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Afghanistan Needs an Economic Czar
BY TAMIM ASEY OCTOBER 16, 2014
China had its Deng Xiaopeng; India, Manmohan Singh; the United Arab Emirates, Sheikh Rashid; Singapore, Lee Kuan Yew; and dozens of others statesmen have unlocked the economic potential of their countries and paved the way for phenomenal economic growth and development in their countries. It is time to reset the economic development agenda for Afghanistan. Afghans can find a sustainable source of economic growth based on natural resources and geographic location in Asia under an economic czar with a vision for the Afghan economy and a program for economic reform in a short time span.
In the past 13 years, the Afghan economy has had double digit economic growth with an average growth rate of 9.5 percent per year along with a single digit inflation rate. However, since 2013, the GDP growth rate has plummeted from 13.5 percent to 3.2 percent, based on World Bank and IMF estimates. This drastic fall in GDP growth is due to the withdrawal of foreign forces, a prolonged election, fading business confidence, and pervasive corruption within the Afghan government.
The recipes for building a sustainable Afghan economy ranged from reviving the Silk Road to building a resource-based economy given Afghanistan's vast underground mineral resources. Under President Hamid Karzai, either these models did not work or security priorities overtook the economic development agenda. Furthermore, as Karzai was never interested in an economic development agenda and vision for Afghanistan, economic issues never made it high in his agenda. His assumption was that the international community would continue pouring in millions of dollars in foreign aid, keeping his country afloat and bringing much needed foreign exchange to the economy -- not realizing that, like any form of foreign aid, it won't last long.
Too many recipes: an inflation of strategies and policies
With the establishment of the interim administration, led by Hamid Karzai in 2002 -- the then-coordinator of aid for Afghanistan and current president, Ashraf Ghani, formulated the first ever post-Taliban economic development strategy, called the National Development Framework (NDF). The NDF categorized the economic development and poverty reduction priorities of Afghanistan into four pillars and was later presented to donor countries at a Berlin conference as a seven-year plan, called Securing Afghanistan's Future.
After Ghani's departure as finance minister and with the arrival of a pool of ministers that followed, a plethora of new development strategies were devised for Afghanistan from Afghanistan National Development Strategy (ANDS) to Kabul Conference National Priority Programs (NPPs) to the document presented at the Tokyo Conference II referred to as "Towards a Self-Reliant Afghanistan." Unfortunately, none of these plans were completely implemented. Policy priorities depended on the personal taste and choice of each finance minister officeholder who drew up their own economic development plan for Afghanistan and presented it as Afghanistan's set of economic development priorities at new international donors' conferences.
The tyranny of experts: too many cooks in the kitchen
Since 2001, each year, millions of dollars in foreign aid is poured into Afghanistan for technical advisors, consultancy projects, and capacity development programs -- all without much achievement. This has created a revolving door of domestic and foreign consultancy industry where consultants, often highly incompetent, come for short-term consultancies, most of which is highly ineffective. These consultants have produced dozens of documents that do nothing more than lay on shelves in Afghan ministries, gathering dust, with little feasibility to implement and relevance to realities on the ground.
A framework for the inflow and outflow of consultants should be put in place with clear productivity and competency benchmarks for this shadowy industry in Afghanistan.
Fiscal policy failure: budget deficit and the Dutch disease
Afghanistan still lacks a basic fiscal policy framework outlining its short, medium, and long-term expenditure and revenue targets to help adjust the aggregate demand and GDP fluctuations in the economy.
Fiscal policy is constricted by the Afghan National Budget, estimated to be around $7 billion annually. Afghanistan's operating budget is 40 percent funded by the international community and includes the Development Budget, which is completely dependent on foreign aid.
But the heavy reliance of the Afghan economy on foreign aid has created some major problems. Dutch disease, where the increase in the development of natural resources brings a decline in the manufacturing sector, and aid addiction, has resulted in few Afghan policymakers bothering to invest time and energy in finding domestic, sustainable sources of revenue and economic of growth.
Monetary policy, central banking and financial markets: strengthening banking and financial sectors
The Afghan Central Bank, also known as Da Afghanistan Bank (DAB), is the main regulatory body responsible for the banking and financial sectors of the Afghan economy. It is an efficient institution but lacks the sophistication, capacity, skills, and independence of a modern central bank. Like many central banks, DAB was part of the Ministry of Finance until recently when the new constitution changed its status, transforming it into an independent institution.
DAB's independence is a new phenomenon and the institution lacked the basic skills and capacity to develop and implement an independent monetary policy, even to this day.
