Chapter 5 -- 5.8. Economic Reform

Country Reports on Terrorism
Office of the Coordinator for Counterterrorism
April 30, 2008

High unemployment and underemployment, often a result of slow economic growth, are among the most critical issues in predominantly Muslim countries. U.S. assistance programs attempt to address this issue with reforms to improve the investment climate. Such reforms could include business registration, dispute settlement, financial sector and agricultural reforms, combined with education, job training, and health programs.

The U.S. strategy of Total Economic Engagement pursues economic reform, rule of law, and global economic integration, including countries with predominantly Muslim populations. Total Economic Engagement includes:

  • Regular bilateral discussions on these topics with host government officials, with both U.S. Embassy officials and officials from a wide range of U.S. agencies participating;
  • Formal structured dialogues, high-level Economic Dialogues, and Trade and Investment Framework Agreement (TIFA) Councils;
  • U.S. bilateral and multilateral assistance programs for economic reform, trade capacity-building, and rule of law managed chiefly through USAID, the Millennium Challenge Corporation (MCC), and the State Department's Middle East Partnership Initiative (MEPI). Programs are often complemented with technical assistance provided by specialized U.S. agencies and offices;
  • Coordinated multilateral policies and assistance strategies to advance reform goals by working with such international organizations as the (IMF, WB, World Trade Organization (WTO), and OECD (MENA-OECD Investment), and other multilateral donors; and
  • Working with NGOs, such as Transparency International, and U.S. and foreign business associations, such as American Chambers of Commerce and Business Councils, to advance reform issues of mutual concern.

Integrating Predominantly Muslim Countries into the Global Trading System

There are a number of USG-funded programs to promote predominantly Muslim countries' integration into the global trading system and promotion of regional trade and rule of law. The following table lists USG funding for trade and capacity-building programs. USAID/Asia and Near East Bureau currently funds 77 percent of these programs in these countries.

USG Funding for Trade and Capacity-building
Country USG FY-2007 Funding
Afghanistan $27,689,169
Bangladesh $775,088
Egypt $17,557,096
Indonesia $19,714,237
Iraq $2,896,080
Jordan $17,742,245
Lebanon $2,895,500
Morocco $8,626,500
Pakistan $7,406,217
West Bank/Gaza $0
Yemen $480,000
TOTAL TCB Funding $105,782,132

WTO Awareness and Accession. FY-2007 USAID programs with components dealing with WTO awareness and accession are being implemented in Afghanistan ($9,000,000), Indonesia ($7,073,927), and Iraq ($2,222,830):

  • Afghanistan. The Strengthening Private Sector through Capacity-building Project is designed to establish sound economic governance within the economic ministries and agencies of the Government of Afghanistan. Activities include customs operations and administration and other related reforms supporting progress toward WTO accession.
  • Indonesia. The Trade Assistance Project focuses on legal support, economic research, public outreach, organizational development, information technology, and WTO awareness and agreements. The objective is to improve the Ministry of Trade’s capacity to analyze and implement trade reforms that will lead to increased exports and a more attractive investment climate.
  • Iraq. The Trade Policy and Market Access Support Project provides technical assistance to the Government of Iraq on legal, procedural, and practical matters pertaining to Iraq’s bid to join the WTO. This includes technical assistance in completing key accession-relation documentation, in particular ACC4 (agriculture), ACC8 (sanitary and phytosanitary, technical barriers to trade), and ACC9 (intellectual property), and modifications and updates as WTO-related regulatory reforms progress.

