Richard
02-01-2014, 11:28
Everything in A'stan depends on a sustainable economy. Guess what?
And so it goes...
Richard
Afghanistan's Misguided Economy
BGlobe, 28 Jan 2014
Part 1 of 2
On my first trip through Afghanistan in 1978, I was met with the richness of agricultural production at a time when the country had achieved food security for a population of 15 million. My trip was in early spring, when pomegranates, apricots, cherries, figs, peaches, grapevines, and mulberries had started to bloom, and wheat was sprouting. U.S. and Soviet aid had been pouring in since the 1940s in an effort to influence Afghan policies, opening up irrigation projects on thousands of acres of land in the provinces of Helmand and Kandahar.
In the late 1970s, the country was famous as an exporter of fresh and dried fruits, of karakul skins, carpets, and cotton. The northern city of Kunduz, surrounded by fertile agricultural land producing cotton, wheat, rice, millet, fruits, and other crops, was known as “the hive of the country.” There, the Spinzar Cotton Company, built in the 1930s, employed around 5,000 people full-time. It was financed by the national bank, Bank-i-Melli which acted as an investment bank. In the west, the city of Herat was known as the “breadbasket of Central Asia.” In the south, Kandahar acted as the main trading center and a market for fresh and dried fruits, grains, sheep, wool, cotton, and tobacco. The city had plants for canning, drying, and packing fruits, and for manufacturing woolen cloth, felt, and silk. Afghanistan was dignified if poor, at peace internally and with its neighbors.
Today, Afghanistan’s economy is a house of cards. It will likely collapse when foreign combat troops leave and as aid continues to fall. It is estimated that Afghanistan will need at least $8-$12 billion of economic and military aid a year for the next decade to recover. Even if it constitutes just a pittance compared to the cost of the war, this amount is not at all realistic. Moreover, although the government plans to build self-sufficiency during the transformation decade, IMF projections show that, unless there is a sharp shift in policies, the country will remain dependent on aid until well beyond 2025. What happened, and what can be done to return Afghanistan to a peaceful, productive, and stable state?
• • •
Two weeks after my trip, the bloody communist coup d’état in April 1978 led to the Saur revolution. In December 1979, the Soviets invaded Afghanistan, which would become the last political battleground for the Cold War. The mujahedeen—a diverse group of “freedom fighters” including radical Islamic groups that received heavy financing from the CIA—announced a jihad against the Soviets. The Soviets fought mostly in rural areas, laying 10 million landmines and destroying agricultural life and production. At the same time, Afghans began producing natural gas and exporting it to the Soviet Union. In the process, the share of mining in total exports increased and government revenue rose.
Kabul was destroyed both physically and economically by the brutal civil war that followed Soviet withdrawal in 1989 and continued among different mujahedeen after the collapse of the Soviet-backed government in 1992. Opium production and trade fuelled the civil war and weakened the Kabul government. The Taliban took power of Kabul in 1996 and served as de facto rulers of the country until the end of 2001 when they fled the city, almost three months after the start of Operation Enduring Freedom. By then, arms trafficking and smuggling were widespread, and the only domestically produced exports were narcotics and some timber and gemstones.
The promises made by President Bush in April 2002 to help rebuild Afghanistan in the tradition of the Marshall Plan created high expectations among the Afghan population after the rout of the Taliban and the Bonn Agreement of December 2001. But despite costly international efforts, Afghanistan has relapsed into conflict and become one of the most aid-dependent countries in the world. The failure of peace negotiations with the Taliban, the upcoming presidential elections in April 2014, and the impending complete withdrawal of U.S. and NATO combat troops by the end of this year have contributed to uncertainty and instability in the country. Meanwhile, the population has grown to 33 million (from around 23 million in 2002), and the economy remains highly dependent on drugs, imports, and aid.
Afghanistan is not unique, of course. The success rate of peace transitions in countries torn by civil war since the end of the Cold War is dismal: roughly half the countries that embarked in a multi-pronged transition to peace involving security, political, social, and economic reconstruction—either through negotiated agreements or military intervention—have reverted to conflict within a few years. Of the half that managed to maintain peace, a large majority ended up highly dependent on foreign aid. What can the history of the last two decades teach us about how to improve international assistance to Afghanistan and to other countries coming out of conflict in the Middle East and North Africa?
One thing that recent history teaches us is that, because economic reconstruction takes place amid the multifaceted transition to peace, it is fundamentally different from development in countries not affected by war. Economic reconstruction has proved particularly challenging because Afghanistan must reactivate the economy while moving away from the economics of war—that is, the underground economy of illicit activities (drug production and trafficking, smuggling, arms dealing, extortion,etc) that thrives in situations of war and makes the establishment of governance and the rule of law extremely difficult. To succeed, economic reconstruction requires peace-building activities like the reintegration of former combatants, returnees, and other conflict-affected groups into productive activities, as well as rehabilitation of services and infrastructure. As John Maynard Keynes argued at the end of World War I, the economic consequences of building peace are high. The imperative of peace consolidation competes with the conventional imperative of development, putting tremendous pressure on policy decisions, especially budgetary allocations. Because there cannot be economic stability and long-term development without peace, it follows that, to avoid a relapse into conflict, peace should prevail as the main objective at all times—even if it delays the development objectives.