Furthermore, the collapse of Kabul Bank in 2010 and the spread of contagious and risky assets across the financial and banking system of Afghanistan have destroyed the international credibility and reputation of the Afghan financial and banking institutions.
The Afghan banking and financial sector was on the verge of being blacklisted because Afghan government failed to pass the international banking association's money laundering and anti-terrorism financing regulations. Fortunately, it was approved at the last minute by the Afghan parliament under intense national and international pressure.
Building a vibrant financial and banking sector requires a capable, competent, and independent central bank that follows a credible and predictable monetary policy. The governor of DAB has a responsibility to draft, approve, and implement a fresh monetary policy for Afghanistan consistent with the economic realities of the country.
The blessing of geography: Afghanistan, the land bridge of Asia
For a long time, Afghanistan's geographic location was a liability, making Afghanistan prey to empires from the east and west or a buffer zone between the former USSR and the United States. Today, this calculus can change with smart and visionary leadership. The three major rising economies of the world are Afghanistan's neighbors: China, India, and Russia. None of these countries will want an insecure and unstable Afghanistan which could potentially hamper their own rate of economic growth.
Despite the decline of the Silk Road trading routes, even today Afghanistan's ability to act as a cross-regional conduit has never entirely faded from collective perception.
Upstream water and lithium: Afghanistan's oil
Afghanistan is a high riparian state in the Central and South Asia region. Except for a water-sharing agreement signed between Afghanistan and Iran in the late 1950s, no treaties exist between Afghanistan and its neighbors on water-sharing rights. Because of the lack of water-sharing agreements, many World Bank and Asia Development Bank small and medium hydropower and irrigation projects are on hold. Afghanistan can seize this opportunity and negotiate water-sharing treaties with its neighbors and either sell its water or ask for other incentives in return.
There are also four geological belts of high quality Lithium deposits, 60 to 70 percent pure, spread across the country. Geologists and the U.S. Geological Survey (USGS) have termed Afghanistan the Saudi Arabia of Lithium.
Currently, China has a monopoly in global lithium market, holding over 90 percent of the market share. Afghanistan can partner with the west and exploit this opportunity both to develop a sustainable source of economic growth for Afghanistan but also delivery much needed lithium to international electronics markets.
Agriculture and irrigation: food security and agriculture development
Afghanistan has the land, water, and weather to turn into the bread basket for the region. With a good investment climate, Afghanistan would have all the right potential to attract millions of dollars of foreign and domestic investment in its agriculture and food processing industries. Vast swaths of arable land and huge water resources in the north and south of Afghanistan are a beacon of hope for the country.
The new Afghan president should focus on three priorities: food security, agribusiness development, and standardization of agricultural products for export to regional and international markets. Providing farmers with an agriculture credit through an Agricultural Development Bank and the mechanization of the agriculture sector should be at the top of the agenda for the new Afghan administration.
Aid versus trade: Afghanistan's comparative advantage
Today, Afghan business has a diaspora spread all over South and Central Asia, the Middle East, Europe and North America, but the future of the Afghan trade and business sector lies in the South Asia region. Asia, spurred on by Afghanistan's neighbors China and India, is going to be the engine of growth of the world economy. A regionally integrated Afghan economy could get millions of dollars in revenue from transit fees, taxes, oil and gas pipeline revenues, and above all, technology and knowledge transfer.
Mineral resources: a doubled-edged sword
The Afghan mineral wealth is estimated to be worth $1 trillion. This estimate only accounts for the 30 percent of the surveyed landscape of Afghanistan -- the remaining 70 percent of the Afghan geography is yet to be explored. The identified fraction of land consists of metals, hydrocarbons, and REEs which could serve as the future backbone of a sustainable Afghan economy.
Meanwhile the wealth of resources is like a double edged sword. If not carefully managed, Afghanistan could be pushed into a vicious cycle of violence and resource curse like many African countries. How Afghanistan will fair depends on the management and policies of the new Afghan administration.
The economics of corruption: an economy within economy
Afghanistan is ranked third from the bottom in the corruption perception index (CPI) by Transparency International, making it one of the most corrupt countries in the world. Corruption is rampant in the usual suspect areas: government contracts, procurement, construction, and the service delivery sectors.
According to a recent U.N. survey, Afghans have paid almost $4 billion in bribes;the average bribe paid in Afghanistan is estimated to be $160. This is in a country where the per capita income is around $670, meaning almost 20 percent goes to paying bribes to get access to public services.