USAID Global Export Promotion Programs. USAID global export promotion programs in FY-2007 include Afghanistan ($5,500,000), Bangladesh ($575,088), Indonesia ($3,131, 110), and Pakistan ($3,343,000):

  • Afghanistan. The Small Medium Enterprise Development Project supports the development of the Afghan private sector by addressing non-governmental barriers to enterprise development. Key activities include strengthening business associations through support of trade fairs, trade missions, and participation of leading small and medium enterprises and associations.
  • Bangladesh. The Shrimp Quality Support Project focuses on improving the quality and quantity of shrimp exports by Bangladesh in socially and environmentally acceptable ways by transferring appropriate applied research to farmers.
  • Indonesia. The Enterprise and Agribusiness Development Activity supports the competitiveness of labor-intensive manufacturing industries, including footwear, furniture, auto parts, garments, home accessories, and information and communications technology. Competitiveness is strengthened by strengthening industry value chains, developing new industry-based standards to improve product quality and access to markets, and improving business skills, such as export readiness.
  • Pakistan. The Initiative for Strategic Development and Competitiveness provides technical assistance and training to increase the competitiveness of Pakistani small and medium-sized enterprises. The project works with a number of sectors, including gems, jewelry, dairy, marble, horticulture, and furniture to improve their capacity to market and export their products. The project has formed six strategic working groups to develop sector-specific strategies aimed at upgrading production and improving marketing and trade.

Customs Reforms. Customs reforms are supported by USAID FY-2007 programs in Egypt ($5,000,000), Afghanistan ($9,000,000, previously mentioned), and Indonesia ($7,073,927, previously mentioned).

USAID Africa Bureau Programs. Programs managed within the USAID Africa Bureau include Sub-Saharan integration into the global trading system, the driving forces of which are the African Growth and Opportunity Act (AGOA) and the President’s Initiative - African Global Competitiveness Initiative (AGCI). Program efforts are focused on helping countries build a sound enabling environment including policies, laws, and regulations governing business and trade; improving infrastructure to facilitate trade; strengthening financial services to small and medium-sized enterprises and other businesses; and developing the energy sector to meet the needs of growing African economies.

USAID Europe and Eurasia Bureau Programs.

Albania. The objective in Albania is to strengthen its integration into the Euro-Atlantic community and promote its contribution to ethnic integration in the region. USAID/Albania's programs worked with the government to improve the business climate for private sector growth and investment, and to improve private sector competitiveness to meet international export requirements. The Albanian Center for International Trade, founded in 2003, assists the Government of Albania to improve the quality of its trade policies. The Enterprise Development and Export Market Services Project, scheduled to run through September 2008, promotes the competitiveness of small and medium Albanian enterprises in domestic and foreign markets, and accelerates the entry of Albanian exports into global markets.

Azerbaijan. Azerbaijan's program emphasizes economic growth and reform, with a focus on developing the non-oil sectors of the economy.

Bosnia and Herzegovina (BiH). The program in BiH supports progress towards full integration into the EU. USAID/BiH worked to integrate the energy sector into the regional European framework and supported the development and implementation of a coherent direct taxation system that is regionally competitive. USAID's competitiveness projects promote trade and investment in agribusiness, wood processing, and tourism by improving the competitiveness of the firms, industries, and training firms to meet EU standards.

Central Asia Region. The Trade Facilitation and Investment (TFI) Project has been operating in Kazakhstan and the Kyrgyz Republic since 2001 and in Tajikistan and Uzbekistan since 2002. The project seeks to improve the trade and investment environment for small and medium-sized enterprises through the reduction of investment constraints, trade facilitation, and accession to and active participation in the WTO (Kyrgyz Republic joined in 1998).

Building on USAID's TFI Project, the U.S. Central Asia Trade Facilitation Initiative works to foster greater regional trade through reduced transaction costs for businesses by harmonizing, strengthening, and streamlining customs functions.

The Business Environment Improvement Project (BEI) was launched for Kazakhstan, the Kyrgyz Republic, and Tajikistan in October 2006. This program supports the streamlining of legal and regulatory processes, and facilitates multi-party engagement to improve the business, trade, and legal environment.

The Central Asia Infrastructure Integration Initiative, under the Regional Electricity Market Assistance Project (REMAP), helps to establish a transparent and competitive regional electricity market to increase regional electricity trade, stimulate economic growth, and provide market-based solutions for regional disputes related to hydro facilities and reservoirs.

