A Multilayered Approach to the Economic Component of CVE

Catherine A. Novelli
Under Secretary for Economic Growth, Energy, and the Environment 
Aspen Institute, Workshop on The Economics-Countering Violent Extremism Nexus: Drivers & Solutions
Washington, DC
September 8, 2015

As prepared

I. Introduction

Thank you, Walter and Madeleine for your thoughtful remarks. I would like to also thank the Aspen Institute for inviting such a diverse group of experts to discuss violent extremism this morning.

All of us recognize that the causes of violent extremism are multilayered and extremely complicated. The worrying reality is that extremist activity is worse today than at any other time in modern history. The recent attacks in Tunisia and Kuwait, in France, Denmark, Kenya and Nigeria, and in the United States most recently in Tennessee and Texas, prove that no region, country, or community is immune to this threat.

This is a subject President Obama takes incredibly seriously. Last September, at the United Nations, the President called for an inclusive, international movement that could broaden our approach to counter-terrorism.

And this past February at a White House Summit, the President outlined a strategy to attack and delegitimize violent extremists and their ideologies, as well as address the economic and political grievances that extremists exploit.

Today, we’ve gathered to discuss the nexus of economics and violent extremism.

Broadly speaking, we see how economic factors, often in combination with other factors, play a role in violent extremism. For example, in Kenya, ethnic Somalis and coastal communities have longstanding unaddressed grievances over important economic resources such as land and live in marginalized areas that have long been underserved by the government. With fewer educational and employment options, many feel shut out of many of the economic opportunities in the country. It should come as no surprise that Al-Shabaab seeks to exploit these grievances, and heavily recruits from these marginalized communities.

We also see the deeply corrosive effects of corruption and how it can lead to widespread cynicism and despair, especially among young people who make up one of the most fertile recruiting grounds for violent extremists.

Across many parts of the Middle East and North Africa, for example, bribery is part of everyday interactions with local officials. A recent study suggests that the payment of bribes to obtain basic government services was associated with increased support for violent extremism. Entire economic sectors in the region are dominated by inefficient companies that only stay in business because of preferential treatment, like protection from domestic and foreign competition. Politically connected firms with monopoly pricing power make it more difficult for new firms to enter these sectors. This aggravates perceptions of economic unfairness. And, crucially, it prevents the emergence of a dynamic private sector that can create enough jobs to address the region’s unprecedented youth bulge.

These are some of the broader economic factors that can lead to social isolation and collective withdrawal from society and contribute to violent extremism. But, we need a more granular understanding of the underlying local economic conditions that marginalize elements of our societies and put vulnerable sub-groups at risk of radicalization.

And I hope today’s dialogue will help us better understand some of these very context-specific conditions.

II. Economics as Cause and Solution to Violent Extremism.

To realize President Obama’s call for a more comprehensive, multi-stakeholder approach to violent extremism, we need to address the economic grievances that make communities and individuals more vulnerable to violent ideologies.

The question is: “How”?

At a macro level, we see how economic policies in many countries lead to the creation of parallel but deeply polarized economies. One is formal and often extends the full range of society’s benefits to a relatively small and privileged group, but exacerbates perceptions of unfairness. The other economy is informal, marked by insecurity in every sense of the word, and characterized by low pay and little hope for a better future. According to the World Bank, the typical country in the Middle East and North Africa produces about 27 percent of its GDP and employs 67 percent of its labor force informally.

In many countries, it is almost impossible for an individual to move from the informal sector to the formal sector. In Egypt, for example, over 95 percent of young people who take jobs in the informal sector remain in informal employment eight years later.

Women, who are often economically marginalized, are particularly hurt by being excluded from the formal economy. Women participate in the Middle East’s workforce at the world’s lowest rate. According to a recent World Bank study, the informal sector is considered unsafe for women to work because of a high incidence of sexual harassment. Other forms of systemic gender discrimination also keep women out of the informal sector. As a result, women, some of whom are highly educated choose to wait for one of the limited formal sector jobs, often in the public sector. Many become discouraged over time and end up dropping out of the labor force. We’ve seen ISIL exploit these frustrations in its recruitment efforts by promising women valued positions in their state – and hundreds of women have fall prey to this narrative.

