EDITOR’S NOTE: Private sector growth is increasingly being recognized as critical to peace and stability in conflict-affected states. But this requires clear, consistent priorities that take into account all challenges, according to management consultant Drew Erdmann. In partnership with McKinsey Voices.
I have spent much of the past decade working to stabilize fragile and conflict-affected states, first as a U.S. government official and more recently as a management consultant. During these years I have seen firsthand how entrepreneurs are surviving and even thriving in some of the world’s harshest environments and how they can help heal war-torn countries.
Consider Noor Mohammed, a middle-aged Afghan businessman whom I met at a construction site outside the northern city of Mazar-i-Sharif. Surrounded by younger assistants, Noor Mohammed strode across the site where he was building a factory to process salt from his mines in neighboring Faryab and Jowzjan provinces. He wore immaculate traditional dress — a white prayer cap and grey tunic over a white shalwar kameez. His neatly trimmed dark hair and beard framed a face that was etched with lines from working outdoors and the stress of managing his business.
Noor Mohammed (not his real name) told me that he came from a long line of Afghan traders. He smiled when I asked about his educational background, which amounted to a few years of formal schooling when he was a boy. Then we toured his half-built factory. The four-story building was swathed in rickety scaffolding that lacked guardrails and other safety features. The construction workers wore sandals and caps rather than steel-toed boots and hard hats.
Our conversation quickly turned to business. Noor Mohammed told me that he was investing more than $2 million to expand his operations in northern Afghanistan. He explained that his new factory would be able to produce refined salt at international standards, which would increase the price he could fetch by 150 percent per ton. Twenty new jobs would be created at the start. We discussed the complex supply chain for the construction of the factory, including cement from Pakistan and steel rebar from Uzbekistan. He had chosen a strategic location near a new rail hub and a NATO base, which he hoped would enhance the security of his operation. He planned to buy his own trucks to move the raw salt from his mines to the new factory, in order to reduce the risks involved in working with someone else’s trucks in an environment defined by poor security and inconsistent rule of law.
I was impressed by Noor Mohammed’s sophisticated grasp of his business. Before choosing the machinery for the new salt factory, for example, he compared Chinese, Indian, Iranian, and Turkish equipment by cost, quality, and delivery schedules. He found the Turkish options too expensive and too complex for his workers to operate. The Iranian equipment did not meet his quality standards. The Chinese gear was cost competitive, but he ultimately chose Indian machinery for its balance of quality and cost. The manufacturer offered on-site technical support by Indian engineers during the factory’s first 90 days of operation, and this sealed the deal.
Entrepreneurs in fragile states
Entrepreneurs like Noor Mohammed are driving private-sector growth in Afghanistan and many other fragile states across the world. There is increasing recognition that private-sector growth is not only possible in conflict-affected states but also critical to peace and stability. Synthesizing recent research, the World Bank’s World Development Report 2011 describes how improvements in security, governance and justice, and jobs and essential services must reinforce one another for a country to move from conflict to peace.
Public surveys in conflict-affected states suggest that economic prosperity and perceptions of government effectiveness both affect an individual’s sense of personal security. The Asia Foundation’s years of polling across Afghanistan, for instance, consistently show that Afghans perceive security in economic as much as physical terms.
The core challenge for international development professionals working with the private sector in conflict-affected countries is to define the right priorities. These priorities need to be grounded in local nuance and realities. They should incorporate fact-based analysis and insights gleaned from other experiences. Ultimately, they must translate into decisions about how to focus scarce resources and drive implementation.
Getting the right people to the right place and sustaining them is typically the most important task. Local managerial skill and expertise are always, by definition, in critically short supply in fragile states. The most capable local government officials, leaders of NGOs and entrepreneurs are inevitably overtaxed by demands for their attention. External support often unwittingly complicates matters. In advocating for their agendas, outside experts, donors, and investors can fragment local managerial focus. International expertise can also be fickle, migrating from one high-profile challenge to another as organizations seek to demonstrate relevance to their many stakeholders, including their own donors back home. Without clear, consistent priorities to guide them, leaders in fragile states often become overwhelmed, creating bottlenecks to vital decisions.
Defining priorities sounds simple in theory, of course. Carl von Clausewitz famously observed that “everything in war is simple, but the simplest thing is difficult.” The same is true for countries in transition from war to peace. In order to set economic priorities in such conditions, we must look through at least four lenses simultaneously and then combine the images into a coherent whole. In turn, this involves a dynamic process of dialogue among different stakeholders.
