Assessing the Development of Business Associations in Transitional and Post-Conflict Countries. Center for International Private Enterprise

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1 ECONOMICREFORM Feature Service September 30, 2005 Assessing the Development of Business Associations in Transitional and Post-Conflict Countries Mark McCord Business associations play a crucial role in the economic development of every country. In post-conflict countries, however, associations have a heightened responsibility to facilitate the transition from war to reconstruction. Yet, it is important to note that there is no standard formula for initiating and sustaining the transition to a new system. In many post-conflict countries, circumstances beyond the private sector s control often force business associations to adopt new approaches to economic development and, more importantly, develop a new paradigm of association management. Associations must often take the lead in creating a new vision to address the needs of the business community while the government is occupied with rebuilding the political system and re-establishing order. The role of business associations in post-conflict countries is not only to facilitate the immediate renewal of the economy, but also the rebuilding of the country s underlying economic, political, and social institutions. published by the an affiliate of the U.S. Chamber of Commerce 1155 Fifteenth Street NW Suite 700 Washington, DC USA ph: (202) web: cipe@cipe.org

2 Introduction Business associations play a crucial role in the economic development of every country. In post-conflict countries, however, associations have a heightened responsibility to facilitate the transition from war to reconstruction. As the voice of business and the engine of market reform, associations can revive the private sector and facilitate economic growth, thereby reducing their countries dependence on aid. Yet, it must be recognized that there is no standard formula for initiating and sustaining the transition to a new system. In many post-conflict countries, circumstances beyond the private sector s control often force business associations to adopt new approaches to economic development and, more importantly, develop a new paradigm of association management. Associations must often take the lead in creating a new vision to address the needs of the business community, while the government is occupied with rebuilding the political system and re-establishing order. However, before business associations in post-conflict societies can contribute effectively to development and reform, they must resolve organizational issues inherited from the past. One of the first steps in this process is rebuilding governance structures. While most associations are inclined to undertake initiatives that produce immediate results, experience indicates that to succeed in the long-term, associations themselves must undergo a transition because the changing institutional environment necessitates the establishment of a workable governance structure. Second, associations must focus on strategic planning. Again, experience indicates that programs launched in a vacuum to address short-term needs are unsustainable and have little long-term impact. Third, associations must focus on establishing a strong membership base that will sustain their organization. This can be the most difficult step in the transition process, but financial support from the business community is crucial to success. To gain such support, associations in post-conflict and transitional environments must first of all develop strategies to achieve buy-in from the business community, which is often skeptical or unaware of the benefits associations bring. Keeping in line with the long-term strategy, associations can prioritize their activities in order to achieve the greatest possible impact in the shortest amount of time. At the same time, organizational leaders need to understand that the challenges they face are often a legacy of years of economic and political mismanagement and decay. Therefore, they must be patient. The role of business associations in postconflict countries, after all, is not only to facilitate the immediate renewal of the economy, but also the rebuilding of the country s underlying economic, political, and social institutions. The foundation for future development must be laid one brick at a time and cannot happen overnight. Constraints Faced by Business Associations in Transitional Countries Association development is not an end but a process, as competition, changing economic structures, and challenging advocacy environments force even well-established organizations to change the way they conduct business. In developing and transitional economies, associations face five additional categories of constraints. The first, and arguably the most complex, of these constraints is the lack of a business association mentality or culture. In many transitional economies, the ideology of former regimes is responsible for the lack of an independent association culture. This was the case throughout Eastern Europe, Russia, the Caucasus, and Central Asia. While virtually every country in these regions has had a history of associations, for decades most of them were controlled or run by repressive regimes for the benefit of the government, not the members. Mandatory association membership and the elimination of private enterprise under communist rule took a toll on the business association mentality and eroded associations ability to be effective representatives of the business community s interests. In many cases, associations were formed as an arm of the government, viewed more as government agencies than organizations intended to benefit the private sector. When in the late 1980s and early 1990s commandstyle economies began to collapse, many countries found themselves with a large number of state-owned enterprises and a lack of understanding of key principles of market economies. There was relatively little support of business associations from governments, as laws governing associations remained statist and policymakers were not inclined to engage in open debates with the business community. More importantly, within the private sector there was little support for the association movement as well. This stemmed largely from the belief that associations either could not provide demand-driven programs and services or that they were merely extensions of government as had been the norm in many of these countries for decades. This lack of understanding of the need for business associations created a second constraint, which was lack of trust. In many transitional countries, oppressive regimes had eroded trust in institutions as a whole. Since many existing organizations, usually national chambers of commerce, had been used by governments to promote top-down economic and social policies, the business community was slow to accept associations as the representatives of their views and opinions. This was especially true since the leadership of a number of these organizations did not change during the transition process. So when command economies and closed political systems gave way to a new institutional framework, the old associations either had to be reformed or replaced 2

