Experts from the World Bank, Center for International Private Enterprise, Global Connect, U.S. Chamber of Commerce, and Voice of America discussed the role of business in fragile environments in a conversation facilitated by OEF Research at the launch of our new report Firm Behavior in Fragile States: The Cases of Somaliland, South Sudan, and Eastern Democratic Republic of Congo, authored by OEF Research’s, Dr. Victor Odundo Owuor.
The panel discussion focused on the role of businesses in fragile states and recommendations to governments and international development agencies in strengthening the institution of business amid fragility. Read the full transcript below.
Lars Benson, Regional Director for Africa, Center for International Private Enterprise
Thilasoni Benjamin Musuku, Task Lead for the World Bank’s Financial/Private Sector Operation in Somalia/Somaliland
Arshad Sayed, Chief Executive Officer, Global Connect
Danielle Walker, Senior Director, U.S.-Africa Business Center, U.S. Chamber of Commerce
Scott Stearns, State Department Correspondent, Voice of America (discussion moderator)
Scott: Good afternoon. My name is Scott Sterns. I'm the Managing Editor of the Africa Division at the Voice of America. I thought we might begin with some first thoughts about Victor's presentation. Ben, why don't you give us some of your opening thoughts?
Ben: For those who are not very familiar with fragile states, it's very easy to assume that it's a void, a blank slate. But then it's interesting that you could have a conversation in the [Firm Behavior in Fragile States] report around strategies for business, coping strategies, on how businesses try to thrive and function with some sort of dysfunction around institutions that everywhere else are taken for granted. I think back to the very useful way the report looks at that. You begin to look at business as useful partners in the reconstruction effort.
I think what really jumped at me was the part in the report where it's talking about how businesses generate jobs, which are much more than just a paycheck. You have identity through a job. You have structure through a job. These are things that reverse some of the causes of fragility. Business and jobs for people can become a way of moving out of the fragility. The report talks a lot about social capital and trust, which is the anchor for business, and all the strategies that the businesses are using.
Lars: What I really enjoyed about this report is that it paints a wonderful picture in three different environments. You have the DRC, where you have almost a small Mecca surrounded by conflict, and you have business that is surviving over time. You move quickly over to Juba in South Sudan. Then you go to Somaliland, which of course has experienced its own conflict, but it's also an environment which has over the last 20, 25 years, found and created opportunities for local businesses to thrive.
Going back to my days in consulting with small and medium businesses, [an entrepreneur] needs three things to be successful.
One is you have to have knowledge about the products and services you're selling. The second thing, that I'm going to spend a lot more time talking about today, is opportunity. Opportunity means that you have a system where business can actually function, a business-enabling environment. Ben also mentioned the fundamental part of that, which is trust. How do businesses operate, how do they transact goods and services, how do they survive?
Then finally, [the third] piece of this is financing. The report talks about how it is mostly a cash economy in all three different markets. Also, it's self-generated: the cash comes from friends and families. Well, we know that in a lot of startup businesses, most of the cash comes from friends and families, and it's not banks that are providing those types of financing for new, risky ventures.
What your report also highlights is how this transaction occurs. It's going into mobile banking as a potential solution, or technology that has enabled business to actually transact cash without the risk of it being stolen We also hear a lot of other things in terms of the commonalities across the three countries. Are bribes being paid, and how do firms function in that relationship? Of course that raises risks, especially for any outside investor, which is an issue.
Property rights were also talked about in reference to this report. We find that you're talking about foreign exchange constraints, especially as we heard in South Sudan. This concerns, again, institutions or the business-enabling environment, where the Center for International Private Enterprise (CIPE), with the support of the U.S. Chamber [of Commerce] and the National Endowment for Democracy, spent a lot of time working with local partners in different countries. We have a different dynamic in these three countries we're talking about - they're either in the midst of a horrible conflict, they're coming out a conflict, or they've had a few years of stability. According to the International Institute of Strategic Studies, we were talking about 40 conflicts around the world in 2015. This situation not just pertains to the three countries in the report, but also to other ones.
Finally, we can take some of the coping mechanisms that the private sector uses and some of the recommendations in this report in terms of what donors and international development partners can do, and further refine and localize them. Each conflict or each situation in each country will be different.
Danielle: A couple of things stood out to me. One was about how the private sector contributes to stability. A few weeks ago at the Chamber we hosted the commander of Africom. He said that one of the foundational reasons that Africom was established was because of a belief in the military that business is needed in order to help create a stable environment. If people have jobs, if people have some pride in their work, they're not necessarily going to join a Boko Haram or an Al-Shabaab.
Also, you were speaking about the fact that companies entering these fragile states are entering a harsh regulatory environment. Obviously money goes where it's welcome. I do think that there are businesses that understand opportunities at stake, and there are also businesses that understand that there are a lot of people that stand to be helped. I think for those companies that are well-positioned to go into fragile states, such as infrastructure companies or service providers, the advice I would give them is that they really need to build relationships across a swath of the government and civil society.
