Please Send More Than Troops

If the window closes to fix Afghanistan's government, more boots on the ground won't matter.

The end of Afghanistan's election last week leaves the Barack Obama administration with a narrow window of opportunity to implement a new strategy. While much attention has been paid to such questions as troop levels and counterinsurgency tactics, real success will depend on much less tangible things: personal security, economic growth, and better governance on the ground. Only a strategy aimed at this political progress -- as much as military gains -- has any chance of success.

Now is the time to implement a framework for progress that focuses on protecting civilians, institutionalizing good governance, and spurring economic growth. It will take hard work and even tougher decisions on the part of both the NATO troops and the Afghan government. The risks of further engagement are grave, but there are several reasons why the time is ripe for such a strategy to finally take root.

Opponents of the war in Afghanistan argue that the International Security Assistance Forces' (ISAF's) mission is fundamentally flawed because Afghans, and Pushtuns particularly, simply don't want foreign forces on their land. This is not true. For years as finance minister, I watched as tribal leaders came to the government to ask for more foreign troops. What they wanted then and still want now is security, justice, and a military operation that does not endanger civilians.

Indeed, one of the few positive outcomes of August's presidential election has been an emerging Afghan national consensus on the need for good governance, peace, and reconciliation. As a result, the aspirations of the Afghan people coincide more than ever before with the objectives of President Obama: security and development.

Both Afghans and the international community today share a better understanding of the urgency of rule of law, justice, economic activity, and reconciliation than they have since the start of the war. Even the ISAF has acknowledged that good governance is a prerequisite for peace. ISAF Commander Gen. Stanley McChrystal's recent strategy report concluded that the illegal behavior of government officials and its cronies poses as much of a threat to the future of Afghanistan as the violent insurgency.  

Internationally there are also positive signs that major global players are taking the threat of al Qaeda more seriously, and significant cooperation can be achieved. Saudi Arabia, China, and Russia have said they can agree to the Saudi proposal to work together to defeat the insurgency. As articulated by Prince Turki, that proposal argues that it is necessary to differentiate between al Qaeda and the Taliban. While al Qaeda should be treated as a common, global enemy, the Taliban should be treated separately, as a more manageable domestic challenge for Afghanistan. Saudi Arabia's position of leadership in the Muslim world brings badly needed legitimacy to a new counter insurgency and peace and reconciliation plan.

Perhaps most important of all, the joint action by global powers is finally helping persuade Pakistani decision-makers to take a more pro-active, constructive role in regional security. Already communication and coordination has improved between Afghan President Hamid Karzai and Pakistani President Asif Ali Zadari, as recent military initiatives in South Waziristan have shown. Faced by a coherent front, Afghanistan can now become an ally, not just a liability.

Economic development will of course be vital to sustaining security gains. After narcotics have helped cripple the economy, there is a sense abroad that Afghanistan is destined to be poor and needs to be rescued. In reality, Afghanistan has the natural resource wealth to sustain itself. The U.S. Geological Survey has confirmed large deposits of iron, copper, gold, gas, and several gemstones under the country's soil. Afghans are ready to do business with the world but are held back by insecurity.

The failures of the last eight years, on top of a legacy of 30 years of conflict, will pose formidable challenges to any strategy. The Afghan public is losing confidence both in its government and in the international community, as even ISAF has acknowledged. The former mistrust is the result of the government cutting deals with warlords, tolerating corruption and injustice, and failing to deliver basic services. The latter is the result of the ineffectiveness and corruption of foreign assistance and civilian casualties.

Despite talk of coordination and good intentions, foreign assistance, with few exceptions, has been generally ineffective. The United Nations' refusal to publish the results of its agencies' work has cost it credibility. U.S. indictments of a U.N. official and U.S. military contractors for corruption have only reinforced skepticism of foreign motives.

Only an Afghan administration truly committed to good governance will have any success against these challenges. The international community should therefore help design a five-year road map of governance in Afghanistan that lays out mechanisms for restoring the country's full sovereignty through the building-up of strong, transparent state institutions. Meanwhile, the Afghan government should lay out its framework for national peace-building and cooperation with ISAF.

Rules of governance must be enforced, while limits must be imposed on government officials and elites. Oversight of foreign aid and extractive industries must be created to ensure accountability and efficiency. Government credibility requires both an ability to listen to grievances and the mechanisms for resolving them. Ordinary civilians should be the center of gravity of the state and the international forces.

The debate over Gen. McChrystal's proposed strategy has been reduced to the number of troops, but the issue is more complex. Military success will depend not simply on troop levels, but on political victory in creating security, governance, development, and peace.



Payback Time

A post-Enron United States may get its comeuppance from Asia's erstwhile crony capitalists.