Corruption is so rampant and pervasive that it is considered to be its own economy within the Afghan economy. The full extent of the large scale corruption in contracts, procurements, and revenue collection is unaccounted for and could pose a big threat to the long-term peace and stability of Afghanistan. President Ghani, as a former finance minister and World Bank executive, is well aware of these challenges and has demonstrated his will to fight corruption at the highest level possible.
The institutional challenge: reconciling overlapping mandates
Afghanistan has numerous financial and economic management institutions, dozens of investment promotion agencies, and numerous economic policymaking institutions, all with overlapping mandates and unclear job descriptions. This has created confusion and dissatisfaction amongst the investors and donors in the country.
Today, the Ministry of Finance is in quarrels over its policy role and mandate with the Ministry of Economy, the notoriously corrupt Afghanistan Investment Support Agency (AISA), and the Export Promotion Agency of Afghanistan (EPAA). The office of Senior Economic Advisor of Afghanistan has a largely ceremonial role. The Afghanistan Central Bank is ineffective and lacks the critical capacity and skill set to oversee the nascent Afghan banking and financial sectors. Even the newly created High Council of Economic Affairs is inefficient having no proper organizational structure.
History rarely presents national leaders with the opportunity to rise above their enormous national challenges in order to fundamentally alter the fate of their nations. For Afghanistan, this is the moment for the new leader to reset the economic development agenda for the country.
In spite of millions of dollars in foreign development aid, the Afghan economy would effectively collapse without international intervention and donor support. Afghanistan needs an economic czar held by a visionary economic giant just like Deng Xiaopeng of China, Manmohan Singh of India, or Lee Kuan Yew of Singapore, who made brave decisions and came up with a vision to build an indigenous and self-reliant economy for their nations. The new Afghan president can do the same by investing in the economic potentials of Afghanistan and tapping into the enormous natural wealth and strategic location of Afghanistan, turning it into capital and wealth for all Afghans and the generations after. This is a historic opportunity for President Ghani and his economic team to fundamentally alter the fate of Afghanistan.
Tamim Asey is a fellow at Asia Society and a Fulbright scholar at Columbia University pursuing a degree in Economic Policy management. He was also a former Government of Afghanistan official and taught at the American University of Afghanistan (AUAF).
BY TAMIM ASEY OCTOBER 16, 2014
China had its Deng Xiaopeng; India, Manmohan Singh; the United Arab Emirates, Sheikh Rashid; Singapore, Lee Kuan Yew; and dozens of others statesmen have unlocked the economic potential of their countries and paved the way for phenomenal economic growth and development in their countries. It is time to reset the economic development agenda for Afghanistan. Afghans can find a sustainable source of economic growth based on natural resources and geographic location in Asia under an economic czar with a vision for the Afghan economy and a program for economic reform in a short time span.
In the past 13 years, the Afghan economy has had double digit economic growth with an average growth rate of 9.5 percent per year along with a single digit inflation rate. However, since 2013, the GDP growth rate has plummeted from 13.5 percent to 3.2 percent, based on World Bank and IMF estimates. This drastic fall in GDP growth is due to the withdrawal of foreign forces, a prolonged election, fading business confidence, and pervasive corruption within the Afghan government.
The recipes for building a sustainable Afghan economy ranged from reviving the Silk Road to building a resource-based economy given Afghanistan's vast underground mineral resources. Under President Hamid Karzai, either these models did not work or security priorities overtook the economic development agenda. Furthermore, as Karzai was never interested in an economic development agenda and vision for Afghanistan, economic issues never made it high in his agenda. His assumption was that the international community would continue pouring in millions of dollars in foreign aid, keeping his country afloat and bringing much needed foreign exchange to the economy -- not realizing that, like any form of foreign aid, it won't last long.
Too many recipes: an inflation of strategies and policies
With the establishment of the interim administration, led by Hamid Karzai in 2002 -- the then-coordinator of aid for Afghanistan and current president, Ashraf Ghani, formulated the first ever post-Taliban economic development strategy, called the National Development Framework (NDF). The NDF categorized the economic development and poverty reduction priorities of Afghanistan into four pillars and was later presented to donor countries at a Berlin conference as a seven-year plan, called Securing Afghanistan's Future.
