Last week, the U.S. Treasury Department dismissed a proposal made by the International Monetary Fund’s Anne Krueger that countries should be able to be declared bankrupt. This bickering emphasized yet again the current helplessness of the West in the face of “failed states” and the economic disasters that they cause, and raised the question: is there a better way?
There is no question that there is a problem. Failed states oppress their own people — think Zimbabwe. They default on debts, raising the cost of borrowing for all emerging market countries — think Argentina. Harboring terrorists, and as Sept. 11 showed, endangering the lives of all of us — think Afghanistan, Sudan, Somalia, Iraq, the Palestinian Authority. In most cases, the World Bank, the IMF and the aid agencies do what they can to alleviate the problem. But even if one grants that their solutions are on balance helpful, they are essentially powerless, for one reason: they are forced by international convention to work with the governments that are causing the problems.
If a government refuses to follow their prescriptions, they have no sanctions available — other than simply to suspend all dealings with the country, as has been done with Zimbabwe, for example. But as Iraq has shown, suspending dealings is most unlikely to do any good, and the main sufferers from such suspension are the oppressed people themselves, not the oppressing rulers.
President Bush derides attempt to rectify the problem as “nation building” and is currently refusing to engage in such a process in Afghanistan, thus reducing the power of the pro-Western Afghan president Hamid Karzai, and allowing thugs, warlords and Islamic militants to continue dominating most of Afghanistan’s territory.
Bush has a point. “Nation building” under President Clinton had a mixed record, with one outright failure in Kosovo, where the Albanian militants proceeded to destabilize neighboring Macedonia, and one half-success in Bosnia, where the country has been stabilized but the economy has failed to recover. Clinton-era “nation-building” however, suffered from the same problem as IMF bailouts; for political reasons, the U.S. felt compelled to work with local leaders who had proved themselves less than adequate.
The one counter-example, and it is an interesting one, is Bosnian monetary policy, where a currency board has been instituted, monetary policy stabilized and inflation brought down to a low level. However, this is the exception that proves the rule: since 1997 the Governor of the Central Bank of Bosnia and Herzegovina has been a New Zealander, Peter Nicholl, appointed on the instructions of the IMF.
Before 1914, and the existence of the World Bank and IMF, sorting out failed states was very much easier. The Great Powers would conclave, and an expedition would be sent, generally but not always spearheaded by the British navy, which would partly or wholly take over the government of the country concerned. A typical example was Egypt, where bankruptcy in 1879 was followed by the entry of Evelyn Baring, Lord Cromer, who proceeded to run the country with remarkable effectiveness from 1883 to 1907, with only domestic policy that didn’t affect Egypt’s financial position or foreign relations handled by the Khedive, the local ruler. Naturally, once Britain had dragged Egypt into World War I, this apparently successful policy became highly unpopular with the Egyptians, and the result was a much less successful gradual wind-down of British rule, punctuated by riots, until the eventual emergence of the Egyptian nationalist leader Gamal Abdel Nasser in 1952.
The pre-1914 experience demonstrates the solution to the problem. If states have failed, then it is the responsibility of the international community, in the interests of the country’s inhabitants, those doing business with the country, and struggling emerging markets in general, to intervene and replace the government. Such intervention should be for a fixed period of years only, and should be multilateral, not undertaken by a single foreign power, which would of course be accused of “imperialism”. The intervention would need to be authorized by a representative international body, probably the U.N. General Assembly, in order to give it legitimacy, but should be staffed by a grouping of the richer and more stable countries, which will have the resources, financial and human, to carry out such an undertaking. Hence the Organization for Economic Cooperation and Development, the G7 Secretariat, or possibly the World Trade Organization should set up a body, which would have the responsibility to identify cases where a state appeared to have failed, request the U.N. General Assembly for authorization to intervene, and, if authorization was granted, carry out an intervention.
Interventions should be for a standard period of years, so that the inhabitants of the country concerned know that their independence is to be restored to them after a finite period. However, since repair of a country’s economy is a fairly prolonged process, and establishment of proper norms of business and political behavior an even lengthier one, the standard period should be a minimum of ten years, with the intervening body having full authority for the first five, and locally elected politicians being woven progressively into government over the second five.
