The South Asia Channel

How to Jump Start the Afghan Economy

There is a vibrant domestic economy in Afghanistan. It has rapid growth, ample access to capital, reliable entry to the market, sophisticated mechanisms for international financial transactions, and established security and communication platforms. Unfortunately, it is Afghanistan's "parallel economy," which operates outside the government's control and provides the bulk of funding for anti-democratic forces.

While the world waits for the results of Afghanistan's historic election, the leading presidential candidates are undoubtedly thinking about the next transition facing the country -- the economic one. The new president will be tasked with the difficult, but essential, challenge of moving Afghanistan from an aid-dependent war economy to one that is capable of supporting its own government and people and, in doing so, breaking the illicit lifeline provided by the parallel economy.

President Hamid Karzai has been credited with making great strides in Afghanistan's economy. Indeed, GDP has expanded at an average annual rate of 9 percent from 2002 to 2012, making it one of the fastest growing in the world. However, a large majority of this is due to foreign aid (both military and development) and GDP has fallen from 14.4 percent in 2012 to a projected 3.5 percent in 2014. Furthermore, domestic revenue as a share of GDP is lower in Afghanistan than almost anywhere in the world. While public expenditures are projected to reach 34.5 percent of GDP in 2014, domestic revenues are estimated to hover at 10.8 percent, leaving a financing gap of 23.7 percent.

Compare this to the thriving parallel economy, which includes narcotics, illegal mining, logging, trade in sub-standard fuel, arms smuggling, human trafficking, kidnapping, and protection rackets. This illicit trade does not suffer from the same problems as the licit economy, such as shortfalls in foreign trade, weakened customs revenue, or weak tax administration. It is in fact highly efficient in these areas. Indeed, it succeeds because it is inclusive in nature, offering everyone a chance to get a piece of the proverbial pie, while thriving on bribery, corruption, and violence, preventing the state from establishing its writ.

As Afghanistan concludes the "process of transition" and enters the "Transformation Decade" (a phrase coined at the second Bonn Conference), the new government must counteract this parallel economy by boosting domestic revenue and tightening monetary policy, all while facing the additional challenges brought by the impending withdrawal of international forces at the end of this year-these include rising security expenditures, the cost of operating and maintaining assets left behind by the international community and the expense of expanding civil service reform amongst others.  So where to start?

The First 100 Days

When the new president and his team take office, they should capitalize on the momentum of popular support and use the first hundred days in office to set their economic priorities. The initiatives outlined below (which are by no means exhaustive) have the multifold objectives of income generation for the public sector and harmonizing relationships with neighbors, as well as reducing funding and disrupting logistical support of the parallel economy and, by extension, the insurgency.

Mining

One of the most talked about opportunities for wealth creation in Afghanistan is mining, which is estimated to be worth between $1 and $3 trillion. But who will reap the benefits? The few families who have enough influence to sidestep the bureaucracy?  Foreign companies who will extradite profits? As noted recently, even the expected contracts with China and India appear to be in jeopardy.

Given the scale of investment required, it may be best to follow the precedent set by former Defense Minister Ahmad Shah Masood and nationalize the mining industry. Not only can this contribute significantly towards sustaining the government, but it will also strengthen the writ of the administration by removing the role of warlords and the Taliban in this lucrative industry. As it stands now, illegal mining is a known contributor to funding the insurgency.

Fuel

Any visitor to Kabul notices the price variation and lack of uniformity in the petrol stations throughout the city -- indeed the entire country. Looking to maximize profits, private pump owners will often use sub-standard fuel. Although this may be only a small component of the illegal fuel trade, it still contributes to the parallel economy and also angers neighbors like Iran, who have tried to curb this illegal trade.

By only allowing government-owned pumps, Afghanistan can ensure consistency in the pricing and quality of fuel, as well as generate income for the government. It has the further benefit of enhancing formal trade with neighbors, while denying profit to the parallel economy and its beneficiaries.

Afghan National Army

As the Afghan National Army will be the largest strain on the national exchequer, it would be prudent to develop some sustainability measures to offset its cost. Taking a cue from neighboring Pakistan, the army could look to industries like trucking and logistics as a source of income. It should leverage and capitalize on its countrywide network to provide depots and secure transportation. The first customers would be NATO's International Security Assistance Force and fuel companies, but could later extend to the private sector.

Coupled with a robust trucking policy, this will set a precedent and open up the market for the private sector. As Afghanistan is already a signatory to the TIR Convention, it further facilitates regional economic and security pacts with its neighbors that can help the country reclaim its position as a transit hub. Plus, with more formal transportation companies, the government would be in a stronger position to disrupt logistics lines of the parallel economy and the insurgency.

Other opportunities for the army include construction and civil works organizations (not dissimilar to Pakistan's Frontier Works Organization) to support public infrastructure. Given the growth in livestock production, they can also look at cattle and dairy farming not as only a source of income, but as a way of providing food for their troops. Perhaps these ventures can also be an opportunity to reestablish the estranged relationship with the Pakistani army as they share experiences and lessons learned from these tried and true sustainability initiatives.

Private Sector and Domestic Economy

In order to even the playing field and remove the monopoly from the few families that dominate private enterprise, a number of steps can be taken by the government to boost small and medium enterprises, such as formulating policy that encourages access to capital for first-time entrepreneurs.

With a young, growing population driving domestic consumption, there's an opportunity to move from importing daily essentials to becoming self-sufficient. On the agricultural side, although about 6 percent of land is irrigated and growth is close to capacity, there is potential in modernizing farming practices, for example drip irrigation, tunnel farming, solar pumps, seed production, and storage silos.

In order to address the flight of capital, incentivize foreign remittances and encourage repatriation of funds, certain sectors or industries could be earmarked for expatriate Afghans. Examples of this could be low cost housing or rural electrification. For the local elites and foreign investors, larger industries, such as steel, cement, textiles, sugar and fertilizer should be incentivized. Plus, further economic incentives, tax holidays, and rebates should be extended to those companies that plan to provide employment or infrastructure in remote areas.

The government should also leverage its fleeting position in the spotlight after the election to secure preferential trade policies with the international community that will enhance domestic growth. For example, the UAE and Saudi Arabia can be potential markets for halal meat, fodder, olives, pomegranates, etc.

The Economic Imperative

Will initiatives like these be a priority for the new president? 

In a series of pre-election debates held by Tolo News, it was interesting to note that only one candidate appeared for the final debate on "Economy and Social Development." Let's hope that this is not an indication of where priorities lie.

Afghanistan's security situation can never be adequately addressed unless the funding lifeline for anti-state groups is cut off. Relationships with neighbors will remain volatile until there is true economic interdependence. Plus, with 70 percent of the population under 25 and more than 400,000 youth entering the labor market each year, they will be asking if there will be a place for them in the workforce. The parallel economy certainly has the ability to absorb them -- it's up to the new president to make sure the real economy does, too.  

Faiysal AliKhan is a Carnegie Fellow at the New America Foundation. Follow him on Twitter: @FaiysalAliKhan

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