I think it's important for businesses going into fragile states not to be seen as particularly political with the ruling party or the opposition party. I think it's a fine balance that needs to be struck in terms of looking pretty neutral and just wanting to be a trusted partner. I think that may be an area that trips people up as they're entering these states.
Arshad: Victor’s report leaves me thinking about two sets of things. The first is: what is this problem? How big is this problem or issue? I say this because I think it helped me look at the case studies and think, if I were to zoom out, what does this really mean? At the same time, what is the opportunity set here? Looking at the WBR from the World Bank a few years ago, 2011, it points to is a very staggering set of statistics about the problem at hand right now. I'm just going to read out from here what I have.
The share of extreme poor living in conflict-affected situations is expected to rise from 17% today to about 46% in 2030. Conflicts also drive about 80% of all humanitarian needs. They [conflict-affected areas] lose the domestic gross GDP by two percentage points a year on average. One of the statistics I've read was that no low-income, fragile, or conflict-affected country has yet achieved a single MDG. [Victor’s] case studies really bring out that problem and highlight this in a very stark way. Of course, there's a whole set of opportunities that we need to talk about, how to address them, and what is the role of international agencies like the World Bank, or the private sector. What can be done?
It was your question, Lars, that also made me think, when you asked me, "Where are you doing business?" I said, "I'm in Asia." He said, "Why aren't you in Africa?" I'm still thinking, what does that mean? I'm not sure I have the answers here, but I hope this discussion will help me think of a few things that will help me understand better what the opportunity set is. I have some ideas, and I'll lay that out later, but I just want to put that out that I think what we are looking at is a major challenge and a major opportunity. The challenges are huge. That's why we need to be concerned. I don't think we can just live our lives as we are and expect two billion people to be in those conditions.
Scott: There are many real-world, real-time examples in this report for government, for business and for international non-governmental organizations. Ben, I wanted to ask you. In the world of fragile states, you may get your papers stamped in the capital, but when you get out into the field, where you're actually going to do your business, you may find that that central government has little authority. How do successful businesses overcome those challenges?
Ben: The key thing, I think, is to understand the environment within which you operate and understand the normal protections. There's no 9-1-1 that you're going to call. There's no police, or police is just emerging. The rules of the game are not prescribed, but then the rules are there. You just can't go in and set up a business, because that space could be occupied, as it were. I think it's to understand what the informal rules really are and what the system is in its informal state, and then negotiate your way through there and try and occupy your space.
Inevitably, what that means is that you either have businesses occupying either the top end, the big transactions, because they are large enough and they can negotiate their way much easier. Otherwise at the bottom end, that's where the struggles then begin to emerge, because there's no equality of opportunity. Then that becomes a driver for part of the conflict.
In some of the work that I do, that's the space we try and occupy. It's the space where you want the actors to collaborate much more, the space where you feel the actors need to get together to create institutions, create public goods. That allows for inclusive growth. It's all about reaching out to the actors, making sure that you have all the actors that you need to be able to collaborate and reform the rules of the game.
Scott: Lars, all investors and all businesses look to insulate themselves from shock, whether that's a commodities crisis or a change in regulatory policy. Market shocks in fragile states can be far more dramatic. How does business best try to anticipate shocks like that?
Lars: Well, I'd say a lot of larger businesses take the decision not to invest in these markets. It's coming down to the risk side of the environment. You're absolutely correct - businesses are looking for real stability. They're looking for predictability, and they're looking for transparency. What are the rules? One of the things, again, this report talks a bit about is those informal rules. What business and what the role of business can do is talk about those support institutions or this enabling environment that we all keep on referring to. What we're really talking about is a market where everyone has a fair chance of having a transaction.
When we're working in these environments, whether it be in Afghanistan or Pakistan or Iraq, or Nigeria, or Somalia, we're taking a look really at those institutions, the institutional framework that you need to have so that all business can have a chance. Those include things like business entry, disclosure, who are you doing business with, information, property rights, financing, competition, price controls. Taxes are a big favorite of a lot of our partners. Bankruptcy and human capital development.
The other issue to also think about is focus on domestic investors in local communities. Even if a country is torn up by war, not every city has that situation. There are islands of prosperity and opportunity to actually take advantage of. You need to take a look on all of these different layers in terms of trying to support the local actors.
The other thing is that businesses are risk-averse. A business going in to try to deal with a bribery problem is not probably going to stick their neck out, unless they're a huge multi-national. You hear companies telling you, "Well, you know, I can't do anything. I'm not big enough," or, "I don't want to be known." This gets to another area that we work on quite a bit, and that's collective action - bringing together all sorts of different actors to work towards a common issue and come up with specific recommendations. It's about mobilizing the private sector, or mobilizing businesses to actually achieve something in that local environment. The natural partners for these can typically be NGOs, think tanks or chambers of commerce or business associations, depending upon how stable they are. That was one of the recommendations of the report.