3 by alternative business associations. The latter option was perceived to be the path of least resistance in many countries, as the existing institutions were considered to have too much baggage to be effective even with new leadership. Romania typified many transitional countries in this respect by proliferating new business associations while at the same time undertaking reform of the Chamber of Commerce of Romania and Bucharest (CCIRB), although CCIRB was viewed with a certain degree of skepticism despite attempts to modernize it. The third constraint was lack of communication between organizations and their members. Recruitment of members, although crucial for organizations to survive, remained a daunting task. Success in expanding membership depended on an association s ability to develop demand-driven programs and services and, more importantly, the ability to effectively market the benefits of association membership to the private sector. Associations that were able to develop an effective communications strategy, such as the Brno Chamber of Commerce in the Czech Republic, enjoyed solid membership growth. Those that could not communicate effectively and were stuck in the old organizational framework either remained small, low-capacity organizations or chose a different method of achieving sustainability, such as sticking with mandatory membership models. The latter alleviated the need for the associations to communicate effectively, while still providing them with a constant source of income. In time, the realities of free-market economic systems, such as freedom of choice and association, began to change the attitudes of the business community and started to force a large number of associations to turn to voluntary membership models and to create communications and marketing strategies in order to reach their potential members. The most successful of these strategies focused on the matching of customized benefits and services to the needs of specific members. For instance, manufacturing companies have different needs than retail trading firms, so the programs and services offered should be customized to address their specific needs. Many organizations also created communications products such as newsletters, magazines, advocacy reports, and websites. These products not only provided a variety of ways for them to market their activities, but also allowed the organizations to collect member input and data. In addition to dealing with external communication issues, a majority of the associations also dealt with imperfect internal systems that caused chaos within the management structure. When internal communications broke down, the associations were unable to establish a consistent message for the private sector. Over time, a number of associations were able to improve their internal communications systems by instituting weekly staff meetings, networking events, and modern management techniques. In many cases, the lack of effective internal communication led to an overall inability to adopt a management style conducive to improved organizational effectiveness. This fourth constraint was exacerbated by the ideology and/or culture within the transitional countries. Many had been governed by oppressive regimes for decades, causing a generation of managers to adopt a topdown management style. This hierarchical style facilitated bureaucracy and interfered with the ability of associations to become grassroots organizations responsive to the needs of the business community. This being the case, association leaders had to change their own management paradigms to adapt to new circumstances. This process moved slowly in many developing nations, and even today the hierarchical management style is prevalent in a number of transitional countries. A fifth constraint faced by associations in transitional economies was either lack of a legal infrastructure or the adherence to archaic laws governing organizational development. A large majority of countries within the former communist bloc had laws on the books that specifically recognized one or more business associations (usually a national chamber of commerce or industrialists organization) as the government s official representative on economic issues. Few of these laws were repealed in the early 1990s, which left new business associations in a kind of legal limbo and deprived most demand-driven organizations of legitimacy. Eventually, a majority of transitional countries repealed their archaic business association and/or nongovernmental organization laws, but some were replaced with new laws that put different types of restrictions on the development of business associations. There is still much debate within transitional countries as to the legal framework within which organizations should operate. In many transitional countries, governments showed no interest in acknowledging the right of associations to advocate on behalf of their members. While some governments simply ignored the associations, others actively pursued a containment policy whereby one association or group of associations would be allowed access, while the others remained on the fringe of the policy debate. After several years of focused attention from private-sector organizations, governments in many transitional countries are becoming more inclusive and supportive of a wide variety of institutions. In Uganda, for example, the Federation of Uganda Employers (FUE) has been facilitating local advocacy campaigns, bringing together representatives of the government and the private sector. Government officials on the local level have welcomed the advocacy initiatives of the private sector, recognizing the importance of a strong business community to the development of their districts. 3

