the ones going out and trying to figure out, you know, if this stuff is actually there. And so, you know, that's a problem. But I think, you know, it's kind of a balancing act that the Afghan government has to play because they need to both invite international actors to come in and start exploring and actually extracting the materials, which is a challenge, but also, you know, not getting taken for a ride and making sure that these -- that the local communities as well as the government and everyone else on the Afghan side of the equation benefits from this. And I think that, you know, at this point, it's -- we're so early on in the game that no one knows what's going to happen. And I think the Afghan government is very conscious of the risks of both, you know, not getting people in to exploit this, these minerals, and also just, you know, having them come in and then not benefitting at all. And, you know, it's a very delicate situation that I think we'll figure out over time how that -- it actually plays out.

CUSACK: Please, one last point, because I really wanted to emphasize what Erik said about it's not just -- it's not really primarily even the public sector that should take on the role of private-sector development. But the public sector can help in the areas where the private sector doesn't want to help, or does not find a profitable help, often in infrastructure. Development can play a crucial role in connecting the right people, whether it's a big firm or small firm or otherwise, and allowing those linkages to happen.

Right now in Afghanistan, I think there's a lot of trade shows and conferences and roundtables and meetings where they try and bring all the right people in the room. I mean, that's not the same as getting a deal done. I mean, just -- it looks like it's -- it looks like you accomplished something. It briefs well on your glossy quarterly report that you had another conference on -- with all the Afghan carpet manufacturers. Better to find one or two key individuals or businesses that actually are genuinely interested in exporting Afghan carpets, for example, to America, and focus all the resources on making sure that particular deal happens, and continuing to have -- I mean, all of the problems that Erik and I are talking about have been laid out in papers almost since, you know, 2002. And the hang-up is on the implementation side, not on having smart people identify the things that are wrong.



QUESTIONER: Can I just follow up on that? I mean, you both mention the point of having a high-profile figure like a Holbrooke or a Petraeus who would take charge of or facilitate, bring a spotlight to issues of private-sector development.

Has there ever been any thought of doing that, as far as you know?

QUESTIONER: If I could just -- everything you say is right. The nuanced approach, the -- you want it more private than public, and the like. But it seems to me you've got to pin the rose on somebody who's going to take it on in exactly the same -- the manner that you recommend.

But who does that, okay? And how do you -- you know, how do you make -- go find those two people to pour the resources into carpets? How do we figure out the guy carrying the charter to make that happen? That's what we haven't figured out yet.

CUSACK: I think there's some -- I mean, for example, the task force building civilian operations, I think they've done some good things. There's people that have done what we're talking about. I mean, the alternative thing is maybe if it's not going to come from government, maybe the way to start it is private sector, almost on a philanthropic model, start -- I mean, Robert Mosbacher at OPIC's talked about the idea of starting a Biz Corps, where you have people -- graduate MBAs give up two years, almost like a Peace Corps. And you start it on that side, and prove a model that can work in some certain area of the country, a safer area of the country. And then use -- and then use that to potentially get the funding or the other resources from the government, and have sort of public-private partnership like OPIC or some of these other organizations.

MARKEY: All right. I'm going to have to play the heavy, and cut this off, and apologize to at least two people who had questions that didn't have a chance to raise them.

I'm going to conclude by saying only that in addition to finding that person, you know, there seems to be something of an ideological barrier that the United States needs to cross as well here, too. Or at least we have to get past a certain model of assistance programming if we are to really try and do these sorts of things. And I'm not sure we're there yet.

And part of it is, I think, an inherently maybe American or sort of free-market conception that if we free the market, then money will be made. And all of this stuff about protecting infant industry and so on, this is not easy to swallow since we don't always find it easy to swallow at home or in other contexts. So the question is whether the rules should be bent or broken in difficult environments like Afghanistan, or we simply have to take it on in a different way. And I think that's what we're hearing, at least shades of that here. And that's not an easy thing for us to wrap our collective heads around.

Anyway, I want to thank our two speakers. It's been great and I think very informative. I think for those who did have questions, please feel free to come on up afterwards. And, again, this is on the record, but not for release of recordings on the Web until some other time. I guess, after the 22nd. Is that okay?

All right. Thank you very much. I appreciate it. (Applause.)







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