After Ghani's departure as finance minister and with the arrival of a pool of ministers that followed, a plethora of new development strategies were devised for Afghanistan from Afghanistan National Development Strategy (ANDS) to Kabul Conference National Priority Programs (NPPs) to the document presented at the Tokyo Conference II referred to as "Towards a Self-Reliant Afghanistan." Unfortunately, none of these plans were completely implemented. Policy priorities depended on the personal taste and choice of each finance minister officeholder who drew up their own economic development plan for Afghanistan and presented it as Afghanistan's set of economic development priorities at new international donors' conferences.
The tyranny of experts: too many cooks in the kitchen
Since 2001, each year, millions of dollars in foreign aid is poured into Afghanistan for technical advisors, consultancy projects, and capacity development programs -- all without much achievement. This has created a revolving door of domestic and foreign consultancy industry where consultants, often highly incompetent, come for short-term consultancies, most of which is highly ineffective. These consultants have produced dozens of documents that do nothing more than lay on shelves in Afghan ministries, gathering dust, with little feasibility to implement and relevance to realities on the ground.
A framework for the inflow and outflow of consultants should be put in place with clear productivity and competency benchmarks for this shadowy industry in Afghanistan.
Fiscal policy failure: budget deficit and the Dutch disease
Afghanistan still lacks a basic fiscal policy framework outlining its short, medium, and long-term expenditure and revenue targets to help adjust the aggregate demand and GDP fluctuations in the economy.
Fiscal policy is constricted by the Afghan National Budget, estimated to be around $7 billion annually. Afghanistan's operating budget is 40 percent funded by the international community and includes the Development Budget, which is completely dependent on foreign aid.
But the heavy reliance of the Afghan economy on foreign aid has created some major problems. Dutch disease, where the increase in the development of natural resources brings a decline in the manufacturing sector, and aid addiction, has resulted in few Afghan policymakers bothering to invest time and energy in finding domestic, sustainable sources of revenue and economic of growth.
Monetary policy, central banking and financial markets: strengthening banking and financial sectors
The Afghan Central Bank, also known as Da Afghanistan Bank (DAB), is the main regulatory body responsible for the banking and financial sectors of the Afghan economy. It is an efficient institution but lacks the sophistication, capacity, skills, and independence of a modern central bank. Like many central banks, DAB was part of the Ministry of Finance until recently when the new constitution changed its status, transforming it into an independent institution.
DAB's independence is a new phenomenon and the institution lacked the basic skills and capacity to develop and implement an independent monetary policy, even to this day.
Furthermore, the collapse of Kabul Bank in 2010 and the spread of contagious and risky assets across the financial and banking system of Afghanistan have destroyed the international credibility and reputation of the Afghan financial and banking institutions.
The Afghan banking and financial sector was on the verge of being blacklisted because Afghan government failed to pass the international banking association's money laundering and anti-terrorism financing regulations. Fortunately, it was approved at the last minute by the Afghan parliament under intense national and international pressure.
Building a vibrant financial and banking sector requires a capable, competent, and independent central bank that follows a credible and predictable monetary policy. The governor of DAB has a responsibility to draft, approve, and implement a fresh monetary policy for Afghanistan consistent with the economic realities of the country.
The blessing of geography: Afghanistan, the land bridge of Asia
For a long time, Afghanistan's geographic location was a liability, making Afghanistan prey to empires from the east and west or a buffer zone between the former USSR and the United States. Today, this calculus can change with smart and visionary leadership. The three major rising economies of the world are Afghanistan's neighbors: China, India, and Russia. None of these countries will want an insecure and unstable Afghanistan which could potentially hamper their own rate of economic growth.
Despite the decline of the Silk Road trading routes, even today Afghanistan's ability to act as a cross-regional conduit has never entirely faded from collective perception.
Upstream water and lithium: Afghanistan's oil
Afghanistan is a high riparian state in the Central and South Asia region. Except for a water-sharing agreement signed between Afghanistan and Iran in the late 1950s, no treaties exist between Afghanistan and its neighbors on water-sharing rights. Because of the lack of water-sharing agreements, many World Bank and Asia Development Bank small and medium hydropower and irrigation projects are on hold. Afghanistan can seize this opportunity and negotiate water-sharing treaties with its neighbors and either sell its water or ask for other incentives in return.
There are also four geological belts of high quality Lithium deposits, 60 to 70 percent pure, spread across the country. Geologists and the U.S. Geological Survey (USGS) have termed Afghanistan the Saudi Arabia of Lithium.
Currently, China has a monopoly in global lithium market, holding over 90 percent of the market share. Afghanistan can partner with the west and exploit this opportunity both to develop a sustainable source of economic growth for Afghanistan but also delivery much needed lithium to international electronics markets.