Another thing we learned from recent history is that economic policymaking in war-torn countries at low levels of development requires a simple and flexible macroeconomic framework. But the fiscal and monetary framework established in Afghanistan early on by the Minister of Finance—supported by only a few other cabinet members and adopted by decree since there was no legislative body until the parliamentary elections of 2005—was neither simple nor flexible. The independence of the central bank and the “no-overdraft” rule for budget financing adopted—policy components that make sense for countries in the normal process of development—deprived the government of any flexibility to provide subsidies or other incentives necessary for carrying out peace-related activities. At the same time, a simpler framework would have required less foreign expertise (reducing the distortions created by such presence) and restricted the opportunities for mismanagement and corruption among uneducated and low-paid civil servants.
The restrictive monetary and fiscal framework—in conjunction with a dogmatic belief of the economic authorities and their foreign supporters in trade liberalization, privatization, and private sector–led development, severely restricted the role of the state in reactivating investment and employment. Moreover, donors channeled about 80 percent of their aid through NGOs or U.N. agencies rather than through the government budget and according to government priorities. As an example, the Spinzar cotton company, by then a state-owned enterprise, could have been part of a government project to reactivate the cotton sector but was put up for privatization instead.
Not every aspect of the macroeconomic framework failed. The exchange rate policy worked well. The Minister of Finance opted to introduce new afghani bills issued by the central bank (Da Afghanistan Bank) rather than adopt the dollar or another foreign currency as the International Monetary Fund recommended and as other countries emerging from war often do to help stabilize their economies. In a currency exchange supported by the U.S. Treasury that began in October 2002 and was completed in only four months, the afghani became an important symbol of sovereignty and unity, restoring confidence in the domestic currency.
But a stable currency was not enough to reactivate production. Perhaps the most serious mistake was the neglect of the rural sector—on which roughly 75 to 80 percent of the Afghan population depends. Efforts to move the economy directly into higher productivity through commercial agriculture were misguided since it takes time to build infrastructure. Instead, the government should have used aid to provide subsidies and price support mechanisms to promote subsistence agriculture. Such measures would have improved the livelihoods of the large majority and given them a stake, however small, in the peace process.
(Cont'd)
And so it goes...
Richard
Afghanistan's Misguided Economy
BGlobe, 28 Jan 2014
Part 1 of 2
On my first trip through Afghanistan in 1978, I was met with the richness of agricultural production at a time when the country had achieved food security for a population of 15 million. My trip was in early spring, when pomegranates, apricots, cherries, figs, peaches, grapevines, and mulberries had started to bloom, and wheat was sprouting. U.S. and Soviet aid had been pouring in since the 1940s in an effort to influence Afghan policies, opening up irrigation projects on thousands of acres of land in the provinces of Helmand and Kandahar.
In the late 1970s, the country was famous as an exporter of fresh and dried fruits, of karakul skins, carpets, and cotton. The northern city of Kunduz, surrounded by fertile agricultural land producing cotton, wheat, rice, millet, fruits, and other crops, was known as “the hive of the country.” There, the Spinzar Cotton Company, built in the 1930s, employed around 5,000 people full-time. It was financed by the national bank, Bank-i-Melli which acted as an investment bank. In the west, the city of Herat was known as the “breadbasket of Central Asia.” In the south, Kandahar acted as the main trading center and a market for fresh and dried fruits, grains, sheep, wool, cotton, and tobacco. The city had plants for canning, drying, and packing fruits, and for manufacturing woolen cloth, felt, and silk. Afghanistan was dignified if poor, at peace internally and with its neighbors.
Today, Afghanistan’s economy is a house of cards. It will likely collapse when foreign combat troops leave and as aid continues to fall. It is estimated that Afghanistan will need at least $8-$12 billion of economic and military aid a year for the next decade to recover. Even if it constitutes just a pittance compared to the cost of the war, this amount is not at all realistic. Moreover, although the government plans to build self-sufficiency during the transformation decade, IMF projections show that, unless there is a sharp shift in policies, the country will remain dependent on aid until well beyond 2025. What happened, and what can be done to return Afghanistan to a peaceful, productive, and stable state?
• • •
Two weeks after my trip, the bloody communist coup d’état in April 1978 led to the Saur revolution. In December 1979, the Soviets invaded Afghanistan, which would become the last political battleground for the Cold War. The mujahedeen—a diverse group of “freedom fighters” including radical Islamic groups that received heavy financing from the CIA—announced a jihad against the Soviets. The Soviets fought mostly in rural areas, laying 10 million landmines and destroying agricultural life and production. At the same time, Afghans began producing natural gas and exporting it to the Soviet Union. In the process, the share of mining in total exports increased and government revenue rose.