4 Many of the constraints noted above are being favorably addressed by aggressive and forward-looking business associations. The most successful organizations make a business case for membership and ensure participation from businesses of all sizes. By tailoring programs and services to companies of different sizes and types, associations in transitional countries have been able to create a significant return on investment for their members, which has led to increased member support. While difficulties remain, these associations are examples for their counterparts around the world. The Montenegro Business Alliance (MBA), for example, has enjoyed strong support of hundreds of members because it is effective in representing their interests on the national level. The cornerstone of MBA s programs has been the National Business Agenda (NBA) an advocacy program that accesses the needs of the business community, develops concrete recommendations, and works with the government to improve the business environment. Associations in Post-Conflict Environments Business associations operating in post-conflict environments face many of the same constraints as those in transitional economies, but they also tend to face at least four others. First, business associations in post-conflict countries tend to operate in an environment where few large businesses exist. Since many business associations gain a significant amount of their financial support from large corporations, their absence impedes the organizations efforts to achieve financial sustainability. Some associations address this problem by generating non-dues income. This can be done by looking beyond traditional member services and implementing new business ideas such as producing publications, working under contracts, and providing technology opportunities for other businesses. One of the organizations that have been able to successfully offset the lack of income from large corporations and generate significant non-dues income is the Afghanistan International Chamber of Commerce (AICC). For example, AICC provides technical assistance to its members and other businesses through its offices in Afghanistan and it rents out its conference room and equipment for meetings and events held by other organizations. Second, years of war often erode business activities within the formal economy. The gap between formal and informal sector operations in many post-conflict countries is sizeable, because businesses often struggle just to survive during war. As conflicts wind down, most governments are slow to promote formal business structures, focusing rather on political reform and the reconstruction of hard infrastructure. The lack of attention to formal economic systems spurs the growth of the informal economy outside of the nonfunctional and outdated legal structures. Typically, informal businesses do not participate in business associations, as they are unable or unwilling to adopt the formal procedures required for participation. In many countries, however, associations are beginning to appear that work directly with informal sector firms, seeking to integrate their economic potential with the rest of the economy. In Senegal, the Union Nationale des Commercants et Industriels du Senegal (UNACIOS), the largest business and trade association in the country, has nearly 70% of its membership operating in informal sector, which accounts for more than 50% of country s workforce and GDP. UNACOIS provided tens of thousands of entrepreneurs disconnected from the formal economy with a chance to voice their concerns and provide recommendations so that the formal economic system can be more business friendly. Third, many of these associations operate within an aid-dominated environment. In many countries that have endured periods of war, the post-conflict economy is defined by donor support. This creates a feeding frenzy during which both businesses and business associations spend more time trying to gain donor funding than in establishing a strong private sector. In many cases, massive donor funding has been a disincentive to business association development, as it promotes dependence instead of independence. Recently, the leaders of countries such as Afghanistan have spoken out in favor of developing the private sector instead of creating more dependence on donor funding. This is easier said than done, however, due to the massive amount of assistance required to integrate post-conflict countries into the mainstream of the global economy. Finally, business associations in post-conflict countries must deal with the creation of new legal, social, and even educational structures. While this is a formidable challenge, it provides an opportunity for many business associations to work with government in the creation of new laws and initiatives that are favorable to private-sector growth. This creates a significantly different development pattern from that in transitional countries where the legal, social, and educational infrastructures were left intact but needed massive overhaul. Conclusion Business associations can and must play a leadership role in transitional and post-conflict countries. Many are already doing so. The conditions through which they operate are not ideal, but the standard they are developing is one that can serve as a model for their counterparts around the world. These organizations have mobilized the business community by encouraging it to operate within a formal economy, providing a policy forum in which their input can be channeled, and focusing on investment versus donor dependence. 4

5 There are many excellent examples of business associations that are making an impact on post-conflict societies, but three of special note are the AICC and SHE-ERA, a women s enterprise development organization in Kosovo. The AICC is a demand-driven organization that was created after the fall of the Taliban regime in Afghanistan out of the private sector s belief that business association structures in place at that time did not have the capacity to play a role in the reform process. Since its creation in June 2004, the AICC has focused on the development of a workable governance structure, development of a strategic plan, recruitment of membership, and the launching of sustainable, demand-driven programs. This process has produced impressive results, with the AICC recruiting over 2,000 paid members in less than three days. It is now recognized by the government of Afghanistan as an important player in private sector development. SHE-ERA in Kosovo is an example of an institution that grew out of the ashes of conflict. Created to promote the interests of women in the aftermath of Kosovo s ethnic conflict, SHE-ERA also serves as an organization that brings people and ideas together. It not only focuses on economic healing, but social and political healing as well. By providing practical education training, access to capital, leadership skills development, and other programs, SHE-ERA exemplifies the positive role that business associations can play in post-conflict countries. These examples represent a few of the many organizations that are not only surviving in post-conflict countries, but are thriving due to the leadership of the business community to change the development paradigm. While progress has not been easy, business associations in post-conflict countries continue to act as essential advocates for private sector development, participatory political systems, and sustainable, long-term growth. Mr. McCord is Chief of Party of the CIPE Afghanistan office and a certified chamber executive. Mr. McCord was chief executive officer of metropolitan chambers of commerce in the United States for 14 years before starting his own international development company. For the last three years, he was Chief of Party for a CIPE/USAID project in Romania. He has been in Afghanistan since October The grants permission to reprint, translate, and/or publish original articles from its Economic Reform Feature Service provided that (1) proper attribution is given to the original author and to CIPE and (2) CIPE is notified where the article is placed and a copy is provided to CIPE s Washington office via mail, , or fax. The is a nonprofit affiliate of the U.S. Chamber of Commerce and one of the four core institutes of the National Endowment for Democracy. CIPE has supported more than 800 local initiatives in over 90 developing countries, involving the private sector in policy advocacy and institutional reform, improving governance, and building understanding of market-based democratic systems. CIPE programs are also supported through the United States Agency for International Development. 5