Of course, the policy prescriptions of the international intervention body will not be to everybody’s taste. Indeed, given the politics of the countries forming the body, it is likely that the body will operate on the basis of a rather unsatisfactory social democratic blueprint, much as the World Bank and the IMF do today. Nevertheless, provided corruption is avoided (which has not been the case, for example, in the EU’s Phare aid program to eastern Europe) even social democracy is likely to be greatly preferable to what such “failed states” are suffering from under their existing governments. At least, it will not be necessary to compromise between social democracy and something worse, as is currently done in many cases because of the need to work with unsatisfactory local regimes.
In carrying out this intervention, the private sector needs to be fully involved, as far as possible on a competitive tender basis. Most aid programs are hopelessly bureaucratized, and operate high barriers against the participation of talented consultants. For example, USAID, fearful of scandal and impropriety if it used small consultancy companies and private individuals in its programs, operates an oligopoly to ensure proper standards of probity of no more than 4-5 companies including, for example, Arthur Andersen. Private consultants and individuals wishing to deal with USAID programs must deal through one of the oligopolists, which of course charge high prices — around $1,400 per consultant-day — to the U.S. government while driving the remuneration to the consultants actually doing the work down to $400-$500 per diem. This system results in USAID paperwork being completed in a highly professional manner, but also in the commoditization of the consultancy process, with advisory work being carried out by the cheapest possible workforce that possesses whatever technical qualifications are deemed necessary.
In the case of takeover of a host’s government, it is reasonable to suppose that the quality of technical staff can be very much higher than that in existing aid programs. Even for advisors, the advisory process is more interesting when the advice is likely to be taken — my ex-colleague who was the 1995-97 U.S. Treasury advisor in Belarus, for example, seeking to set up a money market in that benighted despotism, spent a dull and unpleasant two years, whatever the pleasures of the fleshpots of Minsk. Conversely, in Croatia, with a government genuinely seeking to set up a free market system, my stay in the same post during the same years was both enjoyable and productive.
How much more stimulating to be not merely an advisor, but say Minister of Finance, with full plenipotentiary power in your area for the next five years! It is likely that, provided success-based incentives were properly structured and the dead hand of bureaucracy (whether of the aid providers or of the large accountancy firms) was kept to a minimum, that the very best people would be attracted to such challenges, with corresponding benefits for the country concerned.
However even a team of bureaucrats pushing a woolly social democrat agenda, if uncorrupt, is likely to make a radical improvement in client country living standards over 5-10 years, compared with a kleptocrat “failed state” government. Once the first successes of this program had become evident, new interventions would normally be received with wild enthusiasm by the populations of the countries concerned.
The initial intervention in a country would have to be undertaken by military force, to remove the regime that was causing the trouble. Provided however that the initial cases of intervention were in countries where there was a majority world consensus that something needed to be done, the interventions themselves would have a high level of legitimacy. Therefore, provided the initial intervention was carried out with overwhelming force, to prevent the possibility of continued resistance by supporters of the discredited regime, the ongoing military/police force necessary to secure the safety of the interveners would be modest. Certainly, the long term cost to the world of such interventions would be far lower than that of allowing the existing “failed state” regimes to continue unchecked.
Candidates for such intervention? There are, of course, many, but a few stand out as particularly egregious, and should be tackled first. In Asia, Afghanistan (yes indeed, adding “nation building” to the military intervention already undertaken) and Myanmar. In Africa, Zimbabwe, Sudan and Angola. In Latin America, Haiti and Argentina (where President Duhalde was the LOSING candidate in the 1999 election) — Venezuela is likely to fall into this category shortly. In Europe, Albania and, if things go wrong, Serbia.
Imperialism, at its best, greatly improved the living standards of the governed, whatever its other defects. Contract imperialism, installing outside rulers on a contract basis until an economy is restored and a stable political situation obtains, can bring the same benefits to many of the world’s poorest and least successful countries. In such countries, it is the only way to ensure that the world’s aid dollars are beneficial, not destructive.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
This article originally appeared on United Press International.