Afghanistan's Misguided Economy
BGlobe, 28 Jan 2014
Part 2 of 2
The neglect of the rural sector drove production away from licit agriculture to drugs. Without other viable options, farmers increasingly turned to growing poppies. They got support from traders who provided credit and technical advice for future production, bought the opium in situ, and shared the risks. Drug production took the best available land, replacing food crops and necessitating large food imports. At the same time, drug production financed the insurgency, created insecurity, and promoted corruption among government officials and other stakeholders.
While this narrative may be familiar, few have looked closely at the way these developments have impacted Afghanistan’s economy today. In my forthcoming book Guilty Party: The International Community in Afghanistan I use original data from a variety of sources—the IMF, OECD, U.N. system (particularly UNCTAD, UNDP, UNODC), and several U.S. and Afghan government sources and extensive interviews—to develop a comprehensive picture of the Afghan economy. A few figures illustrate the magnitude of the problem.
Of the $650 billion appropriated by Congress for the war, as little as 10 percent may have been spent in Afghanistan itself. Although difficult to estimate with any degree of certainty, as much as 80-90 percent was probably spent in the United States: on war equipment and other procurement (including food) for our troops; on wages and compensation to military and civilian staff; on salaries and fees for our own consultants, contractors and law firms as well as for security companies that protect our people in Afghanistan; and on other imports, including food for the local population.
Of the $70 billion disbursed for Afghan reconstruction, over 60 percent—an amount equal to one third of Afghan GDP during this period—was used to establish and train the Afghan security forces. This allocation has created a security force that is fiscally unsustainable. Of the less than 40 percent allocated to non-security expenditures—including for governance and development, for humanitarian assistance, and for counter-narcotics purposes—the large majority benefited a small elite in the urban areas or has been wasted trying to rebuild infrastructure and other projects in insecure areas.
Despite the government’s remarkable efforts to bring in taxes and customs revenues in border provinces, domestic revenue increased only to 11 percent of GDP in 2012 from slightly over 3 percent in 2002. As a result, donors still cover over 60 percent of the national budget, not to mention off-budget development expenditure. An alternative way to highlight the large aid dependency is to note that donors finance most of the huge trade deficit—the excess of imports over exports—which amounts to over 30 percent of GDP. Misguided agricultural policies contributed to this deficit. Fruit exports, for example, fell to less than half, whereas food imports almost doubled from 2008 to 2011. While the country imported wheat, the area under cultivation dropped. Afghanistan also imported chicken meat, beef, rice, vegetable oil, tea, and even spices, products that could be easily produced within the country.
Despite the rapid economic growth—9 percent a year on average since 2002—that has led to frequent congratulatory remarks from different stakeholders, and despite the huge amount of aid the country has received relative to its size—75 percent of GDP on average since 2002 and 90 percent from 2009 to 2011 (the last year for which there is full data)—the Afghan economy remains small: it amounted to slightly over $20 billion in 2013. While income per capita in real terms almost tripled since 2002 to about $650 a year, it remains among the lowest in the world. Furthermore, construction and services were the most dynamic sectors. Since these sectors were geared to the large presence of foreign troops and civilian aid workers, their growth is not sustainable going forward.
Even the huge investment in security, especially after the 2009 surge, hasn’t paid off. Afghanistan is ranked as the most violent country in the 2013 Global Peace Index and in seventh place in the Failed States Index. Afghanistan is also ranked as the most corrupt country in the world in the Corruption Perception Index, together with North Korea and Somalia. In 2013, the Anti-Money Laundering Index ranks Afghanistan as the country most at risk for money laundering and terrorist activity, out of 150 countries in the index, displacing Iran from the first place.
Neither has the country’s position in the Human Development Index improved in relation to other countries. In 2012 Afghanistan was still ranked at the bottom 6 percent of the index, together with countries such as Mali where war was still raging. While many schools have been built, and attendance has increased significantly for both boys and girls, literacy remains below 30 percent. Basic health services coverage has increased to almost 60 percent of the population, but infant and maternal mortality remain among the largest in the world and life expectancy is still below 50 years of age.
Expectations for large foreign direct investment in mining and other sectors were also shattered. While these flows increased rapidly up to 2005 (mostly in construction and services), they have been anemic (averaging much less than one percent of GDP) since 2007 when security deteriorated, and fell to only half percent on average in 2011–2012.
The international community also failed to support Afghanistan in controlling the drug sector and providing viable livelihood alternatives for farmers. Opium production averaged 5,200 metric tons per year from 2002 to 2013—twice the average produced during the six years of Taliban rule when production was legal. Since 2002, Afghanistan produced on average 85 percent of global opium production.
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The picture that emerges from these data is clear. Donor policy has failed to support a simple, well-thought, and integrated economic reconstruction strategy for Afghanistan and resulted in ineffective, fragmented, and wasteful aid. It is important to reassess the type of economic strategy that donors will support going forward and to shift policy to both minimize the high risk that Afghanistan faces of relapsing into civil war and the extraordinary aid dependency that afflicts the country.
In order to reduce the risks associated with investing in Afghanistan—which has led to the collapse of foreign direct investment since 2007—the government must create a system that benefits local communities and foreign investors alike. By restricting investment incentives exclusively to foreigners and domestic elites, the government has not only increased the potential for conflict with local communities but also neglected the vast potential of small farmers and micro-entrepreneurs who can contribute to steady growth and food security.
It was in this context that I have proposed the creation of “Reconstruction Zones” (see Rebuilding War-Torn States, Oxford University Press 2008). Reconstruction zones would consist of two distinct but linked areas to ensure synergies between them—an export-oriented zone and a local-production zone. In the export zones, the government would provide tax incentives, basic infrastructure and services, security, and a stable legal and regulatory framework for foreign and large domestic investors to produce exclusively for export. In exchange, investors would commit to train local workers, create employment by purchasing local inputs and services, improve corporate practices and local providers’ standards, facilitate the transfer of innovative and productivity-enhancing technologies, and establish links with local technical schools and universities. Export zones could produce commercial agriculture for countries in the Gulf, exploit natural resources, or assemble low-skilled manufacturing goods.
The local zones would focus on integrated rural development of agricultural and livestock products for the domestic market to boost food supplies and reduce Afghanistan’s exorbitant dependence on imports. The local zones would complement the government’s National Solidarity Program—a program that has succeeded in improving local governance but has lacked a mandate for income-generating activities. By providing a level playing field for all Afghans—men and women—in terms of security, social services, infrastructure, credit, and inputs (such as seeds, fertilizers, and agricultural machinery), the local zones would also help to bolster gender equality in the rural areas where women’s productivity is low and they have seen little progress in terms of gender rights.
These and other ideas for sustainable economic reconstruction—including direct cash payments to women for improving human development of their families, direct purchase agreements with global producers that support local farmers, and the creation of a development bank to finance activities in the rural sector—must be broadly debated if Afghanistan is ever to move into a path of peace, stability, and prosperity. As U.S. and NATO combat troops withdraw, we can continue to ignore the negative impact of our actions only at our own peril and at the peril of the Afghan people.
http://bostonreview.net/world/gracia...guided-economy