Economic marginalization is not unique to the Middle East. In the banlieues of France, more than half of the residents are foreign-born and unemployment is over twice the national rate. Studies show that somebody with a typically Muslim name like “Mohamed” or “Kamal”, is four times more likely to be unemployed than somebody named “Philippe” or “Alain”.

At a micro level – at the firm or enterprise level – red tape, corruption, and other regulatory barriers restrict economic growth, discourage entrepreneurship, and dis-incentivize small firms to grow or move into the formal sector. Moreover, rigid labor laws in many countries make firms less willing to hire in the formal economy.

All of these factors contribute to the corrosive divide between those who feel like they have a place in society and those who feel invisible.

This is not just an abstract notion. Real people suffer real consequences as a result of these conditions. We are all familiar with Mohamed Bouazizi, who expressed the outrage of an entire region when his single act of protest sparked the Arab Spring in December 2010. Locked in the informal economy, his frustration at systemic harassment by government employees and the humiliating inability to earn a living accumulated over a lifetime. Bouazizi was not a violent extremist, but his desperation shows how economic grievances and frustrations, if left unaddressed, will manifest themselves in one form or another.

It is important to note that many violent ideologies want to cast blame on the global economic system, capitalism, or “modernity” for creating many of these inequities. In the Middle East and North Africa, for instance, ISIL’s perverse ideology presents a false choice between the unjust status quo, on the one hand, and a romanticized version of a seventh century economy, on the other. Neither option is at all palatable. Thankfully these are not the only choices. But ISIL’s propaganda takes advantage of the profound unhappiness that comes with feeling trapped in corrupt, sclerotic economies.

Instead of a retreat to an idealized past, governments and other stakeholders need to look to the future by reducing economic barriers and promoting regional and global integration.

I have spoken at length in other settings about the policy prescriptions for a Connected World and the importance of value chains in reaping the benefits of the modern global economy. It bears repeating that open markets with efficient customs procedures, international product standards, and modern infrastructure are critical to creating inclusive, job-creating economies. Legal and regulatory processes for doing business need to be transparent, predictable, and streamlined, and they need to include input from all stakeholders.

There are other critical aspects to expanding opportunities more broadly throughout societies. The Internet and free flows of data are vital to competitiveness as knowledge-intensive trade and investment – particularly through the services sector – play a critical role in the Connected World. We also need to create regional markets and lower barriers to trade and investment so diverse communities can enter global markets.

A recent McKinsey study focused on East Africa’s potential to grow into a major garment-sourcing hub for European companies. It concluded that there is a real opportunity for East Africa to become a more important center for apparel sourcing, but “only if stakeholders—buyers, governments, and manufacturers—work together to improve business conditions in the region.”

When I was negotiating free trade agreements with several Middle Eastern countries, my interlocutors would tell me how they worried that if they opened up their economies, their local industries would be flattened by new competition. But that never happened. Today, these countries have economies that are far more diverse and robust than ever before.

III. Moving Forward

Moving forward, the U.S. government has to know where we can most effectively use our resources and expertise to prevent violent extremism from spreading. When we engage in government-to-government discussions, we have to continue to push other countries to adopt democratic policymaking principles that over time will reduce the divide between formal and informal economies. Economies will grow when businesses can advocate for their own self-interests to government authorities that are responsive and who understand their role as facilitators of inclusive economies.

Every country’s most valuable resource is their own citizens; people are innately resourceful and entrepreneurial. When people perceive they have opportunities and will reap the rewards of their economic activities, markets can flourish. People will take risks to start up small businesses. Nearly all new job growth in Tunisia and Lebanon, for instance, has come from businesses in their start-up period, which is to say less than four years old. And most women-run businesses in the developing world are small businesses.