Kazakhstan. The TFI Project operates five offices in Kazakhstan and was directly involved in the drafting of Kazakhstan's Customs Code, bringing the country into greater compliance with WTO principles and agreements. TFI is also financing the training of front-line customs officers in the identification and seizure of pirated goods to help Kazakhstan meet the standards of the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) and achieve removal from the Special 301 Watch List, both of which will help Kazakhstan's accession process to the WTO. The Kazakhstan Small Business Development Project, funded in October 2006, aims to promote development of small business, resulting in an increase of sales domestically and regionally.

Kosovo. The objective in Kosovo is to strengthen its integration into the Euro-Atlantic community and promote its contribution to ethnic integration in the region. USAID's goal is to help Kosovo make the transition from international administration to self-governance in an effective and peaceful manner. USAID provides training and expert counsel to ensure Kosovars quickly build capacity in the fiscal and economic policy sectors, private enterprise development, and energy management. One such program is the Cluster and Business Support Project, assisting businesses in the construction materials, livestock, and fruit and vegetables sectors by promoting productivity, trade and investment, identifying trade, marketing, and import-substitution opportunities; and providing training to meet EU standards.

Kyrgyz Republic. The TFI Project provides support to the WTO Department within the Kyrgyz Ministry of Economic Development and Industry & Trade (MEDIT), to increase its technical capacity in the legal and regulatory process. The Kyrgyz Agri-Enterprise Development Program works closely with the USAID Ferghana Valley Agribusiness Initiative, and provides development assistance to private agricultural-input suppliers that share the Ferghana Valley with Uzbekistan and Tajikistan.

Tajikistan. The TFI Project works directly with the Tajik government to prepare it to meet its WTO commitments by revising and updating the Legislative Action Plan to bring trade-related legislation into conformity with the provisions of WTO Agreements. Patent, copyright, trademark, and geographic indication legislation are revised to reach conformity with the provisions of the TRIPS Agreement. USAID's programs support small and medium enterprise development, customs reform, and the creation of agricultural value chains. Fiscal reform projects focus on reducing regional disparities by increasing the effectiveness of local tax administration and increasing the capacity of local governments to develop and execute budgets.

Turkmenistan. USAID works to foster trade advisory services and implement International Financial Reporting Standards in Turkmenistan.

Stability Pact for Southeastern Europe (SP). The SP has several relevant programs related to global trade that affect parts of the region with significant Muslim populations, including Albania, BiH, and Kosovo. The SP's Trade Working Group has encouraged the negotiation, ratification, and implementation of a network of bilateral free trade agreements among the members of the SP and supports negotiation of a single regional trade agreement aimed at harmonizing the bilateral trade agreements to encompass all SP members. The United States supports this process by providing technical assistance to lower non-tariff barriers within the region, consistent with WTO principles.

Under SP auspices, the OECD Investment Compact for Southeastern Europe aims to improve the region's investment conditions, by setting out commitments for policy reform and to encourage increasing local and foreign direct investment. Albania and BiH (among other Southeastern Europe nations) are signatories.

Possible Actions to Promote Intraregional Trade and Rule of Law in the Region
Supporting intraregional trade and rule of law is a key aspect of U.S. policy in the Middle East and around the world.

