Hearing on the Afghan Economy

 

USIP Visiting Research Scholar Jeremiah S. Pam [1] testified on July 14, 2009, before the House Oversight and Government Reform Subcommittee on National Security and Foreign Affairs on efforts by the U.S., the Afghan government and others to spur the Afghan economy in an effort to stabilize the country.

The following is the oral statement to the House subcommittee:

 

Chairman Tierney, Ranking Member Flake, Members of the Subcommittee:

Thank you for inviting me to appear before you today. I am pleased to have the opportunity to participate in this important hearing on U.S. Promotion of the Afghan Economy: Impediments and Opportunities.

I know your time is limited, so let me start with a summary. I recommend that we adopt an approach to economic development and governance assistance to Afghanistan emphasizing three pillars: an orientation towards Afghan public finance and budgets as a strategic focal point for the entire civil side effort, the collaborative development with relevant Afghan experts of roadmaps setting out a few high-impact programs in key sectors, and a greater use of catalytic financial instruments to share risk with Afghan entrepreneurs.

Background

Before I proceed to the analysis, it may be relevant to note that my understanding of the challenges of strengthening weak state civil institutions, including the economy, has been particularly shaped by four experiences working on sovereign finance and governance in the private sector and government: as a Wall Street lawyer advising sovereign governments during financial crises on restructuring their debts, including working with the Government of Iraq from 2004 to 2006; as the Treasury attaché and senior financial diplomat at our Embassy in Baghdad in 2006-7; as a member of a team organized by Ambassador Crocker and General Petraeus to assess Iraqi governance and U.S. governance assistance efforts in 2008; and as a co-director of General Petraeus' interagency strategic assessment of the Central Command area of responsibility with a particular focus on the civil side challenges and on Afghanistan, to which I traveled this past December.

Summary of Written Testimony

The written testimony I've submitted places the significance of the Afghan economy in the context of a broader legitimacy crisis of the Afghan state that has at least three other, and arguably more important, dimensions: security (namely, the state’s inability to protect the population), political (the reluctance of a critical mass of Afghans to identify politically with their government) and governance (the government’s difficulty performing basic governmental functions and delivering essential services).

I thought the centrality of legitimacy to the current crisis was worth discussing at some length in my written testimony, first, because it helps explain why past U.S. and international civil side assistance to Afghanistan has had so limited an impact on the Afghan situation as to be, in Secretary Clinton’s word, heartbreaking.

If the problem is legitimacy -- Afghan actors failing to do things Afghans expect them to do -- then it shouldn’t be surprising that international civilians trying to do those things directly (the default international approach, for reasons I discuss in my written testimony) has not worked as a solution. (As an aside, please note that all of my comments relate to the civilian and not the military effort - although I suspect there are points of overlap when noted military experts like John Nagl publish op-eds with titles like "We Can’t Win These Wars On Our Own" – WP, 3/9/08.)

The second reason it's worth framing things in terms of legitimacy is that seeing the Afghan problem as a crisis of legitimacy explains why improving the situation requires us to adopt approaches that deliberately structure international efforts in ways that improve Afghan legitimacy, by helping Afghans implement their priorities through their institutions - despite the many frustrations and inefficiencies of such an approach.

This legitimacy analysis leads directly into the three pillar strategic concept for civil side assistance that my colleagues Dawn Liberi (of USAID), Clare Lockhart (of the Institute for State Effectiveness) and I developed this spring, which my written testimony describes in further detail and which was also referenced by Patrick Cronin of the Institute for National Security Studies in his May 19 testimony to this subcommittee. As already mentioned, these three pillars are an orientation towards Afghan public finance and budgets as a strategic focal point for the civil side effort, the collaborative development of new roadmaps for key sectors, and a greater use of catalytic financial instruments to share risk with Afghan entrepreneurs. I will return to the  public finance pillar in a moment, but there is more on all three pillars in my written testimony.

Most important for this discussion is the common idea underlying the concept as a whole: the requirement to use Afghan institutions or business enterprises as the focal point for international assistance, which should better ensure that our efforts are aligned with Afghan policy or business priorities and consistent with Afghan institutional capacity, thus increasing the likelihood that the efforts will both be sustained by Afghans and contribute to resolving the underlying legitimacy crisis. While this idea is present in the President's new strategy for Afghanistan and Pakistan, which calls for "channeling more assistance through Afghan institutions", I believe we should make it a top strategic priority to focus all our civil side efforts around Afghan priorities and institutions, using Afghan budgets and public finance institutions as a principal vehicle.

