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Tue. November 13, 2018
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IA-Forum Interview: Mr. Stephen Kaplitt
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International Affairs Forum: Can you explain the development approach you pioneered at State and now at the Strategic Regions Enterprise Network (SREN)? Mr. Stephen Kaplitt: First, I think you have to step back and ask what is meant by “development” and how external actors can facilitate the process. Development is really just a fancy term for wealth creation. Countries that create more wealth than they consume are considered developed, and those that cannot generally require foreign assistance on a continuing basis. Of course this is somewhat of an oversimplification, since many developing countries face an array of issues involving corruption and historical concentrations of wealth and power in the hands of a privileged few. So the challenge for development is not wealth per se – many developing countries have abundant natural resources – but rather the expansion of opportunities for wealth creation at the popular level. If you accept that premise, then you have to recognize that in the vast majority of developing countries the primary sources of jobs and subsistence are SMEs and small entrepreneurs. There is a dearth of capital and the single biggest need you’ll hear over and over again is SME financing. Micro credit programs have proliferated enormously over the last ten years, and loans of $20-$1,000 are fairly easy to get, through organizations like Kiva and countless others. But SMEs, businesses that employ two or three people but with the right help could scale up and employ a few dozen or a few hundred, they need donations or investments in the range of $25-500,000, and that space has very few actors in it.. So what we came up with was this idea of providing free business development and marketing to SMEs in conflict regions. Personnel in the field, such as Provincial Reconstruction Teams (PRTs), are able to identify and recommend local SMEs, and then we connect them with volunteer MBA students in the US who basically act as their “vp for business development.” The MBA teams work directly with the entrepreneurs to prepare a business plan and then seek funding for their projects from partners in the US and other donor countries. We decided to focus on conflict regions because these are areas that are high priority for U.S. foreign policy, and there tends to be some nexus between a lack of jobs and exploitation by violent extremist groups. In Pakistan, Afghanistan, Mindanao (the Southern Philippines), and Iraq, among others, poverty is not necessarily the cause of conflict, but the lack of economic opportunity certainly helps extremists cultivate recruits, sympathy and sanctuary. With that in mind, we set out to create another soft side tool for US efforts to mitigate conditions that are exploited by extremist elements. IA-Forum: There are clear national security benefits to developing conflict zones. Should an emphasis be placed on helping entrepreneurs in these regions over other regions where conflict isn’t occurring? Mr. Kaplitt: It’s a great question and it’s one that I was asked often at State. There are roughly 150 “IDA” countries that qualify for international development assistance under US law. Why privilege conflict regions over other needy countries that do not pose threats to U.S. national security? For starters, all underdeveloped countries need significant help to create more jobs. People with jobs have less need for assistance from their governments or the international community. Very few countries receiving substantial foreign assistance have high levels of full employment. Conflict regions in particular face the greatest obstacles for job creation. If the need is everywhere, it is also true that very little help finds it’s way to conflict regions, in comparison with “non-conflict” developing countries. Also, the US does have legitimate interests in focusing certain efforts on regions that have strategic importance to our interests and national security.. As I often pointed out, there is a need for SME support here in the US, even in Washington. This was conceived as a foreign policy initiative so it was natural to focus at least initially on conflict regions. Obviously there is a need for job creation and support for entrepreneurs in places like Haiti, even more so after the earthquake. But even in Haiti there are resources and NGOs helping entrepreneurs create or expand businesses. Many of those resources are very limited, unavailable or inaccessible in conflict regions like Afghanistan or Pakistan. USAID and some NGOs will quickly point to their private sector programs in these areas and suggest this approach is already in existence. And they are doing what they can, given funding, program and practical constraints. However, we thought this approach would add additional value by delivering free business development help directly into conflict regions, via the Internet, using volunteer MBA teams. So why conflict areas? Because they have substantial needs and in addition, they also face extraordinary obstacles even beyond those of “regular” developing countries. Businesses can and do live in extreme environments, but they have an infinitely more challenging task attracting partners. Furthermore, there is a clear strategic US interest in promoting job creation in places where violent extremists exploit the lack of economic opportunity. IA-Forum: What are some of the risks or legal constraints you’ve seen when working with these entrepreneurs in conflict zones? Mr. Kaplitt: From the donor or investor standpoint the practical risk is seeing your money disappear. The more specific legal and reputational risks are being tainted by either corruption or running afoul