Americans are not alone in worrying that their
economic futures are headed in the wrong direction. Afghans, too, fear that the
next several years will bring a business tailspin that will see recent
gains eked out by small and medium companies dissolve amid security woes and a
sharp pullback in international largesse and, of course, foreign forces.
The "light of a new day" may be "on the horizon," as President Obama announced this May from Bagram Air Base, but Afghan entrepreneurs want to make sure their start-ups survive the changes that will accompany whatever comes next. This Thursday 50 such business-owners, 12 women among them, will gather at an investment conference in New Delhi hosted by the Confederation of Indian Industries with support from the Confederation of Women Entrepreneurs in India (CWEI).
The goal is to promote private sector investment in Afghan firms that will increasingly be seen as growth anchors for their country going forward. Companies descending on India this week in search of dollars range from big mining entities to smaller but growing entities including software, carpet-making, and media ventures. Outside Afghanistan few may think of the war-plagued nation as a small-business or start-up hub, but the resourcefulness of the dogged entrepreneurs I have covered these past seven years matches that of any I have interviewed in other countries, rich or poor. Afghan businessmen and women will need every bit of this determination as they confront the uncertainty of the coming years. And it is in America's and NATO's interests that they succeed.
As President Obama noted at Bagram, "Americans are tired of war," and the military intervention in Afghanistan has plunged to new depths of unpopularity in the latest public opinion polls. But economic development is critical to promoting stability and U.S. security interests, and it is essential to making the President's laudable idea of bringing a "responsible end" to America's longest war more than just empty words. Research shows that negative economic shocks of five percent can increase the risk of a civil war by 50 percent in fragile environments . Bolstering entrepreneurs, particularly those running small- and medium-size enterprises, is part of fostering lasting growth that is in both Afghanistan and America's best interest.
Despite remaining on the list of the world's poorest nations, Afghanistan has logged economic successes and macroeconomic stability on which to build. The country's GDP has more than tripled in the last decade, averaging around nine percent a year, with notable gains in infrastructure, telecommunications, and financial and business services. The Ministry of Communications recently began awarding 3G licenses to cellular phone companies and internet usage is expected to climb as technology improves and prices drop. Mobile phone penetration has leapt from less than one percent in 2001 to well above 60 percent today.
And business growth has not been limited to large
firms. Small companies have cropped up across sectors, creating
desperately needed jobs in a country whose unemployment rate is estimated
at well above forty
percent. The non-governmental organization Building Markets,
which ran a business matchmaking service that helped Afghan firms learn of and
apply for international contracts, counted 3,400 companies in its business
database in 2008. By 2012 that number had climbed to 8,300, with nearly
300 owned by women. According to the World Bank's
"Doing Business" report, Afghanistan ranks 30th among 183 economies
when it comes to the ease of starting a business, requiring four procedures and
seven days to register a firm. Training programs such as the
International Finance Corporation's "Business Edge," Goldman Sachs' "10,000
Women," and Bpeace's "Fast Runners" now work with entrepreneurs seeking
management and marketing training. And Afghan export promotion officials
proudly point to recent wins marketing their carpets and dried fruits and nuts
to consumers in Europe and the Middle East.
Yet bad news and economic question marks threaten to swamp the small steps forward. In 2010, Afghanistan's economy received nearly the same amount in foreign aid as it counted in GDP, and the assistance tsunami, often routed around the rickety central government rather than through it, has hardly helped to bolster the country's already weak institutions. Graft remains rampant: Afghanistan shared the next-to-last spot with Myanmar in Transparency International's 2011 "Corruption Perceptions Index." Meanwhile, the trade deficit looks to top $6 billion and fiscal health remains shaky at best, with estimates suggesting government revenues will cover only 60 percent of the Afghan operating budget in 2013.
President Obama pledged in the Strategic Partnership Agreement he signed with Afghanistan's President Hamid Karzai that the United States "shall help strengthen Afghanistan's economic foundation and support sustainable development." This promise was not made simply because America is a benevolent power, but because an economically stable and increasingly prosperous Afghanistan connected to the world is good for the United States. It will soon be up to Congress to decide how much continued economic aid and development assistance to offer Afghanistan, and the temptation will be great to follow the Iraq example of ever-smaller requests met by even smaller authorizations. But shoving Afghanistan off the economic edge would be both short-sighted and counter-productive. As the World Bank noted recently, "international experience and Afghanistan's own history show that an abrupt cutoff in aid can lead to fiscal crisis, loss of control over the security sector, collapse of political authority, and possibly civil war."
America may be drawing down troops and withdrawing militarily from Afghanistan, but the Afghan entrepreneurs gathering this week in India remain worthy of U.S. support and investment. They are allies in the American quest to bring "sustainable stability" to a country and a region that desperately need it.
Gayle Tzemach Lemmon is a fellow at the Council on Foreign Relations and the author of The Dressmaker of Khair Khana.