Intraregional Trade

  • The President's vision of a Middle East Free Trade Area (MEFTA) by 2013, linking countries in the region with each other and the United States, is the centerpiece of our effort to promote intraregional trade. Our strategy for attaining MEFTA includes:
    • Negotiating Free Trade Agreements (FTAs) with countries ready for that step. The United States has concluded FTAs with Israel, Jordan, Morocco, Bahrain, and Oman;
    • Working with additional countries through the TIFA process to advance readiness for FTA negotiations; and
    • Assisting reform-minded Middle East countries that are not yet in the WTO accession process.
  • The MEPI, MCC, and USAID Missions in the Middle East, provide support for the MEFTA initiative through a variety of programs in trade capacity-building. MEPI and USAID missions in the Middle East are supporting the WTO accession efforts of Iraq, Yemen, and Lebanon. USG assistance programs assist FTA partners Jordan, Morocco, Bahrain, and Oman with free trade implementation with the United States.
  • USAID/Jordan’s Business Development Center supports implementation of the FTA between the United States and Jordan, and assists small and medium-sized firms to modernize and improve their competitiveness so they can move into higher value sectors and take advantage of FTA export opportunities. FY-2007 funding is $840,220.
  • USAID/Morocco's New Business Opportunities (NBO) Program helps export-oriented Moroccan firms to take advantage of new opportunities for entry and expansion into the United States created by the Morocco-U.S. Free Trade Agreement. NBO includes business development services that help exporting firms to identify new market opportunities, and then work to improve their marketing and promotion to turn these opportunities into exports to the United States. FY-2007 funding is $3,343,000.

The Rule of Law

  • The Middle East Partnership Initiative (MEPI) will continue to support rule of law activities aimed at strengthening the capacity of regional governments to enact and implement commercial laws conducive to promoting economic growth. By working with legislators, judges, lawyers, and business persons, improvements in the commercial legal and regulatory environment focused on international best practices should lead to increased investment and employment across the region.
  • Egypt. USAID’s Administration of Justice Support II project promotes the rule of law by reforming and modernizing the commercial court system and improving the access to quality legal services. FY-2007 funding is $3,700,000.
  • Indonesia. USAID’s Financial Crime Prevention Project (FCPP) is designed to strengthen Indonesia’s ability to combat financial crimes. FCPP provides technical assistance to the FIU (PPATK), Supreme Audit Commission, Attorney General’s Office, Corruption Eradication Commission, and Ministry of Finance-Inspector General Office. FCPP’s work aids Indonesia’s own efforts to build a more modern legal and institutional framework to detect and prosecute corruption and financial crimes. FY-2007 funding is $254,132.

The Millennium Challenge Corporation (MCC). The MCC provides assistance for transformational development in countries that perform well on 17 independent, transparent policy indicators in the areas of ruling justly, investing in people, and economic freedom. Besides the financial support provided by MCC programs, MCC selection criteria creates an incentive for candidate countries to adopt related legal, policy, regulatory, and institutional reforms related to the MCC selection criteria. Such reforms will contribute to countries' efforts to reduce poverty and increase economic growth.

Summary of MCC Activities in Predominantly Muslim Countries:

Compact-Eligible Countries. Based on their good performance on the 17 policy indicators mentioned above, Compact-Eligible countries are invited to apply for substantial grants from MCC for programs that they design and implement through a "Compact."

Mali. Mali signed a five-year, $460.8 million Compact with MCC in November 2006 which entered into force in September 2007. It aims to reduce rural poverty and help achieve national food security through a sustainable increase in the economic performance of the agricultural sector, and to spur economic growth and reduce poverty by increasing the competitiveness of light industry and increasing the value-added of exports and tourism. These objectives will be met through investments that increase farmers' productivity, enhance agricultural supply chains, reduce transport costs, and create a platform for industry. The Compact focuses on improved infrastructure at the Bamako Airport, a key gateway for trade, and along the Niger River for irrigated agriculture.

Burkina Faso. Burkina Faso submitted an initial Compact proposal to MCC in October 2006. It aims to promote economic growth in the rural sector by fostering land tenure security; investing in irrigation and watershed management infrastructure for agricultural purposes; constructing national roads, feeder roads, and market infrastructure; and improving existing agro-industrial supply chains. While MCC continues due diligence, it granted the government $9.43 million in pre-Compact assistance in December 2007 to cover preparatory work and fees.

Morocco. Morocco signed a five-year, $697.5 million Compact with MCC on August 31, 2007. The Compact focuses on relieving constraints to growth in the agriculture, fishing, artisan, and small enterprise finance sectors. Entry into force is pending.