of terrorist financing statutes or the Foreign Corrupt Practices Act. A relatively recent development is exposure from the Alien Tort Claims Act, which has been used as a weapon against large multinationals that need the cooperation of host country governments that are accused of human rights violations. This risks are present in every developing country; but, for conflict regions in particular, the highest level of risk is probably the FCPA and terrorist financing statutes that impose stiff criminal and civil sanctions for doing business with anyone who is essentially acting on behalf of designated terrorist organizations. You can never be 100% certain who is connected with the your local partners.. That’s why vetting through known intermediaries and communicating with the U.S. government is very important. That said, I think corruption is probably the biggest concern because you face it every day, at every level. Corruption has reached epic proportions in Afghanistan, and it’s made life very difficult for the average Afghan, not to mention foreign investors. So corruption is the biggest day-to-day problem trying to engage in a conflict region. Based on the noteworthy prosecutions in recent years, it seems inevitable that anyone doing business in the developing world will face FCPA situations that have to be addressed. With terrorist financing, my impression is that the risk of prosecution is probably lessened somewhat if the investor or donor can show they undertook reasonable due diligence and had no reason to believe their local partner had ties to terrorist organizations, even if that later turns out to have been the case.. IA-Forum: As your effort at SREN grows, will it be necessary to have people in the field screening entrepreneurs on your behalf or are you confident that you’ll be able to rely on NGOs and PRTs already on the ground? Mr. Kaplitt: The SREN concept is not to have any direct field staff. The idea is to leverage the field staff who are already there, whether they’re U.S. government, U.S. military, or field staff from NGOs or other bilateral or multilateral institutions. SREN will simply create a mechanism so that when SME needs and opportunities are identified in theirs areas of operations, they have a place to send it for business development help. My expectation is that we would be completely dependent on third party field staff using their own discretion and judgment – and SREN guidelines and criteria – to source and refer to us SMEs and entrepreneurs in which they have confidence, based on either an established relationship or local reputation. IA-Forum: Will an NGO be more effective than the federal government in helping entrepreneurs in conflict zones? Mr. Kaplitt: It’s hard to say which platform would be more effective because they have different strengths and limitations. An NGO is free from the many legal, bureaucratic, and administrative restrictions within the U.S. government. On the other hand, EESR; is a known name with the imprimatur of the State Department. I don’t think of it in terms of which approach is more effective. An NGO platform has far greater freedom and flexibility to pursue things whereas a government effort has the advantage of instant credibility and being plugged in as a platform within the interagency community. Efforts like this often benefit from partnerships amongst NGOs, the U.S., other governments, bilaterals, multilaterals and other allied stakeholders with field staff in the target regions. We certainly intend to seek to partner with U.S. government constituencies, and other partners, NGOs, and we’ve already had several express serious interest in partnering once we have our templates and website operational. We hope to be at that point during this summer. IA-Forum: Can you compare the likelihood of success under your approach to the success rates of actually giving fiscal aid? Mr. Kaplitt: To a large extent I think its apples and oranges.. USAID does many important and effective things, far more than you would think given some of the negative noise and misconceptions. I never thought of EESR as an alternative, much less a competitor, with traditional aid. In medicine the mission is to improve the patient’s health, and that’s usually a combination or treatments or therapies, not just one. At USAID I was struck at how, even though US foreign assistance tripled during the Bush administration, global development needs are still staggering. That gets into the Jeffrey Sachs-Bill Easterly argument over aid and dependency, which is outside my focus. The point is that USAID folks will be the first to tell you that aid, no matter much, isn’t a cure. In fact, it’s encouraging to see that under Secretary Clinton, USAID has broadened partnership programs that were started during the Bush administration, and I know that they’ve launched several new ones. I believe that any new model that delivers more help to SMEs and entrepreneurs in conflict regions, in a way that complements traditional aid, should be welcomed. IA-Forum: What would success for SREN look like? Mr. Kaplitt: It’s an obvious question but frankly it’s a little hard to answer. Ideally, we will find good SME projects and successfully market them to donors or investors who bring funding, technical assistance, in-kind contributions or other intangible help. It may be as simple as making introductions or creating visibility for a project that ends up getting a grant from an NGO or a foundation. We could be successful merely by helping an SME that for whatever reason couldn’t make those connections before or didn’t have the ability to increase their own visibility. From the very beginning this was extremely difficult because the easiest way to measure success is how many jobs are created after the work is put in making business plans and matching entrepreneurs with partners. A lot of time and effort