Last week, Afghan president Hamid Karzai surprised U.S. and coalition officials by announcing the creation of a special tribunal and prosecutor to seek redress for the almost two year old Kabul Bank scandal. And earlier this month, the Afghan House of Representatives rejected the proposed federal budget in part because of the allocation of U.S. $80 million to Kabul Bank. Already, the Central Bank has poured $450 million into the beleaguered bank after it lost almost a billion dollars in the 2010 financial scandal. This money has been traced to interest-free loans given to Mahmoud Karzai, brother of President Karzai, to buy shares in the bank itself, and also to former CEO Khalil Frozi, who used bank funds to finance the President's 2009 election campaign.
Though Afghan authorities arrested Frozi and Kabul Bank founder Sherkhan Farnood approximately nine months after the crisis, it was recently reported that neither can be found in their jail cells, and both are collecting rent from tenants occupying Dubai villas bought with illegally obtained loans. A year after the debacle, only 10% of the missing money had been recovered.
Kabul Bank is more than a symbol of the pervasive corruption plaguing Afghanistan's government, it is the largest private financial institution in the country and an integral piece of infrastructure that has direct consequences for the country's security and financial stability. If Afghanistan is to have any chance at a legitimate economy and stable future, it will need an efficient and trustworthy financial system.
In particular, Kabul Bank is a conduit for government payments to Afghan soldiers, police, and teachers. The United States aims to reduce American troop presence by 2013 and shift security duties to the Afghan military and police force. Absolutely vital to a "successful" drawdown is the establishment of a reliable and transparent payment system. The rampant corruption plaguing Kabul Bank shows that traditional banking systems may not be suitable for the Afghan economy at all. However, the United States Agency for International Development (USAID) is working with Afghan companies to provide an alternate solution - mobile money.
In the past year, mobile phone-based money transfers have taken off in Afghanistan. Three out of the four largest mobile network operators now offer mobile money services, two of which were launched in the last six months. Roshan, the telecommunication company that deployed the country's first mobile money product in 2008, M-Paisa ("paisa" meaning money in Dari), has grown to 1.2 million registered customers that can receive salaries, pay bills, and make domestic financial transactions over their mobile phones. Last month, the company announced a partnership with Western Union to allow these customers to receive transfers from around the world directly to their mobile phones.
USAID has made mobile money central to Afghanistan's financial development. According to USAID, while less than five percent of Afghans have access to a bank account, more than 60 percent of the population has access to a mobile phone. To accelerate the pace of its development, USAID has allocated more than $2 million to mobile network operators as part of its Mobile Money Innovation Grant Fund, and spearheaded the forming of the Afghan Mobile Money Operators Association. Currently, there are five USAID mobile phone payment projects underway, which range from the payments of teacher stipends to police force salaries, and 14 more mobile transfer projects in planning, according to a USAID official who spoke off-the-record. With the scaling of mobile money, an estimated $60 million annually could be retrieved that had been lost to corruption and fees.
Although promising, mobile money is not entirely immune to the harsh realities on the ground. In 2009, the Afghan government worked with Roshan to pilot a mobile phone-based salary payment system to 54 officers of the Afghan National Police Force who had previously received cash from their superiors. When the policemen took their SIM cards to the local M-Paisa offices to directly collect their entire salaries, they thought they had received a 36 percent raise, while what they were really seeing was a full salary untouched by crooked officials, according to a U.S. Air Force Colonel overseeing the project.
However, a confidential State Department cable released by Wikileaks revealed that a corrupt Afghan commander, frustrated that he was no longer able to skim off the top, fraudulently registered phones and collected his officers' salaries. In a separate incident, the same commander ordered subordinates to handover their SIM cards and attempted to retrieve the salaries himself. Though the local M-Paisa employee refused to hand over the salaries to the commander, he was forced to go into hiding for fear of retribution. Despite direct reports to the Ministry of Interior and pressure from the U.S. Government, no one has been prosecuted.
The ability to efficiently pay Afghanistan's security apparatus is critical to any post-war strategy, especially in the face of a U.S. drawdown and the ousting of private security firms. It is especially important for USAID efforts because $899 million worth of development programs they administer are in jeopardy without a functioning security force, according to a recent letter from Steven Trent, the acting Special Inspector General for Afghanistan Reconstruction. Though USAID says this claim is exaggerated, it still highlights the significance of dealing with the systemic corruption within Afghanistan's financial system and in particular Kabul Bank, given its central role in government payments to soldiers.