Agriculture and irrigation: food security and agriculture development
Afghanistan has the land, water, and weather to turn into the bread basket for the region. With a good investment climate, Afghanistan would have all the right potential to attract millions of dollars of foreign and domestic investment in its agriculture and food processing industries. Vast swaths of arable land and huge water resources in the north and south of Afghanistan are a beacon of hope for the country.
The new Afghan president should focus on three priorities: food security, agribusiness development, and standardization of agricultural products for export to regional and international markets. Providing farmers with an agriculture credit through an Agricultural Development Bank and the mechanization of the agriculture sector should be at the top of the agenda for the new Afghan administration.
Aid versus trade: Afghanistan's comparative advantage
Today, Afghan business has a diaspora spread all over South and Central Asia, the Middle East, Europe and North America, but the future of the Afghan trade and business sector lies in the South Asia region. Asia, spurred on by Afghanistan's neighbors China and India, is going to be the engine of growth of the world economy. A regionally integrated Afghan economy could get millions of dollars in revenue from transit fees, taxes, oil and gas pipeline revenues, and above all, technology and knowledge transfer.
Mineral resources: a doubled-edged sword
The Afghan mineral wealth is estimated to be worth $1 trillion. This estimate only accounts for the 30 percent of the surveyed landscape of Afghanistan -- the remaining 70 percent of the Afghan geography is yet to be explored. The identified fraction of land consists of metals, hydrocarbons, and REEs which could serve as the future backbone of a sustainable Afghan economy.
Meanwhile the wealth of resources is like a double edged sword. If not carefully managed, Afghanistan could be pushed into a vicious cycle of violence and resource curse like many African countries. How Afghanistan will fair depends on the management and policies of the new Afghan administration.
The economics of corruption: an economy within economy
Afghanistan is ranked third from the bottom in the corruption perception index (CPI) by Transparency International, making it one of the most corrupt countries in the world. Corruption is rampant in the usual suspect areas: government contracts, procurement, construction, and the service delivery sectors.
According to a recent U.N. survey, Afghans have paid almost $4 billion in bribes;the average bribe paid in Afghanistan is estimated to be $160. This is in a country where the per capita income is around $670, meaning almost 20 percent goes to paying bribes to get access to public services.
Corruption is so rampant and pervasive that it is considered to be its own economy within the Afghan economy. The full extent of the large scale corruption in contracts, procurements, and revenue collection is unaccounted for and could pose a big threat to the long-term peace and stability of Afghanistan. President Ghani, as a former finance minister and World Bank executive, is well aware of these challenges and has demonstrated his will to fight corruption at the highest level possible.
The institutional challenge: reconciling overlapping mandates
Afghanistan has numerous financial and economic management institutions, dozens of investment promotion agencies, and numerous economic policymaking institutions, all with overlapping mandates and unclear job descriptions. This has created confusion and dissatisfaction amongst the investors and donors in the country.
Today, the Ministry of Finance is in quarrels over its policy role and mandate with the Ministry of Economy, the notoriously corrupt Afghanistan Investment Support Agency (AISA), and the Export Promotion Agency of Afghanistan (EPAA). The office of Senior Economic Advisor of Afghanistan has a largely ceremonial role. The Afghanistan Central Bank is ineffective and lacks the critical capacity and skill set to oversee the nascent Afghan banking and financial sectors. Even the newly created High Council of Economic Affairs is inefficient having no proper organizational structure.
History rarely presents national leaders with the opportunity to rise above their enormous national challenges in order to fundamentally alter the fate of their nations. For Afghanistan, this is the moment for the new leader to reset the economic development agenda for the country.
In spite of millions of dollars in foreign development aid, the Afghan economy would effectively collapse without international intervention and donor support. Afghanistan needs an economic czar held by a visionary economic giant just like Deng Xiaopeng of China, Manmohan Singh of India, or Lee Kuan Yew of Singapore, who made brave decisions and came up with a vision to build an indigenous and self-reliant economy for their nations. The new Afghan president can do the same by investing in the economic potentials of Afghanistan and tapping into the enormous natural wealth and strategic location of Afghanistan, turning it into capital and wealth for all Afghans and the generations after. This is a historic opportunity for President Ghani and his economic team to fundamentally alter the fate of Afghanistan.
Tamim Asey is a fellow at Asia Society and a Fulbright scholar at Columbia University pursuing a degree in Economic Policy management. He was also a former Government of Afghanistan official and taught at the American University of Afghanistan (AUAF).
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