Conclusion: Learning from Iraq

My discussion thus far has emphasized explaining all of (1) the current crisis in Afghanistan, (2) the limitations of past civil side international assistance and (3) the rationale for the alternative approach we’ve recommended solely by reference to the Afghan situation and the dynamics of international assistance – in other words, without bringing recent experience in any other country into it. I'd like to now conclude by describing briefly how the U.S. experience in Iraq reinforces both the general component of this analysis and the feasibility and effectiveness of the particular solution proposed.

While Afghanistan and Iraq are indeed apples and oranges in many respects -- perhaps no more so than in public finance and economic terms, where Afghanistan ranks near the bottom in terms of wealth and human capital indicators and Iraq has the second largest proven oil reserves in the world -- the Afghanistan and Iraq efforts do have one major factor in common: us. In both countries the same U.S. (and U.K.) civilian and military organizations operate according to broadly similar organizational dynamics, setting the stage for the same kinds of misalignment with local country priorities and institutional capacity and the same tendencies towards a fragmented international effort.

Indeed, I'm sure you will all recall that in 2004 and 2005 and 2006 the Iraq effort was routinely condemned as seriously, perhaps even fatally, hindered by coordination challenges - between civilians and the military, between different civilian agencies and, most importantly, between the U.S. efforts and the Iraqis themselves. Both official audits and journalistic accounts produced story after story about how the left hand didn’t know what the right hand was doing and all of the ways in which this was undermining our efforts to get to the point when the Iraqi government and economy could stand on their own.

As it happened, a little appreciated but significant factor in addressing some of most important coordination problems and improving the effectiveness of our efforts to support Iraqi self-governance was a belated recognition of the strategic importance of Iraqi public finance, particularly budgets. This led to a significant shift in emphasis across the entire U.S. assistance effort towards helping Iraqi officials at both national and provincial levels execute Iraqi budgets.

As recounted in the capstone report of the Special Inspector General for Iraq Reconstruction, Hard Lessons: The Iraq Reconstruction Experience, in 2006 most Americans in Iraq were still focused on spending U.S. money largely independent of Iraqi government institutions. Consequently, "In many cases there was a lack of sufficient Iraqi participation in deciding how or what to reconstruct and ensuring that projects could be maintained afterwards" (333). The end of 2006, however, saw "The Rise of Budget Execution" as a U.S. civilian and military priority (267). By mid-2007, the standard for a useful expenditure of U.S. funds had largely shifted to "if it can’t be done by Iraqis, we probably shouldn’t do it. What is better is a project that takes 60 days instead of 30 days - but is done by the Iraqi manager and is sustainable by the Iraqis [and] that their operations can support” (298). By mid-2008, Iraqi public finance and budgets had become such a central organizing principle to the U.S. effort that the Embassy and Multi-National Force Iraq created a civil-military Public Financial Management Action Group (PFMAG) chaired by the senior civilian and military leaders responsible for governance and the economy and incorporating the participation of dozens of U.S. organizations working on the civil side in Iraq in order to ensure that all civilian and military personnel, whether working with ministries from Baghdad or with provinces from Provincial Reconstruction Teams (PRTs), would make assisting with the execution of Iraqi budgets a paramount civil administration mission priority. By the end of 2008, an independent U.S. Institute of Peace study of the PRTs had concluded that "[the budget execution] role is critical to the U.S. mission in Iraq and is the primary strategic justification to continue the PRT program."

Before closing, I hope it goes without saying that nothing I've just said should be taken as suggesting that an approach having modestly worked in Iraq is by itself a reason to adopt it in Afghanistan. Indeed, I limited my written testimony to Afghanistan to avoid any such implication.

However, if we believe that there are some common, daunting challenges to finally establishing an effective civil assistance effort in Afghanistan -- which have as much to do with the international challenges of providing effective assistance in this kind of environment as with Afghanistan -- we might find some value in the idea of public finance as a strategic focal point, and in the broader idea of deliberately structuring our assistance to better align our civil side efforts in Afghanistan with Afghan priorities and institutional capacity. I believe that by strengthening the ability of Afghanistan’s state institutions and private sector to recover from the current crisis of legitimacy and stand to a greater degree on their own, such an approach would advance our national interest in greater stability in this critical region.

I thank you, Mr. Chairman, for giving me the opportunity to testify today. I look forward to any comments or questions you may have.
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