Governments also have an important, collaborative role to play with other stakeholders in creating spaces where entrepreneurs can thrive. We have seen that successful East Asian countries have managed difficult economic transitions by utilizing consultative processes with key stakeholders – governments, businesses, civil society, and labor organizations – to work together to develop and implement national development plans. Institutional dialogue mechanisms were a key component of this model.

There are examples of countries that are already moving forward. In a variety of areas –including structural, tax, and business environment – the Moroccan authorities have brought together key stakeholders to help guide reforms. Although more work remains, the results so far have been significant. On the business environment, streamlining procedures and cutting red tape has led to improvements in Morocco’s standing on the World Bank’s doing business report. At the same time, Moroccan companies are expanding into West Africa, laying the groundwork for Morocco to serve as a regional hub for trade and investment between Europe and sub-Saharan Africa. Its continued progress on economic reforms will pave the way for new, higher-value opportunities as Morocco moves up the economic value chain.

Across the world, every strategy must ensure that local private sectors have a voice in identifying the reforms that are needed and the support they want. The private sector needs to help design job placement and other support services that will make economic reforms successful. Economic programs to counter violent extremism must create jobs, but other reforms are also needed; they must be integrated with broader policy changes to eliminate skills mismatches, close expectations gaps, and increase genuine employment opportunities, particularly for disenfranchised communities.

Fortunately, we know that economic improvement can galvanize political and social change, but it is a long-term process.

According to a study published by the Portland Trust, economic disparity was a principal aggravating factor in the Northern Ireland conflict, which lasted 30 years and claimed thousands of lives. In 1985, Catholic unemployment was 15 percent higher than Protestant unemployment. By 2004, six years after the Good Friday Agreement, the unemployment rates were only three percentage points apart. The study also found that private sector growth, supported by substantial foreign direct investment, was a crucial contributor of increased employment and improved living standards. These improved economic conditions helped sustain peace between the Protestant and Catholic communities. The impact of economic factors on political stability cannot be underestimated.

It is also worth remembering that international mediation in the conflict initially began around economic issues. Senator George Mitchell, who eventually chaired the talks that led to the 1998 Agreement, first went to Northern Ireland as a special economic adviser. Economic discussions became a platform for political settlement. Business organizations, in this case and in others, became a key lobby for peace. Similarly today, we need to empower voices that can credibly speak up against violent extremism and offer people – especially marginalized people – a better future.

The private sector, and small businesses in particular, can help advocate for increased transparency and accountability – along with reduced corruption – that will be critical elements of addressing economic grievances.

One promising program that USAID is supporting in Tunisia, for instance, the Business Reform and Competitiveness Project works with SMEs and the Tunisian educational system to help better match training programs with the labor market needs of private employers. The program also works to educate and empower local businesses so they can advocate for policy reforms in key areas that will impact the talent pool they draw from, and which directly impact their bottom lines.

Through programs like the Department of Commerce’s Commercial Law and Development Program, the United States is also working to improve the legal environment for doing business in countries, including in Tunisia, Pakistan, Iraq, and Afghanistan. And through partnerships with large multinational companies like Microsoft, we are supporting programs that teach young Egyptians computer programming, matches them with internships, and coaches them through professional and “21st century” skills development program.

IV. Conclusion

These are only examples of the types of efforts that, with the right scale, can begin to make a difference. This is certainly not something the United States or any single stakeholder can do alone. It requires partnerships and deep commitments from countries to address economic marginalization and a lack of opportunities. The most effective way to confront these challenges is for countries to pursue sound market-economy principles, embrace transparency and the rule of law, and ensure that all people have the chance to succeed. That alone requires courage and no small amount of effort. But courage is also needed to make the difficult policy changes that, over time, will promote inclusive economic growth and can blunt the message of violent extremists.

This morning, we’re beginning a dialogue that will help us better understand how to incorporate economic levers into our overall strategy of addressing violent extremism. I look to all of you to help policymakers make the right interventions in the most constructive ways.

Thank you very much.