After enduring endless lectures about "crony capitalism" from U.S. officials, executives, and academics during the Asian crisis, Asians might be forgiven a little schadenfreude over the corporate accountancy scandals now roiling the United States. But Asian policymakers and executives are reacting to the United States' current corporate travails less with anger than angst -- and their response threatens to diminish not just U.S. influence in Asia but also the dollar's hegemony as a reserve currency.

Five years ago, any Western investor naive enough to ask Asian business executives about their corporate governance standards was likely to be met with blank stares. Occasionally, however, the response was more enlightening. When one Swiss fund manager asked a senior executive at a Singaporean company about its efforts to improve investor relations, he was told that as an outsider he was lucky to be allowed to buy the stock at all. As for investor relations, corporate executives took instructions directly from controlling shareholders. Minority shareholders had no rights, so companies had no need for relations with them.

The Asian economic crisis of 1997 and 1998 changed all that. True, the region still suffers plenty of corporate governance abuses; the difference is that now they are openly discussed and widely considered shameful. The shares of listed companies believed to play fast and loose with minority shareholders' interests commonly trade at a discount. Corporations that adopted recognized standards of best practice from the United States have been rewarded with higher share prices.

Even so, the revelations of senior executives' misdeeds at companies like Enron and WorldCom may well slow Asia's drive toward improved corporate governance standards. The failure of non-executive directors to detect the abuses at WorldCom, for example, is likely to give ammunition to controlling family shareholders in the region in their rearguard action to resist the introduction of external company directors. Even in well-regulated marketplaces like Hong Kong, where 80 percent of companies are family-controlled and stock exchange rules require listed companies to appoint two nonexecutive directors, senior government officials concede that external directors are seldom, if ever, independent.

The crisis of confidence in the United States is also likely to reduce the number of Asian companies seeking Wall Street listings for their stock. In recent years, U.S. generally accepted accounting principles (GAAP) came to be regarded as the gold standard of accountancy. For leading Asian companies, a New York listing (although expensive) offered value, as it enabled them to demonstrate compliance with what was widely seen as the strictest, most demanding regulatory regime in the world.

After Enron, however, GAAP lost its former credibility. Today, many Asian companies and regulators are inclining instead toward implementing the rival International Accounting Standards, soon to be adopted as the European norm. For the time being, at least, that inclination toward European standards precludes a U.S. listing, reducing the importance to Asia of New York as a financial center. Even a tightening of gaap in response to the current U.S. scandals would do little to encourage Asian companies to list in the United States. It could even deter them. The Bank of China (Hong Kong), for example, dropped its plans for a New York listing after paying U.S. regulators a $20 million fine following revelations of fraudulent loans at its New York branch. Although the bank was able to satisfy Hong Kong listing requirements, it balked at attempting to prove its compliance with U.S. regulations. Given the prospect of tighter rules in response to the recent train of scandals, more Asian companies may shy away from tapping U.S. capital markets in the future.

U.S. economic influence in Asia will likely wane if more revelations of corporate fraud prolong the current fall in the value of the dollar. From March until July this year, for example, the U.S. currency slipped by around 10 percent against a basket of other major currencies. In addition to reducing the international purchasing power of U.S. importers, that drop had an immediate impact on the local currency value of Asian governments' foreign exchange reserves. The central banks of Japan, China, South Korea, Taiwan, and Hong Kong together currently hold foreign currency reserves worth more than $1 trillion. Add in the foreign reserves of Southeast Asia and India, and you have a pot of more than $1.3 trillion, easily the world's largest concentration of foreign exchange reserves, a sizable percentage of which is held in U.S. dollars.

For the last three and a half years, ever since the launch of the European single currency, Asian central bankers have pondered how much of this money to convert into euros to rebalance their reserves. They held off during the euro's long slide between January 1999 and October 2000, when the euro lost 30 percent of its value against the dollar. This year, however, the euro has rebounded, and the dollar has weakened, buffeted by the impact of accounting scandals on investors who would otherwise sink money into U.S. equities and corporate bonds.

Purchases of euros by reserve managers at Asian central banks helped fuel the euro's rise to parity with the dollar in mid-July. As of then, the amounts converted had been small relative to the size of Asia's reserves. But if the dollar continues to drop as many forecasters expect, then the pace of conversions could well increase, driving the dollar still lower.

In the long run, this shift could presage the end of the dollar's hegemony as a reserve currency. Of course, the dollar has seen periods of weakness before: In 1995, it dropped below 80 yen, far below its value in mid-July 2002 of 117 yen. The difference this time is that Asian countries have greater reserves and a viable alternative reserve currency in the euro.

For the United States, a shift will mean a loss of seigniorage (the revenue that accrues to issuers of reserve currencies) that could outweigh any gains a weaker currency will bring U.S. exporters.

That the United States will remain a major regional economic power is undoubted. But the combination of a weaker dollar and diminished moral authority will likely force the United States to share the stage with an ever more economically assertive China, and even with a newly self-confident European Union.