Despite the importance of anti-corruption measures to security efforts, a clear disconnect between Afghan and U.S. officials gives reason to believe that Karzai's recent announcement to prosecute those involved in the Kabul Bank crisis will not amount to much. As Afghans rushed to withdraw $800 million in deposits in the two weeks following the scandal's breaking, Mahmoud Karzai insisted the bank was stable and not in danger of collapse while simultaneously asking the U.S. Treasury for monetary help in averting a crisis. When the U.S. refused a direct injection of capital, President Karzai publicly blamed the collapse on a lack of foreign technical support rather than the illegal activities of the bank's leadership. A few months later, he banned U.S. government advisers from working with the country's central bank, as they attempted to assist Afghan officials in regulating the financial system and tracking foreign aid, both of which were conditions for releasing $1.8 billion of donor funds.
While the ideal situation for USAID is an end to corruption's hold on financial infrastructure, the reality is that they are working within a delicate political climate. According to a NYT/CBS News poll released this month, almost 70% of American respondents want an end to U.S. military efforts in Afghanistan. With this dramatic fall in American public opinion and election year politics putting the focus on a swift withdrawal of U.S. troops and transition to Afghan forces, the Obama administration is loath to engage in a battle with the Karzai government over corruption that is almost guaranteed to fail. Yet there are still ways for USAID to recognize the restraints of corruption and push forward; one of the promising solutions involves integrating mobile money to build a stronger financial system and more transparent post-transition payment system.
After all, the reality is also this: the results of development projects will have significant bearing on America's legacy in a country where it has spent over 10 years, half a trillion dollars, and countless lives. USAID's success, and ultimately that of the entire U.S. mission in Afghanistan, will depend on our ability to acknowledge that "success" is not an all or nothing proposition. Corruption exists but that doesn't mean that the development community cannot adapt to work within its confinements.
Anjana Ravi is a Research Associate with the New America Foundation's Global Assets Project, where Eric Tyler is a Program Associate.
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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.
Javid Ahmad, a native of Kabul, is Program Coordinator with the Asia Program of the German Marshall Fund of the United States in Washington, DC. Louise Langeby is a Program Associate with the German Marshall Fund of the United States in Brussels. The views reflected here are their own.
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Editor's note: This is Part II of a two-part seriesfocusing on aid provision in conflict zones. The first installment can be foundhere.
Ehsan Entezar's Afghanistan101, dryly academic though its language tends to be, is nevertheless anilluminating guide to the Afghanistantoday. As a scholar born, raised, and educated in Afghanistanbefore obtaining his doctorate in the UnitedStates, Entezar lends the insight of a native son inilluminating the realities of Afghan culture and society, and by doing so,providing some sharp clues as to the likely efficacy of the aid programs thatare allegedly "building" Afghanistan.
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By Peter Bergen and Sameer Lalwani
The top American commander in Afghanistan, Gen. Stanley A. McChrystal, is right to warn that efforts to rebuild that country depend on winning the “struggle to gain the support of the people.” And few issues do more to stoke the resentment of ordinary Afghans than the tens of billions of dollars of foreign aid from which they have seen little or no benefit. They see legions of Westerners sitting in the backs of S.U.V.’s clogging the streets of Kabul and ask themselves what exactly those foreigners have done to improve their daily lives.
Eight years after the fall of the Taliban, Afghanistan remains one of the poorest countries in the world. And by some estimates 40 percent of international aid leaves the Afghan economy as quickly as it comes in -- going to pay Western security contractors, maintain back offices in the West and pay Western-style salaries, benefits and vacations -- while as little as 20 percent of that aid reaches its intended recipients. Compounding this problem, the salaries of imported civilian workers are orders of magnitude higher than those of their Afghan peers. Some employees of the United States Agency for International Development, for instance, earn more than 300 times the monthly pay of an Afghan teacher.
Yes, when it comes to large-scale projects like building roads and hospitals, Western contractors have to take the lead because Afghan companies are years away from having enough experience. But there is a way for the Afghan government to recoup some of the billions of dollars of aid flowing to those contractors and being recycled back to the West: tax it.
Foreign contractors and corporations working in Afghanistan do not pay income taxes there; and if they do pay taxes at all, it is to their home governments. America and its European allies could easily give up claims on taxes from their citizens working in Afghanistan and instead condition contracts so that the workers and the companies that employ them pay Afghan taxes. The loss in tax revenue suffered by Western countries would be trivial compared to the good will this would engender among Afghans. Right now the government’s tax revenues total a paltry $300 million. Taxing foreign technical assistance alone -- an estimated $1.6 billion annually -- could double this revenue.
And this would require little sacrifice from the 70,000 or so foreigners working in Afghanistan. Afghan taxes are quite low, with the highest bracket set at 20 percent, while technical advisers from Western development agencies can earn $9,000 to $22,000 per month and private contractors can earn even more. With Western unemployment rates high, it is unlikely that having to pay a relatively paltry amount of tax to Afghanistan would deter contractors or corporations from taking on lucrative work there.
To read the rest, visit the New York Times, where this was originally published.
Peter Bergen is a senior fellow at the New America Foundation. Sameer Lalwani is a research fellow there.
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