Can The Afghan Economy Be Saved?

Courtesy of Foreign Policy, a look at Afghanistan’s economy and economic future.  As the article notes:

Whipsawed by a long-drawn U.S.-led military operation and a decade of erratic international economic assistance, Afghanistan is in shambles.  With economic development always considered secondary to security concerns, little has been done in the past decade to establish a sustainable Afghan economy. While the international community has tried to generate a steady flow of aid, the Afghan government is still unable to cater to the population’s basic needs. Moreover, the little economy we have seen evolve in Afghanistan since 2001 is predominantly based on the international security presence. The bulk of Afghanistan’s gross domestic product (GDP) stems from international aid, and the impending 2014 deadline for the withdrawal of international combat troops will be accompanied by a parallel reduction in aid money. Thus, as the tide of war recedes, a large chunk of the economy will also disappear, posing an increasing threat to stability. The country’s current economic trajectory beyond 2014 is fraught with corruption and uncertainty.  However, despite the dire situation, Afghanistan’s economic transition has received only minor policy attention, with the focus remaining on the ongoing security transition. Thus the question remains: How will Afghanistan sustain its economy beyond 2014?

The decrease in foreign assistance is like to cause today’s economic bubble to burst, potentially plunging the country into an economic recession. And if the security environment further deteriorates, the country could face full economic collapse.  A financing gap of 25 percent of GDP by 2022 due to increased military and non-military spending by the Afghan government further puts Afghanistan’s economic stability at risk. While the international donor community can help to prevent a total collapse of the economy by decreasing aid gradually, the key to a prosperous Afghanistan is to invest in the long-term economic advantages the country has to offer.

One such advantage may lie in Afghanistan’s geographic location.  The New Silk Road strategy, often promoted by the United States, aims at linking Afghanistan with its South and Central Asian neighbors, transforming the country into a nucleus for regional trade. Focus should also be placed on rebuilding the oil and gas pipeline running from Turkmenistan through Afghanistan and on to Pakistan and India.  If done right, these initiatives might enable Afghanistan to attract increased foreign investment, connect the country to foreign markets, and promote growth, gradually reducing its dependence on foreign aid. However, the key to such a scenario lies in Afghanistan’s relations with regional players, in particular Pakistan. Given its location, Pakistan is expected to serve as the main transit route for Afghan exports and access to the port cities of Gwadar and Karachi will remain crucial to Afghanistan’s development. However, a volatile relationship with its eastern neighbor could mean a precarious dependency for Afghanistan.

Another potential economic trigger may be found in Afghanistan’s untapped mineral reserves, ostensibly valued in the trillions of dollars. Based on cautiously optimistic assumptions by the World Bank, the iron ore project at Hajigak and copper mine at Aynak could deliver $2 to $3 billion to the extractive industry, with each deposit potentially generating over half a billion dollars in government revenue in just a few years. The mining industry may appear at first glance to be a potential panacea for the Afghan economy, but it will take decades before the country can reap the benefits of such a project. The Afghan mineral reserves require significant investments in infrastructure, and more importantly, effective and accountable governance that can efficiently and transparently manage revenues. Furthermore, in 2010, of the total $17 billion government expenditure, only $1.9 billion of the spending were drawn from Afghanistan’s own sources of revenue; the rest: foreign assistance. Hence, besides the projected tax revenues and some foreign aid, even if mineral resources did manage to generate the estimated revenue, the Afghan budget would still face an annual deficit of $7 billion.

Rebuilding after more than a decade of conflict must also involve encouraging growth in Afghanistan’s nascent private sector, a sector that has been stifled to some degree by the international donor presence. In a “donor drunk” economy, there are a large number of foreign, private NGOs, which dominate the private sector and make entry into it difficult for Afghan organizations. Although some of these private entities are effective development organizations at the grassroots level, many carry a negative perception among the Afghan people, who see the ubiquitous “briefcase NGOs” as money-making mechanisms for the people involved. Meanwhile, the influx of foreign money and employers has also artificially inflated labor costs for low-skilled workers over the past years, and has made Afghanistan an attractive venue for external laborers from neighboring countries such as Pakistan. However, as the flow of aid dwindles, those who have been paid hefty salaries over much of the past decade for low-skilled work for foreign entities may now prove more affordable to Afghan businesses, and will also open up more jobs for Afghan workers. While the initial transition phase from a military focused economy to a regular one will be difficult, it will leave room for a more long-term, sustainable economy to develop.

Regardless of Afghanistan’s many potential sources of revenue, any real progress will be limited without the long-term support of the international community. While the West’s future commitment to Afghanistan is vague at best, the increasing number of strategic partnerships with key allies signals a willingness by certain powers to remain involved in shaping Afghanistan’s future beyond 2014. In the past week, Afghanistan has signed strategic partnership agreements with key European allies such as the UK, France, and Italy that ensure an enduring commitment and cooperation with Afghanistan in key areas, including economy, security, and governance. While only time will tell if the West really will stay committed to Afghanistan, this week’s agreements are at least a step in the right direction.

Similarly, any future foreign aid funneled by the West to the Afghan government is effectively futile without properly addressing the raging corruption and lack of transparency and accountability in public finances. As the world’s second most corrupt nation, any failure by the West and the Afghan government in tackling this menace in the so-called “transformation decade” would mean repeating and wasting yet another inefficient ten years of international assistance.

Today, as U.S. and NATO troops prepare to assume a lighter military presence, many Afghans fear a serious economic downturn when foreign aid and spending recede, leaving Afghanistan with little or nothing to fall back on. It is still uncertain if and how the Afghan government will function after 2014 without an open-ended $8 to $10 billion yearly commitment from the United States and Europe. However, responsibility for a stable and secure Afghanistan ultimately rests with the Afghans themselves, and there is still a sense of optimism among the Afghan people about the future of their country. The Afghan government, for its part, must foster transparency and accountability in public finances drawn from foreign aid, and work to cut leaks that enable corruption. If these reforms and the myriad of other challenges go unaddressed, the hard work and accomplishments of the past decade could easily unravel and ultimately lead to an even more troubled Afghanistan than we have seen in the past ten years.

This entry was posted on Friday, February 3rd, 2012 at 12:08 pm and is filed under Afghanistan.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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