Why do people join business associations? They join them essentially for insurance. Not insurance products. They join because if something goes wrong, this is a body that they can actually communicate with to try to solve problems. Associations play a critical role, as do NGOs in these markets in terms of creating a more prosperous community.
Scott: Danielle, how have some of your members dealt with trying to figure out whether what you're doing is working in an environment absent some of the more traditional benchmarks that business uses to determine that the path that you're on is the right one?
Danielle: You know, I think part of it is talking to their colleagues, where they have colleagues. To Lars's point of chambers of commerce, those are good, even if it's just a small business group. Talking to colleagues about whether they are having some of the same issues in terms of getting licenses - are they seeing the same problem with a certain agency? The domestic chambers of commerce are really great touch points for these issues, because they can help companies that may be coming in. It helps some of our companies understand if what is happening here is normal - are these roadblocks normal? Are we making progress, or am I just being singled out, targeted and stalled for a different reason?
I think making sure you have a network, some trusted people that you can talk to about the work that you're doing is important. The US Embassy is a great resource.
Scott: There are many different actors in fragile states, from businesses (sometimes complementary, sometimes competitive) to agencies delivering governmental and non-governmental aid, to the actual actors who are making these states fragile. Arshad, how do you see the concurrent deployment of non-governmental and governmental aid with businesses trying to get up and running? Those should be complementary. They are not always.
Arshad: They're not. I think it's a good point. Victor points that out in the supply chain strategies, for example. You look at procurement policies of all international organizations, including my own institution, my former institution, the World Bank and I think the need for a local component [in procurement] cannot be overstressed. You would find, for example, that in Afghanistan you're importing bottled water, California almonds: things that you would definitely be able to source locally would be flown in. In that particular area there is a lot of work that can be done to minimize this crowding out of the private sector. The problem in fragile, conflict-torn states is that you have a government that has very little fiscal space, because much of the money is going towards security and stability. There isn't anything to spend towards growth.
You have international organizations who have either pet behaviors or pet sectors. These tend to be ones, for example, in many of the countries, a natural resource sector. Until recently, it's always been like that. The challenge is, how do you diversify? How do you generate alternative investments? What are the alternative growth paths? How do you allow businesses to take their rightful place in this kind of a setup, versus trying to do a lot of the things yourself? As an international agency, it's very hard when small players are competing and you are the big player with projects in that area, going to certain sets of people. Usually they [big players] lead. Usually they have access.
The question then becomes, how do you reach out to those people? For example, women. Rural areas, other places where businesses need to flourish. How do you get that going? Those are questions I think international agencies and businesses need to come together and work together in finding new paths.
Scott: Most governments, depending on the government, favor profit-making businesses working in these fragile states. Not all deliverers of aid and non-governmental aid consider those seeking commercial profit to be partners in making these fragile states less fragile. There is a sentiment among some in the aid community that these are vultures of sorts, trying to make a quick dollar, not interested in investing in infrastructure. How do we improve those lines of communication and more actively engage both those people trying to deliver aid and those people trying to make a profit?
Arshad: Maybe I'll take a stab at it first. I think one has to be careful, because there are some real, genuine issues around this. There is a nexus usually between private enterprise, illegal activity and the government. This collusion often leads to a kind of perception, whether it is right or wrong, which tends to see the private sector as the vultures - and it's justified in some cases. The question is, how do you isolate that set of people, whether it's illegal logging, the drug trade, arms trade? Those people versus the small and medium enterprises, the new generators of wealth and growth. You do that by fostering the kind of institutions that you just mentioned. It's through the dialogue. It's to be able to sit around a table, at least in the countries that I worked in. What really helped was creating that kind of space where multiple actors came together. It was the international agencies, the foreign agencies, the government, civil society and private sector, and having that kind of dialogue.
Every six months, there would be an open news media event about that. It would be known to people what was the outcome what are the issues that are being discussed. It was known to everybody. That was just one way of doing this - I'm sure there are others.
Ben: I think one reason people might not like this report is because not only are you coping with fragility and conflict, but you're also giving us a story through the lens of what some people claim to be those that have benefited the most from the situation. Beyond doing that, I think the report goes to discuss these partnerships and gives some of these examples where business could come together to try and deliver some of these public goods that are needed for inclusive growth.
I think the benefit of the report is an understanding that yes, sometimes the failures are not necessarily failures of government - they could also be failures of business. A key aspect, in my view, is having this capability of allowing the businesspeople in these environments to be able to see how else they could actually conduct themselves in a way that is far more inclusive, in a way that actually allows the market functioning to emerge. Even if you are talking about the rules, I think the first sets of rules would be rules that they agree amongst themselves.