Picking the right industries
First, the challenge should be viewed through a macro or wide-angle lens in order to identify the sectors or industries that hold the greatest potential for job and wealth creation. This requires us to analyze local industry structure as well as comparative cases. For example, many private-sector development models emphasize goods and services that have potential long-term value in the international marketplace, such as agricultural products, energy, and minerals. It makes sense to prioritize these “tradable” industries. Yet export opportunities probably represent less than half the economic potential in most fragile states. In practice, domestic sectors such as local trade, retail, construction, and transportation account for half of GDP and approximately two-thirds of employment growth in most developing economies. In the long term, the main drivers of employment in low-income countries will typically be local retail and wholesale trade, followed closely by agriculture.
Understanding value creation
Second, we need a micro lens to understand the activities required to produce a given product and bring it to market in each priority industry. Building such a perspective requires engaging with local businesses to understand the constraints on their growth at the firm level. Only then can we identify interventions that are likely to unlock the greatest impact.
This sort of analysis typically reveals potential improvements at every step in an industry’s value chain. But not all opportunities for improvement are equal. In the poorest economies, there is often significant value destruction at the production stage of the value chain. Examples from the Afghan marble and agricultural industries illustrate the point. The use of primitive extraction and cutting techniques — including blasting out marble using repurposed military ordnance — can destroy up to 80 percent of the value of Afghanistan’s world-class marble at the initial extraction step of the value chain. We find similar stories in Afghan agriculture, where the majority of a crop often rots before it can be sold.
There will be myriad needs at the micro level; priorities allow stakeholders to identify the most important ones to address in sequence. It often makes more sense to help local businesses stop destroying value at the start of the value chain — for example, by introducing new marble-cutting equipment and techniques — than to build their marketing capabilities. And this can involve tailored investments in infrastructure such as new roads that enable farmers to move their produce to market more rapidly.
Grasping the political dimension
Third, we need to view entrepreneurship in fragile states through a political lens, because economic challenges in such states are inevitably political challenges as well. In practice, this means that efforts to promote private-sector development must also consider potential secondary and tertiary political implications.
For example, so-called disarmament, demobilization, and reintegration programs often provide training and new job opportunities for insurgents or former combatants. More broadly, international organizations often contract with local suppliers to support their missions by providing housing, transportation, construction, and other services. They naturally tend to favor local contractors who can reliably navigate complex procurement processes to deliver services and products on time. Yet a series of individually rational contracting decisions can appear biased or even corrupt in that they favor one firm, family, party, or tribe at the expense of others. In developing priorities, such considerations of legitimacy should weigh in the balance with potential economic impact.
Adopting a local perspective
The fourth lens is probably the most challenging to adopt. It involves viewing private-sector development priorities from a local perspective, rather than personal or organizational perspectives. Too often our priorities are foisted upon leaders and communities in fragile states with little appreciation of local requirements. How many schools, hospitals, and other facilities have been built with the best intentions by international donors in the past decade, only to fall into disuse because local communities either couldn’t sustain them or decided not to? Likewise, development agencies and NGOs often build expertise that makes them distinctive in a competitive fund-raising market back home. They can arrive in a country with specific but not necessarily relevant solutions in hand — the proverbial hammer in search of a nail.
By arguing that we need to view private-sector development priorities through local eyes, I don’t wish imply that the local perspective is always right. Inevitably, these views will reflect particular biases and interests. At times, local political and business leaders will try to advance parochial agendas by playing donors against each other. “People here know how to shop around among donors that aren’t talking to each other,” one European aid worker told me in Afghanistan.
Sometimes local officials will overestimate the attractiveness of their markets and underestimate the challenges of attracting investment from the international private sector. What locals may proudly consider crown jewels are often assessed to be marginal, high-risk ventures by investors with a global perspective. Iraqi efforts to transition their state-owned enterprises are a case in point. At times, Iraqi government ministries would simply post tender opportunities for partnerships with their SOEs on official websites. They made little effort to reach out to the most capable and desirable potential investors. Not surprisingly, the tenders often went unread and failed to attract the attention of international firms that might possess the full range of capabilities and resources desired.
That said, I have learned humility by trying to see economic challenges and opportunities through the eyes of local stakeholders. The very condition of fragile states means that virtually any assistance can be justified because it “helps” in some way. A major risk, therefore, is that the accumulation of seemingly good ideas can overwhelm local leaders or provide incentives for less-than-ideal outcomes. Better to start by viewing entrepreneurship through all four lenses — macro, micro, political, and local. It’s about walking the shop floor, listening, and helping local leaders to refine their own priorities, so that they can focus energy, attention, and resources during the challenging transition from war to peace.
Edited for style and republished with permission from McKinsey & Company. Read the original article.