goes into screening and preparing business plans, before they’re even marketed, which may or may not yield investments or other contributions... The approach has to be refined and calibrated as we gear up and generate potential projects. One of the things we’ll do at SREN is create templates and criteria for use by field staff to help them spot good prospects. One clear lesson from the EESR experience is the importance of effective screening at the field level. In its first year we sourced over 50 potential proposals, but only a handful proved viable. The others were too big, too complicated, the principals couldn’t really deliver on their own vision, or political factors got in the way. We want to find realistic opportunities where the entrepreneur doesn’t just have the desire, but has the ability, the capacity, and the willingness to really push a project forward and benefit from our help. Our goal is to source and market SME projects that we can bring to potential partners, and say here’s a great entrepreneur, great business, local support, competitive advantages, the big disadvantage is their environment, and they need partners willing to help them scale up and create more jobs. . IA-Forum: How big can your impact really be with this approach as a supplement to foreign aid? Mr. Kaplitt: That’s another question I was often asked at State, and it candidly it’s something I have asked myself many times: what’s the impact? This approach has two big drawbacks. One, we can’t guarantee funding outcomes. Foreign assistance means you’ve got all these pots of money and the only question is how and where to spend it, hopefully effectively. Ironically, one of the pressures on USAID managers is to make sure they’ve spent their full appropriation each year, since unused funds tell Congress they’re giving too much funding. But SREN is ultimately just a free business development initiative, we don’t have a pot of money, we can’t guarantee output. The second big drawback is that it’s a pretty labor-intensive process that benefits SMEs one at a time. On the other hand, since we leverage third party field staff for sourcing and stateside MBA teams to develop plans, we’ll eventually be able to process a very large number of proposals. Once we have the process and mechanisms in place, and some lessons learned, it will be a matter of replicating and scaling it up to have a larger impact. IA-Forum: Are there certain project types, like medical or agricultural, which make a bigger impact in conflict zones and are easier to find funding for? Mr. Kaplitt: Yes. Agriculture is the number one or two SME area in most of the places that we’re talking about. But, I don’t think there should be an industry focus. Rather, we have simple requirements: any SME that will create say at least five, but hopefully at least twenty jobs through a locally driven business. I don’t see any need to restrict the effort to specific industries. All we’re doing is being an advocate for these SMEs and giving free labor, advice, and hopefully visibility through access to potential partners. IA-Forum: How do you see students benefiting from this process and how does interaction with students in America benefit the entrepreneur? Mr. Kaplitt: If it’s an entrepreneur who has both the ability to grow their business, working with the MBAs is invaluable. In all likelihood this is their first meaningful interaction with Western business culture. . Students and entrepreneurs alike can learn an enormous amount about how business is actually done in the toughest environments by working through important issues together, obviously bringing very different skills and needs to the effort.. A good example is the medical lab in Tikrit which is already up on the EESR website. It’s a very strong business case, but I think it was a little too large and ambitious for a start-up in Iraq. A team of Kogod students is working with the principal to refine it, scale it down and make it easier to market. I know for a fact that students at Notre Dame who did the original proposal, and now the Kogod team, learned a lot about the challenges this project faces, but also is its strengths and competitive advantages. For the principal, Dr. Mukhlis, he’s an Iraqi-American physician with more than thirty years’ experience in emergency medicine, Tikrit is his ancestral home, his family has a prominent role in the history of Tikrit, he has strong ties and tremendous credibility with the local population as well as government, tribal and religious leaders. He has a very specific vision to build a medical lab in Tikrit, utilizing the most advanced Western techniques and standards. The only thing he was missing is business development help. He doesn’t have a business background, he couldn’t package and market the business plan, and that’s where the MBAs teams are providing critical help without leaving their dorm rooms. In fact, there was a small blurb in the Washington Post online about how this Kogod group did a Skype call with Dr. Mukhlis during the blizzard this winter. I was on the call, it was amazing that with all of DC paralyzed, I couldn’t open my front door, but at midnight we’re on a Skype call working through this project with Dr. Mukhlis in Tikrit. That’s a pretty good metaphor for what we’re trying to accomplish. During the last year of the Bush administration, Mr. Kaplitt pioneered a new approach to private sector development at the U.S. State Department known as Economic Empowerment in Strategic Regions (EESR). The program seeks to enhance job creation in conflict regions by aiding small and medium-sized enterprises (SME). Today, he is working with two business schools, Notre Dame and American University’s Kogod School, on a new NGO platform, Strategic Regions Enterprise Network (SREN), to help entrepreneurs in conflict regions.

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