Threshold Programs are designed to assist countries that have demonstrated significant commitment to improving their performance on MCC selection criteria, but do not yet pass more than half the indicators in each of the three selection categories of ruling justly, investing in people, and encouraging economic freedom. A Threshold Program provides financial assistance to help improve a low score on at least one of MCC's policy indicators.

Albania. Reducing corruption is the primary focus of the $13.8 million Albanian program that began in April 2006. Albania is receiving assistance from MCC to fund three programs designed to reform tax administration, public procurement, and business administration. The program anticipates reducing the extensive red tape and below-board payments needed to start a business while increasing the national tax base.

Burkina Faso. The $12.9 million program, signed in July 2005, is a pilot program that seeks to improve performance on girls' primary education completion rates. Specific interventions include the construction of 132 "girl-friendly" schools, teacher training, providing take-home dry rations to girls who maintain a 90 percent school attendance rate, and providing literacy training for mothers. Burkina Faso is also eligible for Compact assistance.

Indonesia. The $55 million program with Indonesia, begun in November 2006, seeks to immunize at least 80 percent of children under the age of one for diphtheria, tetanus, and pertussis, and 90 percent of all children for measles. The Threshold Program also has a component aimed at curbing public corruption by reforming the judiciary and strengthening government institutions that fight corruption.

Jordan. The $25 million Jordanian program, signed in October 2006, aims to strengthen democratic institutions by supporting Jordan's efforts to broaden public participation in the political and electoral process, increasing government transparency and accountability, and enhancing the efficiency and effectiveness of customs administration. The Threshold Program is a part of Jordan's reform efforts focused on improvements in public administration, civil liberties, infrastructure, and the economy.

Kyrgyz Republic. The Kyrgyz Republic $16 million Threshold Program was approved in August 2007 to help the Kyrgyz government fight corruption and improve the rule of law through judicial, criminal justice, and law enforcement reforms. As of December 2007, the implementing agreement (SOAG) was pending signature.

Yemen. In February, the Republic of Yemen was reinstated into the Threshold Program based on the Yemeni government’s efforts to address the country's performance on the MCC selection criteria. On September 12, the MCC Board approved a $20.6 million grant to Yemen to help it fight corruption and improve rule of law, political rights, and fiscal policy. However, signing of a Threshold agreement, originally scheduled for October 31, has been indefinitely deferred pending MCC review of Yemen’s status.

The Middle East Partnership Initiative (MEPI). In 2007, MEPI provided tangible support to reformers in the region so democracy could spread, education could thrive, economies could grow, and women could be empowered. Working in 16 countries and the Palestinian territories, MEPI invested in programs ranging from trade technical assistance to commercial code reform to a network for Arab businesswomen.

Examples of MEPI's work with reformers include the following:

  • Provided technical and other assistance in support of successfully completed free trade agreements with Bahrain and Oman; Trade and Investment agreements with Kuwait, Qatar, Tunisia, and Egypt; and supported WTO accession for Yemen, Algeria, and Lebanon;
  • Expanded trade capacity of Arab countries with training and technical assistance, including assisting a number of Gulf and North African countries with revising their labor codes, and updating intellectual property codes, customs codes, and agricultural import/export standards;
  • Expanded efforts to strengthen indigenous labor and business organizations;
  • Provided entrepreneurial training for more than 400 participants, almost half of them women, from 16 Middle Eastern and North African countries, with 50 alumni going on to start or expand businesses. These entrepreneurs created at least 1,000 new jobs following their participation in MEPI programs;
  • Extended credit and services to small- and medium-sized businesses through peer consultation and training for regional banks and financial organizations;
  • Established self-sustaining Junior Achievement chapters in 12 countries throughout the Middle East, with more than 10,000 students participating. Created public-private partnerships that assisted in the sustainability of Junior Achievement chapters; and

Expanded commercial and legal reform efforts in the Gulf by working to update legal curricula at law schools in Qatar and Oman, update commercial codes to meet international standards in Bahrain, Qatar, and Oman, and provide continuing education programs for the judiciary.