Danielle: I might just add to what Arshad and Ben said - your point of having a dialogue. One important filter for the conversation is the company: are the companies trying to create jobs locally? If they are, how can the NGO be supportive of that? Can they help with training? Can we find an intersection here? I think that maybe that's one conversation point that's important to be had in order for the NGOs to feel comfortable, in order for the local government to feel comfortable that this is going to be an ongoing concern, that there is an intention here for the company to really do good in the long term.
Lars: We can't expect the government to solve all the problems. I think a lot of times in the development community, it's all about what we should do for the government. But the private sector operates at a community level. They're working within neighborhoods.
We need to make sure that international NGOs don't support programs that are crowding out opportunities for local business. At the same time, we need to have more of a discussion among government donor partners in some of these fragile states and the business community. Many times, in the places that we're working across Africa, you find that government is really looking to the private sector for solutions, the private sector is looking to the government for solutions, and they don't know how to talk to each other. A lot of times, CIPE just plays a facilitation role, where we come in and help them find those mechanisms so that they can actually have a conversation about what is truly needed.
Scott: For governments in crises, emerging from crises or in the middle of crises - as we have now in South Sudan - those priorities clearly change, sometimes day to day. What a government in crisis might find as a priority today, the sort of business that it would be interested in encouraging, or the sort of business that it feels would create the most local jobs, may change as the seasons change. That clearly presents a different difficulty for businesses trying to figure out what will be profitable in that environment. How important is it? Victor speaks of the need for businesses to be nimble in the ability to adjust to local religious or customary laws when it comes to pricing or hours of operation, that it's not a one size fits all. The only way to be successful in a local market is to adapt your business model to that market.
Danielle: Absolutely. I would hope that companies that are going into Somaliland or a fragile state, it is not their first rodeo, that they have done work in other places that are not easy to operate in and have that kind of agility, because the companies with agility are the only ones that are going to be able to make it in this type of environment. I think agility and relationships are probably the two key priorities to surviving, and to being able to be profitable.
Scott: Have you seen that in your work as well?
Ben: Certainly. Some of the examples of businesses that are there, some of them are international and global names. They've been able to find their own space in which they could do their business in a way that is consistent with local laws. Sometimes in Western jurisdictions there are also obligations imposed on businesses in terms of how they conduct themselves abroad. They have to strike that balance. If you look at the financial sector for instance, part of the challenge that is emerging now is this phenomenon called de-risking, where financial institutions in the West are not able to provide banking services to emerging banks in fragile situations. That presents a little bit of a challenge for the businesses. They are able to cope in one way or another, but that also exerts some pressure in terms of the reforms that need to take place at the domestic level.
Scott: There are several examples in these case studies about the value of a silent local partner. Lars, what have you seen are the pluses and the minuses of having that local experience?
Lars: You read reports on China doing business in Africa, reports generated in many of these countries. One of the things that comes out of these reports is that there is truly a desire by African firms to find international partners for knowledge and resources. It's also the way that typically American businesses operate. They find local partners. They don't invest millions and millions of dollars to build plants without testing the market, and it's a slow process. I think that what we're talking about with these silent partners though, is who they know in order to perhaps bypass tax law or get licenses that you need. All of these things that businesses need to operate. But we are really talking about an environment where corruption is flourishing. I think that's what unfortunately we see in these three countries.
Scott: I wanted to ask just one last [question] of the panel, about the opportunities that this report highlights for firms to leapfrog some of the technology in terms of e-payment, in terms of telephony. There are unique opportunities with M-Pesa, with Dahabshiil in Somaliland. In a fragile state, are there opportunities to go beyond the payment and communications infrastructure that businesses might find here in the United States or in Europe?
Ben: It's phenomenal, the use, growth and use of the digital money and information and communications technology. Everybody is reliant on the US dollar. In places where the US dollar is not able to reach, you find the reliance on digital money. I think it's only comparable in my view to Northern Europe. Finland, Sweden.
Then there lies the challenge as well, the paradox, because to be able to use that technology well, you have to rely on your mobile signal. That infrastructure needs to be secure, because once that is knocked off, then you don't have access to your digital money. That's where security is still crucial - making sure that we are pushing the boundaries of security, of working on the justice system, so that we are able to resolve many fundamental issues. You have to be able to do both things at the same time.
Scott: Danielle, how do investors capitalize on that?
Danielle: I think investors do well not to underestimate the people that they're trying to serve. One way is spending some time on the ground and figuring out what are the problems people are facing. What are the solutions that this firm or other firms may have to offer? Definitely mobile offers so many opportunities. You said it well, Ben. It can't be a fix-all if you don't have a signal. I think there's a combination there. I think really knowing your customer is probably a good starting point.