US' Afghan market dreams faltering

Saturday, October 25, 2008

By Aunohita Mojumdar in Kabul

A dormant industrial park cordoned off by a wall stands on the main highway outside the northern Afghan city of Mazar e Sharif.
Funded by USAID, the US government's development aid arm, the park was the representation of hopes for a flourishing market-led economy in Afghanistan, an economic policy that was supposed to put the war-torn country back on its feet.

But it lies strangely silent, lacking the hum of machinery and noise of human activity. A non-starter in the absence of basic requirements such as power and water.

In a reconstruction effort led by Western countries and dominated by the US through its sheer political clout and large financial contribution, Afghanistan adopted the free-market approach with little debate, less research and none of the existing conditions that have presaged a shift to such an economy in western countries.

The ideology was enshrined within the 2002 National Development Framework, but there were "no discussions with civil society or political parties" says Mudasser Hussain Siddiqui, a policy research manager with Action Aid in Afghanistan.

"It was formulated by citizens or Afghans residing in the US and led by the World Bank," he says.

More recently, the approach was enshrined as one of the defining tenets of the vision for Afghanistan as "a society of hope and prosperity based on a strong private sector-led market economy" in what is known as Afghanistan's National Development Strategy (ANDS), finalised and adopted at the Paris Conference in June 2008.

Four months later, despite the spectacular collapse of the market in Western countries and an ongoing debate over the pros and cons of the value of the market-led economy in those nations, there is little discussion here in Afghanistan about the approach and what it has delivered.

Endorsing ANDS, Michael Yates, the Afghanistan mission director of USAID, said: "The US government and the broader donor community are committed to helping Afghanistan achieve this important vision."

Reform 'laboratory'

But Bahman Hares, an Afghan working with Action Aid, laments the fact his country has become "a laboratory" for different policies from other countries.

And Haroun Mir and Idrees Rahmani, researchers for the Afghanistan Centre for Research and Policy Studies, argue that ambitious economic reforms were launched without adequate thought and planning.
"International institutions have brought policies studied by foreign experts and imposed them on the government for implementation," they say.
Afghanistan has had to follow these policies in order to get debt relief and access to financial and technical assistance from these institutions.

Yates argues that the telecom sector is a good example of the private-sector model.
Afghanistan's four mobile companies recently surpassed $100 million in combined quarterly revenue and have invested more than $1.3 billion in the economy.

The beneficiaries of this 100 per cent, private-sector led, market-oriented achievement are Afghans, he says.

The investments stay in Afghanistan, the jobs go to Afghans, the taxes paid by the telecoms companies go to the Afghan government – allowing the government to offer greater public services to its people.

The success of Afghanistan's telecoms sector serves as a model to the rest of the economy, and to the world, of what can be achieved with the right policies, he says.

But is the telecom sector a model or an exception?

Deregulation has not automatically translated into growth and the industries to supply even basic goods is almost non-existent.

Lack of competition

A walk around Kabul, one of the most economically active areas of the country, tells its own tale.

Mushrooming houses, shops stocked with goods, the chaos of traffic and throngs of people suggest the hustle and bustle of economic activity.

A second look however reveals a different story. Walk into the shops stocked with goods and a look at the manufacturer's origin will reveal that the goods are imported.Food items are largely sourced from Pakistan and Iran while household goods are largely Chinese.

While few countries in the world are exempt from the threat of cheap imports, Afghanistan's tragedy is that here there are no indigenous competitors, no local industry that can even provide an alternate source of goods and services beyond the subsistence agricultural economy that has always existed.

Despite this, the Afghan government and its international backers follow a low-tariff regime in the name of a free-market economy, even while countries exporting a massive amount of goods into Afghanistan continue to follow protectionist policies and impose tariffs on Afghan carpets, raw hides and plants.

Six years into reconstruction, the promise of a better economic future, stable environment and improved security still remain elusive.

Despite growth figures that are quoted frequently in a bid to prove signs of economic recovery, the benefits of economic growth remain skewed and despite a high rate of growth (13.5 per cent in 2007), food insecurity has increased with 4.5 million people facing severe food shortages, according to the World Food Programme.

According to the WFP, more than half the population, estimated at 24.9 million, live below the poverty line and the 2005 National Risk and Vulnerability Assessment found that around 6.6 million Afghans do not meet their minimum food requirements.
Targeting the poor

Opinion is divided on the reasons for the lack of economic development.
In a recent paper, ACBAR, the umbrella organisation for more than 10 non-governmental organisations, argued that a pilot participatory survey had revealed an urgent need for pro-poor targeted schemes rather than the "trickle down" theory of the market place.

The government, it said, must develop policies and programming that "explicitly contain components and programmes that directly included the poor in targeted initiatives".

For an effective trajectory of poverty reduction, the poor cannot be an add-on category, it said.

Yates, however, argues a strong free-market economy "attracts new businesses, creates jobs and ensures higher demand is met by higher productivity, not higher prices".
Freddy Bob-Jones from the British government's aid arm, DFID, in Afghanistan, also argues in favour of the free-market approach, saying "recent evidence shows the failure of the market economy has been caused primarily by state failure through corruption, lack of policy clarity and good infrastructure".


"The state is standing in the way of the growth of the private sector.
"Growth in the telecom sector shows the potential for commercial success - the government has deregulated in that area and the sector has grown massively."
But some economic analysts feel that the free-market policy does not take into account the very real absence of power, water and roads, which continue to present the biggest stumbling blocks to the growth of indigenous industry, along with the prevailing insecurity.

Power failures
"Unfortunately the debate is among experts from donor countries and international multilateral organisations and does not include Afghan voices" say Haroun Mir and Idrees Rahmani, researchers for Afghanistan Centre for Research and Policy Studies

According to current government statistics, only 20 per cent of the population have access to public power (grid-supplied) "on certain days for a limited number of hours".
On a per capita basis, the electricity generating capacity is "well below what it was in 1978", while on water resources the national development strategy refers to the current "unclear delineation of responsibilities between ministries with regards to the water strategy" adding "co-ordination between water-related institutions remains weak".

While a considerable amount of roads have been built or repaired, they are highly unstable due to the increasing insecurity.

Rahmani and Mir say Afghanistan is far away from meeting other basic free-market prerequisite conditions as well.
"A market-led economy without basic requirements like power, water and roads leaves investors with no incentive to invest," says Action Aid's Siddiqui.

Siddiqui feels some form of protectionism is required to allow the domestic industry to grow as, without that, it is more cost-effective for businessmen to import cheap goods than produce them in Afghanistan.

Jones agrees that "there could be some protection in a neutral way, by creating infrastructure, some limited protection in areas like value-added agriculture" but insists that this has to be limited.

An earlier assessment of the free-market policy by the Afghanistan Research and Evaluation Unit had, however, argued for more, rather than less, state intervention, saying the market on its own would not deliver the wider benefits expected of it.
Asked whether the market-led approach could work in Afghanistan if privatisation was on track and in the absence of corruption, Jones states: "I cannot give a definite answer to this. It needs more analysis."

Both Mir and Rahmani, however, feel the debate has never included Afghans.
"Unfortunately the debate is among experts from donor countries and international multilateral organisations and it does not include Afghan voices from civil society and the business community," they say.
Both, it seems, would seem to have some grounds for their critique.