coauthor Leland R. Miller
Five years ago America accomplished the unthinkable in Afghanistan—it overthrew the Taliban in just under three months, and with minimal casualties. Now, however, the United States may be frittering away this victory. Though military setbacks remain a growing concern, a fundamental problem continues to be the fragile and primitive state of the Afghan economy.
Ravaged by decades of war, bereft of capital, and burdened by security conditions inhospitable to large-scale private investment, the Afghan economy is sputtering on empty. Some foreign assistance is flowing into the country, inevitably collecting in the capital city, but it rarely reaches down to the town and village level. There is virtually no export market other than a vigorous opium trade, and only scant resources available for small and mid-size enterprises. Because financial benefits do not trickle down, Western aid and ideas are having a minimal impact on the poverty-stricken countryside.
That is why the real battle for Afghanistan is now economic—and it is one that we are beginning to lose. If Afghanistan is to develop into more than a jihad-fueling tinderbox, Afghan citizens must feel that their lives are improving and that they have a stake in their democratic system.
Fortunately, there is a weapon that can help reverse this situation. It is not an untried scheme but one in which America already has years of successful worldwide experience: the creation of a U.S.-Afghanistan Enterprise Fund.
When Communism collapsed in 1989, the U.S. suddenly faced the challenge of turning a bloc of backward, formerly hostile nations into functioning democratic market economies. The imaginative answer was to create U.S.-funded but business-run investment companies in each country. In 1991, with the Support for East European Democracy (SEED) Act, Congress created the first wave of enterprise funds in Poland and Hungary, followed soon after by funds throughout Eastern Europe and the former Soviet Union.
Originally funded by the U.S. government through the Agency for International Development (AID), enterprise funds are managed by boards of volunteer private citizens appointed by the President of the United States. Their explicit mission is to operate as private venture capital funds, with some degree of governmental oversight but a minimum of bureaucratic interference.
Funds can potentially be much more effective than traditional foreign aid. First, funds directly target industries with growth and profit potential, as opposed to bilateral aid, which is often just dumped into the hands of corrupt officials. Fund projects have included micro-loans to mom & pop businesses, convenience stores, clothing manufacturers, chicken farms, small hotels, printing operations, bakeries, fish farms, and thousands of others.
Second, funds play a didactic role. By financing the development of business plans, loan applications, contracts and other legal constructs, a fund would help combat the “documentation deficit” that exists in the Afghan business world today.
Third, since a fund is designed to earn a return on its investment, the money expended can be recycled again and again, with a multiplier effect, instead of being distributed once and disappearing. Over time, a dollar can have many times the financial impact of a single grant.
The application of the enterprise fund model to Afghanistan is not a new concept; in fact, in The Afghanistan Freedom Support Act of 2002, a bipartisan coalition in Congress already authorized $300 million to create it. However, because risk-averse politicians still deem the situation on the ground too unstable—or perhaps not enough of a priority?—the money has yet to be appropriated.
This was a mistake. We should create the fund and let the civilian businessmen-directors decide if the environment is stable enough to justify investing.
The problem is not money. U.S. aid to Afghanistan exceeded $4.8 billion in 2005, with another $4.6 billion already budgeted for the next two years. With military spending in Afghanistan nearly ten times greater than spending on economic development, an enterprise fund would be a relative drop in the bucket.
Furthermore, an enterprise fund is not a creative mechanism for charity. Above all, these funds are intended as—and have proven to be—money-makers. In Bulgaria for instance, several tens of millions of dollars is now worth over $500 million, with growth of 25% a year. (John Train has been a director of the Bulgarian fund.)
Overall, the existing enterprise funds have stimulated more than $1.3 billion in private sector investment, created over 150,000 jobs and made more than 50,000 small business loans. Their effects upon the local economies, moreover, go beyond the mere figures. One fund, for example, created a big-prize national competition for young entrepreneurs that provided the incentive for thousands of citizens to attend training sessions on how to form small businesses.
Not every enterprise fund has been a winner, of course. Several stumbled badly and had to be reorganized; at least one was a complete failure. Still, after a dozen years of experience we now have a much clearer idea of what works and why. The experiment overall has been a huge success.
Afghanistan is ripe for this kind of investment experiment. Supporting the development of a disciplined banking system with credit experience—particularly one comfortable providing debt and equity financing for promising but unproven ventures—could have a jumpstart effect on the economy. Following the model of predecessor funds, the groundwork would also be laid to finance the creation of such financial institutions as insurance and mortgage lending.
The Afghan economy is at a dangerous crossroads. A strong market economy could very well survive without democracy in Afghanistan, but the fledgling democracy in Kabul stands little chance without a vigorous economy. ■