Kabul was destroyed both physically and economically by the brutal civil war that followed Soviet withdrawal in 1989 and continued among different mujahedeen after the collapse of the Soviet-backed government in 1992. Opium production and trade fuelled the civil war and weakened the Kabul government. The Taliban took power of Kabul in 1996 and served as de facto rulers of the country until the end of 2001 when they fled the city, almost three months after the start of Operation Enduring Freedom. By then, arms trafficking and smuggling were widespread, and the only domestically produced exports were narcotics and some timber and gemstones.
The promises made by President Bush in April 2002 to help rebuild Afghanistan in the tradition of the Marshall Plan created high expectations among the Afghan population after the rout of the Taliban and the Bonn Agreement of December 2001. But despite costly international efforts, Afghanistan has relapsed into conflict and become one of the most aid-dependent countries in the world. The failure of peace negotiations with the Taliban, the upcoming presidential elections in April 2014, and the impending complete withdrawal of U.S. and NATO combat troops by the end of this year have contributed to uncertainty and instability in the country. Meanwhile, the population has grown to 33 million (from around 23 million in 2002), and the economy remains highly dependent on drugs, imports, and aid.
Afghanistan is not unique, of course. The success rate of peace transitions in countries torn by civil war since the end of the Cold War is dismal: roughly half the countries that embarked in a multi-pronged transition to peace involving security, political, social, and economic reconstruction—either through negotiated agreements or military intervention—have reverted to conflict within a few years. Of the half that managed to maintain peace, a large majority ended up highly dependent on foreign aid. What can the history of the last two decades teach us about how to improve international assistance to Afghanistan and to other countries coming out of conflict in the Middle East and North Africa?
One thing that recent history teaches us is that, because economic reconstruction takes place amid the multifaceted transition to peace, it is fundamentally different from development in countries not affected by war. Economic reconstruction has proved particularly challenging because Afghanistan must reactivate the economy while moving away from the economics of war—that is, the underground economy of illicit activities (drug production and trafficking, smuggling, arms dealing, extortion,etc) that thrives in situations of war and makes the establishment of governance and the rule of law extremely difficult. To succeed, economic reconstruction requires peace-building activities like the reintegration of former combatants, returnees, and other conflict-affected groups into productive activities, as well as rehabilitation of services and infrastructure. As John Maynard Keynes argued at the end of World War I, the economic consequences of building peace are high. The imperative of peace consolidation competes with the conventional imperative of development, putting tremendous pressure on policy decisions, especially budgetary allocations. Because there cannot be economic stability and long-term development without peace, it follows that, to avoid a relapse into conflict, peace should prevail as the main objective at all times—even if it delays the development objectives.
Another thing we learned from recent history is that economic policymaking in war-torn countries at low levels of development requires a simple and flexible macroeconomic framework. But the fiscal and monetary framework established in Afghanistan early on by the Minister of Finance—supported by only a few other cabinet members and adopted by decree since there was no legislative body until the parliamentary elections of 2005—was neither simple nor flexible. The independence of the central bank and the “no-overdraft” rule for budget financing adopted—policy components that make sense for countries in the normal process of development—deprived the government of any flexibility to provide subsidies or other incentives necessary for carrying out peace-related activities. At the same time, a simpler framework would have required less foreign expertise (reducing the distortions created by such presence) and restricted the opportunities for mismanagement and corruption among uneducated and low-paid civil servants.
The restrictive monetary and fiscal framework—in conjunction with a dogmatic belief of the economic authorities and their foreign supporters in trade liberalization, privatization, and private sector–led development, severely restricted the role of the state in reactivating investment and employment. Moreover, donors channeled about 80 percent of their aid through NGOs or U.N. agencies rather than through the government budget and according to government priorities. As an example, the Spinzar cotton company, by then a state-owned enterprise, could have been part of a government project to reactivate the cotton sector but was put up for privatization instead.
Not every aspect of the macroeconomic framework failed. The exchange rate policy worked well. The Minister of Finance opted to introduce new afghani bills issued by the central bank (Da Afghanistan Bank) rather than adopt the dollar or another foreign currency as the International Monetary Fund recommended and as other countries emerging from war often do to help stabilize their economies. In a currency exchange supported by the U.S. Treasury that began in October 2002 and was completed in only four months, the afghani became an important symbol of sovereignty and unity, restoring confidence in the domestic currency.
But a stable currency was not enough to reactivate production. Perhaps the most serious mistake was the neglect of the rural sector—on which roughly 75 to 80 percent of the Afghan population depends. Efforts to move the economy directly into higher productivity through commercial agriculture were misguided since it takes time to build infrastructure. Instead, the government should have used aid to provide subsidies and price support mechanisms to promote subsistence agriculture. Such measures would have improved the livelihoods of the large majority and given them a stake, however small, in the peace process.
(Cont'd)